Analysis of Ford Motor Company - Case Study Example

Running Head: Ford Motor Company, Final Research Paper Ford Motor Company: Final Research Paper and Section # of Abstract Incorporated in 1903 and founded by Henry Ford, the Ford Motor Company is an American multinational currently ranking at the worlds fifth largest automaker. Based in Dearbon, Mich the company is involved in manufacturing and distribution of automobiles across six continents with about 201,000 employees working in its 90 plants worldwide (Baki, 2004). It was this company that introduced the concept of car manufacturing on a large scale through the employment of a gigantic labor force to manage the automated moving assembly lines. Being a prominent part of the global culture, Ford’s cars have appeared on television serials, movies, books, magazines and other media outlets on numerous occasions. Ford Mustang, Lincoln, Mercury, Volvo and the pickup trucks are some of the most popular automotive brands of the company. Introduction Even before the financial crisis struck the global economy, the automobile industry in general and Ford Motors in particular was incurring heavy losses in billions due to their inappropriate and untimely strategy of bringing luxurious and pricey cars to the market. Ford experienced a decline of 34% in its car sales in late 2008 as banks employed aggressive techniques for credit approval after the increasing statistics of loan defaults. Since automobile industry was already in financial trouble in 2006, the added credit tightening and increased fuel costs served a major set back to the industry as many suppliers struggled to breakeven (Millward, 2008). In the face of calamitous situation many automobile dealers had to sell out or close down their operations to avoid further losses Discussion For the past 100 years, the Ford Motors has been a strong runner up to the General Motors and a stable base for the U.S economy even though it went through troublesome times especially in 1950s when Henry Ford was in the last years of his life and also in 1970s and 1980s when the sudden outburst of Japanese imports posed a serious threat to the company’s profitability, survival and brand image. The 1990s were good years for the company as their pickup trucks, sports cars and minivans became the demand of the century while the Taurus became one of the most prominent passenger cars (Baki, 2004). In 1999 the company bought Volvo adding it to its list of European brands which included Aston Martin and Jaguar. Ford Motors formed the Premier Automotive group in 2000 when it bought Land Rover, expecting a surge in profitability and sales. The impact of the financial crisis on the automobile industry especially Ford Motors and General Motors seemed to worsen the financial condition even further. When the salaries of the millions of employees working in the factories of these two giants came to a standstill, the economy of the concerned countries worsened fueled by the increasing unemployment rate. Demand for heavy vehicles was projected to be extremely low due to the low industrial activity during the crisis and this left Ford Motors highly exposed since a major proportion of its sales comprised of pick up trucks. The industry was encouraged by customer demands for fuel efficient cars but the lack of major purchases and customer hesitance to engage in such purchases served as a major concern for the industry and demanded government initiative to boost the economy. Amid the financial crunch the company has been severely impacted in terms of declining sales having a corresponding repercussion on its global ranking further fueled by the automotive crisis of 2008-2009. Late 2008, Ford Motors intended to sell 20% of its stake in Mazda to raise $540 million in order to manage the severe losses it had incurred for the year. In spite of this sale, Ford would still be the largest shareholder of Mazda but its influence would decline though it would continue to rely on its Japanese manufacturing partner for its small, fuel efficient cars. But the sale of the shares was deferred as the slump in the car industry showed a steep decline in the share prices (Bunkley, 2009). The financial crisis led to a redesign on the company’s strategy where the modified plan emphasized on aggressive restructure of the company to deal with the declining demand and changing needs, investment and focus on fuel efficient vehicles to satisfy customers requirements and most importantly to improve the balance sheet by working in unison having the common goal of maintaining the brand image of Ford Motors as the quality leader in the automobile industry. Towards the end of 2007 the company suffered a loss of approximately $6 billion incurred as a result of restructuring costs, losses at subsidiaries and the drop in sales due to declining demand. Although the senior management at Ford’s had given the statement that the company won’t reach sustained profitability until 2011, the $2.3 billion net income and the increased sales during early 2009 were a surprise for many (Clark, 2008). The improved conditions were a proof that the restructuring of the company had been successful after all. Being one of the major sponsors of the Jay Leno show, the company is depending on effective marketing for further boost to its sales. For the first time in 14 years the company was upgraded in its credit rating to Caa1 by Moody’s thus further strengthening the analyst and investor belief that the intensive restructuring had shown some viable profitability for the company. The decision to mortgage all its assets including its logo, in 2006 turned out to be a sensible one which saved the company from filing for bankruptcy at the first sign of the impending financial crisis. It served to protect the company from the harsh effects of recession which, its competitors mainly General Motors and Chrysler were unable to dodge (Szczesny, 2009). The loans secured the company against bankruptcy for a further 30 years although it posed a serious risk to the company since all its cherished assets especially its logo was mortgaged against the loan. Although the $26 billion debt and the heavy interest payments on it was a hurdle for the company’s maximum profitability, but