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Ford Motor Company (F)Stock (Transportation Industry, Luxury Industry, Consumer Products Industry, Auto Makers Industry, Manufacturing Industry)
 Ford Motor Company (NYSE:F) is the world's fourth largest automotive manufacturer by production volume. The company sells vehicles under the Ford, Mercury, Lincoln, and Volvo brands, and holds a one third stake in Mazda. In 2007 Ford generated $173.9 billion in revenue and posted a $2.7 billion loss; the company made 6,247,506 vehicles and controlled a 15.6% market share in the US and 8.6% worldwide.[1][2] Since the mid-1990s Ford has been steadily losing Market Share in the US, from 25% in 1995 to 15% for 2005.[3][4] At the same time, Ford's European operations have increased share by producing many critically acclaimed vehicles well known for quality.[5][6] And in the developing world, most importantly the BRIC countries, Ford's market share has been fairly constant even as overall sales have increased massively due to growth in per capita GDP.[3] Between 2006 and 2008 Ford's non-US operations have been profitable, albeit not nearly enough to offset losses in North America.[3] This difference between Ford's domestic and international operations is a result of costly US manufacturing facilities caused by high wages and expensive healthcare and retirement obligations for union labor. Another factor is a product line-up reliant on trucks and SUVs - these vehicles accounted for about 60% of sales between 1997 and 2007, but truck sales in June 2008 were 22% lower than a year earlier.[7] .[8] Improving operational efficiency and developing a more fuel efficient product offering are the centerpieces of Ford's turnaround plan. During the fall of 2007 Ford reached an agreement with the United Autoworkers Union (UAW) that will shift healthcare obligations for Ford's 123,000 retirees to the union in exchange for Ford setting up a healthcare fund of $15.4 billion.[9][10] Meanwhile the company cut 40,000 jobs in the past three years [11] and closed seven factories in the past five.[12] Meanwhile the company has unveiled plans to bring six of its fuel efficient models (average fuel economy of over 30 mpg) currently sold in Europe to the U.S. market.[13] In addition to answering demand for smaller cars in the short-term, Ford hopes that offering the same lineup of automobiles in all of its international markets will provide considerable economies of scale in the long-term.
[edit] Business Overview Ford makes money by selling and financing motor vehicles on six continents. At the end of 2007, Ford had 246,000 employees at 95 manufacturing facilities worldwide.[3] The perennial number two automaker, Ford has lost market share over the past decade to japanese producers. While Ford bought several foreign luxury auto brands during the 1990s, as the company's financial position became more tenuous, most of these have been sold off in order to focus on the core brands of Ford, Lincoln, and Mercury. Although Ford is a large global enterprise, until recently the company made little effort to capitalize on potential economies of scale achievable with its size. Meaning that Ford produced completely distinct cars for Europe, the United States, and the developing world. As the developing world has grown wealthier and higher energy prices have universally increased demand for better fuel economy, it has become more realistic to produce a single automobile that can be sold across the globe with few modifications. Creating these so-called 'world cars' is a central pillar of Ford's turnaround. Ford's first world car is the new Ford Fiesta, which was engineered by Ford of Europe, but will eventually also be produced and sold in the US and China.[14] Ford's future plans call for the development of many more world cars, with the idea of creating a similar vehicle offering in all of its markets worldwide.[15] Ford has also been successful in drastically improving the quality and reliability of its cars. For the first half of 2008 JD Power ranked Ford's initial reliability in the top quartile of major automakers.[16] JD Power also reported that Ford's quality improved at a faster rate than the industry average over the same period.[17] These improvements mean that Ford has effectively closed the quality gap with japanese producers, which had long drawn potential buyers away from Ford's brands.