the increased investor confidence boosted the share price up serving to negate the pessimism regarding the debt. As the financial crisis showed signs of escalating, the company decided to reduce its production which not only implied a drop in the number of productive days for the company but also meant downsizing of a number of employees. The drop in demand for cars along with the increased fuel prices was a major setback for the entire automobile industry and Ford being a global leader, suffered immensely. The fear of having inventory pile up of unsold cars was enough to convince Ford to cut back on production and simultaneously reduce the number of shifts and production hours in the manufacturing plant which meant a four day productive week for Ford. The ever increasing fuel prices in the midst of the global financial crisis ensured that customers stay away from even the slightest notion of an automobile purchase. This situation continued to worsen during 2008 leading to tremendous losses for Ford Company as depicted by the 8% drop in its share value but the intensity of the situation was revealed when Standard and Poor’s were considering degrading the company’s credit rating (White & McCracken, 2006). Forecasting a much severe loss in 2008 as compared to the $2.7 billion loss in 2007, cutbacks in production and investing in more fuel efficient vehicles to satisfy existing customers seemed like the only feasible step. This projected a serious dilemma for the company since it meant more raising more capital in spite of having mortgaged most of its assets including its logo to raise $23 billion in 2006. The shift of consumers towards more fuel efficient cars severely impacted Ford’s production lines of its specialty which dominantly included pick up trucks and sports vehicles. To bring the company back on the track on profitability it closed down two plants along with downsizing 10,000 salaried employees near the end of 2006. Three more plants were shut down in 2007 leading to a 26% decline from 2005 in the North America manufacturing capacity, down to $3.6 million by the end of 2008. The company intended to sell or close its Automotive Components division as well in 2008 (Szczesny, 2009). Although the company realized that closing down operations had severe repercussions for its loyal staff but it believed that this was the only way to bring the company back to profitability. Although it had been speculated that the company might consider going private but Ford Motors denied any such intentions although the company focused on buyouts which led to an increasing figure of downsized employees. Buyouts became the sole focus of the company in 2008 because Ford operations in the United States realized that health care benefits, wage and pension packages added to the costs for the company which the Asian sector saved on. To combat this issue the company put forward buyout offers where the worker could get a certain sum of money to leave the company as well as his health care benefits package. To beat the competitive market and the rising fuel costs the company redesigned it production strategy by shifting to gas and hybrid versions of its already existing product line along with a full redesign of their pickup trucks to ensure that their image of the truck leader stays intact. The redesign included not only more innovative and appealing features but also more fuel efficient and high performance gas options. The buyouts offer indicated that Ford Motors was speculating further losses for the year in question and the aggressive buyout strategy for the North American factory confirmed the suspicion. The plan included offering buyouts to all the 75,000 factory workers hoping to reduce payroll costs by nearly one-third (Bunkley, 2009). In early 2008, the company was hoping to reduce its debt by about 40% by giving cash and shares to the debt holders. This move was part of the restructuring of the balance sheet under which $10.4 billion of debt was expected to be paid off. Due to the financial crunch, the company offered its bondholders a payback which was less than the original value of the bonds, but it still served as a better option for the debt holders rather than selling the bonds at the much lower current market value (Clark, 2008). Near the end of 2008, the company had closed down 17 plants and had downsized 51,000 employees while fuel efficient and hybrid cars became the core focus of the company. To finance this new product line the company divested their non core assets and also applied for a bank loan. At the same time, cutting back on production, downsizing and a drop in bonuses and raises continued to remain the dominant strategy in combating the financial crunch. Ford Motors was wise enough to cut back production rather than build on an inventory of unsold cars because the financial crunch gave rise to an escalating fuel price which demonstrated a complete turnaround in consumer demand. Where pickup trucks and chic passenger cars had been highly demanded, the crisis shifted customer needs towards a more fuel efficient and economical car. The drop in the productive days and shifts at the manufacturing plants at Ford incurred costs without any returns for the company thereby making it inevitable to close down or sell a number of its plants. The Asian automakers were fortunate in the sense that they could modify and utilize the same assembly line to meet the changing production needs while the European and American brands failed to compete at this level. Although the economy is slowly recovering from the financial crisis but still the general public does not have enough disposable income at the moment to invest in luxurious passenger cars (Bunkley, 2009). Today, all investments in assets are need based and the increase in fuel costs has seen a shift to public transport which might have serious repercussions for the automobile industry in general. Under such conditions, Ford Motors has developed intensive revamping strategies to provide incentives to its customers. As the Ford Company cuts off its reliance on SUVs and pickup trucks, it focuses on manufacturing electric vehicles which are still a decade away from reaching the market. While to meet the current