[edit] RestructuringFor Ford, 2007 was a year of cost reduction and revenue increase. Revenue rose 8.6% to $173.9 billion and net losses declined from $12.6 billion to $2.7 billion.[19] The year was led by a groundbreaking cost-diminishing deal with the UAW to shift Ford's $22 billion of healthcare obligations to a separate union administered fund.[20] At the same time, this agreement introduced a system of dual wages whereby new hires receive fewer benefits than current employees and are paid half as much.[21][22] Additionally, throughout 2007 and early 2008 Ford offered buyouts to all 54,000 of its UAW factory workers in the United States and reduced its white-collar workforce through attrition. As a result of these efforts, since 2005 Ford has halved its US hourly workforce from 99,500 to 54,000 and closed 14 North American factories.[23][3] Altogether Ford expects these changes to cut $5 billion dollars in structural costs.[24] While these very important actions improved Ford's competitiveness and brought its production costs closely in line with the perennial Japanese leaders, during 2007 Ford still lost $1,467 on every vehicle it produced while Honda made $1,641 on each vehicle and Toyota $922.[25] The spike in oil prices in the first half of 2008 completely undermined Ford's planned return to profitability in 2009 as buyers spurned the larger vehicles on which Ford earns the most money.[26] In response to this change, Ford halted production at several truck/SUV plants and accelerated its existing plans to update its North American sales fleet toward smaller more fuel efficient vehicles. The acceleration of this plan includes bringing 6 fuel efficient cars developed by Ford of Europe to the United States within the next 18 months.[27] Simlarly, the company has embraced many cheap conventional methods to quickly boost the fuel economy of existing vehicles, such as transmissions with more gears, direct injection turbochargers (which Ford calls "ecoboost"), or low resistance tires.[28] For the longer term, Ford will employ these tricks in addition to a complete redesign of all its US engines by 2010 to be more fuel efficient.[29] Few major automakers have made such an aggressive adjustment to higher fuel costs. At the same time that the company seeks to realign its product offering with consumer demand, management is also taking innovative steps to improve Ford's long term competitiveness. For example, all of the new manufacturing facilities built by Ford are 'flexible facilities.[30] This means that these factories can go from producing one kind of vehicle to a completely different model in a short period of time.[31] [edit] Ford Motor CreditFord also makes money by offering consumer loans and leases to car buyers, as well as business loans and lines of credit, through its financial services division Ford Motor Credit Company. This division arranges automobile financing in 36 countries worldwide through a network of over 12,500 Auto Dealerships.[32] Though Ford's automotive operations posted losses in 2006 and 2007, the financial services division was profitable in those years. Nevertheless, Ford Credit has posted $1.4 billion in losses for the first half of 2008.[33] These losses have been caused by higher credit defaults and significantly lower resale values for Ford vehicles coming off lease. [edit] SubsidiariesIn addition to the Ford, Lincoln, and Mercury brands, Ford currently owns Volvo and one-third of Mazda. While Ford previously owned several other marques, these have all been sold off to help fund Ford's ongoing restructuring plans. Ford intends to sell Volvo by 2010 for the same purpose. On the other hand Mazda continues to be a boon to Ford for two reasons. First, with its focus on smaller cars, Mazda sales and profitability have weathered higher oil prices relatively successfully. Second, Mazda and Ford share several Research and Development facilities for smaller cars and it is estimated that this coordination saves Ford several hundred million dollars a year.[34] [edit] 2007 International PerformanceWhile Ford's US business has faced serious problems, the company's international operations have thrived. Although these international divisions are too small to completely offset Ford's North American losses, their success indicates Ford's ability to build quality cars in high demand by consumers. Furthermore, management is currently employing much of the engineering and development undertaken by these divisions to improve the quality and fuel efficiency of its US sales fleet. The fact that Ford possesses such know-how gives it an advantage in being able to quickly bring this technology from other markets instead of developing it anew like several of its competitors. At the same time, one should not forget that emerging markets represent the key to Ford's future sales growth.