customer needs, the automaker extended its fleet of alternative fuel vehicles by introducing the Ford fusion hybrid and Mercury Milan hybrid in early 2009. The Volvo takeover in 1999 served to improve the profitability of the company at that time but the financial crisis dampened any future expectations from this transaction resulting in a consideration to sell off the Volvo division (Millward, 2008). The Volvo buyout by Ford intensified competition in the market for executive and luxurious SUVs and sedans, and the rationalized distribution of the Volvo cars by the strong established Ford network worked wonders for the company. But as consumer spending went down and the rising fuel costs depicted a need for more fuel efficient cars, the Volvo division lost its appeal for the majority and the company considered suitable buyers for its Volvo division. Also the fierce competition from the Asian automakers who had the added advantage of low payroll costs, made Volvo division an unprofitable one in the near future where Ford’s strategy involved huge cost savings through the manufacture of multiple models worldwide. For the same reason, the company sold Aston Martin for $848 million dollars in 2007 after the intense scrutiny of the current market situation and the realization that the Aston Martin brand did not fit in with the new restructuring strategic plan being implemented by the Ford Motors. After intense product redesign and development the company launched the Ford F-150 truck in 2009 which has managed to beat all competition completely and is soon expected to be America’s number one and most widely demanded truck. This vehicle has managed to meet consumer needs of unsurpassed fuel efficiency and mileage along with added innovative features and technological attractions. It has already won 25 awards for its fuel economy, safety, capability and adaptability (Clark, 2008). The decision to downsize employees was inevitable amidst the intensifying crisis but the move to cut down on payroll costs and the buyout offers was a timely decision to reduce costs and accelerate the process of restructuring in order to survive the financial crunch. In early 2009 the leaders of the United Automobile workers and the Ford Company came to an agreement under which the company substituted its shares for its retiree health care benefits payments. The agreement was beneficial for the company as it served to tremendously cut down on its payroll costs thereby improving the profit margins for the company and also offered protection to the employees in terms of the viability of the company whereby they could earn through capital gains or dividends received by the company. The restructuring plan to layoff 30,000 hourly jobs and 14,000 salaried employees was a harsh yet calculated decision which became a necessity in the early 2008 as financial crisis continued to aggravate declining sales and profits for the company. Conclusion The company is optimistic about its future primarily since it’s investing in latest technology and will be bringing new products to market soon like the 2010 Mustang. Along with this the $14 billion investment in research and development in the coming years is expected to boost the company’s comeback to the market after the adverse periods of monetary losses and lost sales (Baki, 2004). In early 2009, the share price of Ford increased considerably nearly tripling in value in April relative to the previous two months, depicting investor confidence and expectations for the future of the company. While its competitors are struggling to avoid filing for bankruptcy, Ford Motors still has more than $21 billion as cash reserves owing to the earlier decision in 2006 to borrow as much as possible. Ford has been given a buy rating but a bankruptcy by its competitors would impact their suppliers which in turn would affect Ford as well since they are served by the same suppliers. Also if competitors in an act of desperation sell out their unsold cars are extremely low prices, it would bring down prices for the entire automobile industry in general and Ford in particular (Millward, 2008). The only obstacle to the company’s current profitability is that customers still do not have enough money to spend given the financial crunch and the company is at risk of running out of money before the customer comes back for consistent purchases. In October 2009, the company was awarded the “2009 Fellows’ Choice Award Winners for Brand of the Year” because of the effective means of communication adopted by Ford’s through the use of social media to communicate with its stakeholders. The company is seen to have a dominant position on online social platforms not to mention its involvement in the Fiesta Movement where 100 million digital users were provided with the European Ford Fiesta ahead of the launch of the car in 2010. Ford adopted marketing tools and techniques to reach out to its target customers and manufacture what they ask for. References Baki, M. (2004, November). Automotive Industry Analysis – GM, DaimlerChrysler, Toyota, Ford, Honda. . Retrieved November 26, 2008, from www.academicmind.com Bunkley, Nick (2009, April). At Ford, a sense of survival despite the losses piling up, The New York Times. Retrieved October 24, 2009 from: http://www.nytimes.com/2009/04/25/business/25ford.html?_r=1 Clark, Andrew (2008, June). Automotive Industry: Carmaker Ford facing dire financial crisis, The Guardian. Retrieved October 24, 2009 from: http://www.guardian.co.uk/business/2008/jun/20/automotive.useconomy Millward, David (2008, September). Financial Crisis: Ford staff to work four-day week, Telegraph. Retrieved October 25, 2009 from: http://www.telegraph.co.uk/finance/newsbysector/transport/3109827/Financial-crisis-Ford-staff-to-work-four-day-week-as-car-demand-drops.html Szczesny, Joseph R. (2009, January) Despite losses, Ford still spurns federal aid, Times. Retrieved October 25, 2009 from: http://www.time.com/time/business/article/0,8599,1874945,00.html White, Joseph B. & McCracken, Jeffrey (2006, September). For unveils deeper cuts to fend off financial crisis, Mindfully.org. Retrieved October 24, 2009 from: http://www.mindfully.org/Industry/2006/Ford-Financial-Crisis15sep06.htm Read More