[edit] Trends and Forces[edit] Betting on Smaller CarsTraditionally, Ford's most profitable vehicles have been large SUVs and pickup trucks. As Oil Prices have spiked through 2007 and 2008 the market for these larger vehicles has collapsed. As a quick fix, Ford announced plans to retool three manufacturing facilities formerly used to produce trucks to instead make six of its more fuel efficient european models in the US (such as the Mondeo and European version of the Focus, both of which are far more efficient than Ford's current American offerings).[35] This offers the advantage of quickly bringing highly demanded fuel efficient cars to the U.S. market without having to invest the money and time to create an entirely new automobile.[36] In the longer-term, the company intends for all of its vehicles to be the leader (or co-leader) for fuel economy in any given car category.[37] As part of this plan, all of Ford's engines will be redesigned or updated by 2010, efficiency enhancing direct injection turbochargers will be made an option on all vehicles, four hybrids will go on sale for 2009, and Research and Development spending on cars and crossovers will be increased from 1/2 to 2/3 of total development spending.[38] The company is also embracing lower tech solutions such as low resistance tires and 6-speed automatic transmissions that improve fuel efficiency over transmissions with fewer gears. These 6-speed transmissions allow the engine to rev at more efficient levels and improve fuel efficiency by 4-6% over the 4 and 5 speed transmissions currently installed on most Ford vehicles.[39] Ford hopes to build 98% of its vehicles with six-speed transmissions by 2012. The beginnings of this massive adjustment can be seen with the 2009 Ford Focus, which has better fuel economy than the Honda Fit or Nissan Versa, and the 2009 Ford Escape, which gets better mileage than either the Toyota Rav4 or Honda CRV.[40] Yet as the development and production of a new car costs billions of dollars and several years to implement, Ford's efficiency campaign is both costly in itself and difficult to reverse once implemented, especially since Ford has practically exhausted its ability to borrow or sell additional assets to raise money. So if Ford's aggressive bet on a shift to smaller cars proves wrong, or is executed poorly, the long-term viability of the company will be in serious question.  [edit] North America vs. InternationalFord has historically maintained a heavy North American focus, claiming that higher income U.S. consumers buy more often and tend to buy upscale. However, North America's once-significant lead on international unit sales has all but disappeared and more importantly, growth in cars sales in the BRIC countries continues growing quickly. For example, in 2007 car sales increased in China 22% [41] Brazil 26%[42], Russia 36% [43], and India 12%.[44] This trend has continued through 2008 and is expected to go on for several years.[45] Through 2007 Ford's market share in these developing markets has remained fairly constant.[3] How Ford manages to take advantage of this trend will be decisive to the company's long term growth. As discussed above, Ford's current international plan is the "One Ford" campaign, which seeks to save production and design costs by producing a single fleet of vehicles for all markets worldwide. The first fruit of this scheme is the new Ford Fiesta, which was developed by Ford Europe but will be sold in all Ford's major markets, and Ford of Europe's iconic Ford Transit van, which will be introduced in Asia and the US in 2009.[46] Whether Ford will be able to successfully use a single product line to both cut costs and grow sales worldwide remains to be seen. Fig. 2: Unit Sales, international vs. North American. Source: Company Data  [edit] Incentives, Financing, and Ford CreditFrom the late 1990s Ford began to offer a number of generous and profit eroding incentives such as interest-free auto loans, "employee pricing," rebates, along with others. Additionally, the frothy real estate market allowed individuals to easily use a home equity loan to pay for an automobile- for example, nearly 30% of California car buyers borrowed against the value of their home to purchase a new car.[47] While these conditions temporarily supported sales, the economic downturn in the US and Western Europe has still hit Ford's sales and resulted in an increase in loan delinquencies and repossessions. These repossessions have hit Ford Credit especially hard because demand for off-lease and repossessed larger vehicles, that make up the majority of Ford Credit's portfolio, has been enormously reduced due to high gas prices. Although major automakers such as Chrysler and General Motors (GM) have responded by partially or totally curtailing leasing, Ford claims that vehicle leasing will continue to be part of its business plan.[48] At the same time, Ford continues to offer greater incentives through 2008 in response to the difficult sales environment.[49] Although the continued use of generous incentives may be a necessary stop gap measure, to be profitable in the long term Ford will need to stop relying on incentives to spur demand, and instead gain buyers through the quality and appeal of its products. [edit] Commodity PricesDue in large part to massive demand from emerging economies, the prices of all major raw materials used in the manufacture of automobiles has increased considerably over the past several years. These materials include rubber, plastic, copper, steel, and aluminum. As of mid-2008 the prices of these commodities have increased 45%, 20%, 23%, 66%, and 40%, respectively, since the beginning of the year.[50][51][52][53] Strong demand from emerging markets for these commodities continues to increase the price of Ford's raw materials and this trend will likely be long term. [edit] Comparison to Competitors Ford continues to lose market share in the U.S., but considers this loss acceptable as it attempts to return the company to profitability, trying to become a smaller, more flexible auto company than it has traditionally been.  
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