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WIKI ANALYSIS
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.
Since the mid-1990s, Ford has been steadily losing market share in the US, from 25% in FY1995 to 14.2% for FY2008.[1][2] At the same time, Ford's European operations have increased share by producing many critically acclaimed vehicles well known for quality.[3][4] 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.[1]
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. Therefore, improving operational efficiency and developing a more fuel efficient product offering are the centerpieces of Ford's turnaround plan. For example, Ford has cut 40,000 jobs in the past three years and closed seven factories in the past five years. [5][6] 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.[7] 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.
Ford has been restructuring Volvo and separating its operations to run on a stand-alone basis. Ford started discussions on the sale of Volvo in the first reporting quarter of FY2009. In October 2009, Ford began talks with Crown consortium, which has raised the potential rival bid for Volvo to that of China's Geely Automotive to over approximately 2.5 billion USD.[8]
Business Overview
Business and Financial Metrics
Ford makes money by selling and financing motor vehicles on six continents. At the end of FY2008, Ford had about 213,000 employees at 90 manufacturing facilities worldwide (down from 246,000 at 95 factories at the end of FY2007).[10] Ford bought several foreign luxury auto brands during the 1990s, but 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, the company has until recently 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, its current strategy seeks to produce fewer automobile models that can be sold across the globe with few modifications: coined 'world cars.' Ford's first world car is the new Ford Fiesta, which was engineered by Ford of Europe, but will eventually be produced and sold in the US and China.[11] 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.[12]
Ford has also been successful in drastically improving the quality and reliability of its cars. These improvements meant that by early 2009 Ford exceeded Honda in initial quality rankings and in a statistical dead heat with Toyota.[13] Not only do such improvements make cars more attractive to consumers, but they have also reduced Ford's warranty costs by $1.2 billion in FY2008.[14]
Ford Motor Credit
Ford 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.[15] Ford Credit is currently in the process of shrinking its portfolio and loan volume due to the drop in auto sales and the sale of Jaguar and Land Rover.
Subsidiaries
In 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 and in December 2008 announced that it was employing J P Morgan Chase (JPM) to find a buyer for this division.[16] Ford hopes to sell Volvo for around $6 billion - it was purchased for $6.4 billion in 1999 - and it is expected that the buyer will be either a Chinese carmaker, a buyout firm, or a group organized by the Swedish Government, since other major automakers remain preoccupied with their own crises.[17]
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.[18]
September 2009 Sales Release Summary
September 2009 sales for Ford fell 5.1 percent compared to one year ago; the drop in sales is primarily due to the 2009 summer's Cash for Clunkers program.[20] However, despite total sales decreases, sales of Ford's F-series trucks rose 3.5 percent, and sales on Ford's new 2010 Taurus sedan increased more than 60 percent.[21]
Note that although September 2009 sales are down, from the perspective of the entire third reporting quarter, Ford’s sales rose 5 percent, marking its first quarterly increase in four years.[22] Furthermore, Ford has been able to sustain the auto industry's downturn better than many competitors. As the only domestic automaker not to take a government bailout nor file for bankruptcy, Ford gained more than five percentage points of the U.S. retail market share in the third quarter compared to FY2008 third quarter, where GM and Chrysler lost ground (see graph). [19] One reason for Ford's success after adjustment of the Cash for clunkers program was its ability to minimize sales declines while taking advantage of Ford's competitors' weaknesses. For example, Ford continues to benefit from its vehicles which retain the greatest amount of their original retail price after five years of ownership; as a result, Ford benefits from stronger prices for both its new and used cars.[19]
Q3 FY2009 Summary
Ford posted almost $1 billion of profit in the third-quarter of FY2009, its first operating profit since early 2008.[23] Ford's positive earnings was largely attributed to the Cash for clunkers program, a government program that offered car buyers rebates when they traded older vehicles for more fuel-efficient ones. Ford's October sales rose 2.6% to 132,482 vehicles, driven mostly by Ford's new lineup of fuel-efficient cars such as the Taurus sedan.[24]
Despite the positive profit outlook, however, Ford still carries more than $23 billion in debt, and is not predicting a profit for 2010; to cope with this, Ford sold $2.5 billion of convertible notes on November 3, 2009 in FY2009's largest offering of debt.[25]
| Region | FY2008 worldwide wholesale unit volumes by automotive segment (in thousands) |
|---|---|
| North America | 2,329 |
| South America | 435 |
| Europe | 1,820 |
| Ford Asia Pacific and Africa | 464 |
| Volvo | 359 |
| Jaguar, Land Rover, and Aston Martin | 125 |
| Total | 5,532 |
Key Trends and Forces
As Political Pressures for a Greener Economy Intensify, the Future of Ford's Main Sales are Centered on Fuel-Efficient Vehicles
Traditionally, Ford's most profitable vehicles have been large SUVs and pickup trucks. However, volatile oil prices and political pressures for more fuel-efficient cars have taken a toll on the market for these larger vehicles. 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).[27] 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.[28] 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.[29] 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.[30] The 2010 Ford Fusion Hybrid, for example, has been ranked the best affordable midsize car by US News and World Report, considered to be a better drive than the Prius and with better initial quality than the Camry or Accord.[31] 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.[32] 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.[33] 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.
Ford Plans to Expand into Emerging Markets by Designing "One-Fit-All" Vehicles
Ford 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.
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.[34] Whether Ford will be able to successfully use a single product line to both cut costs and grow sales worldwide remains to be seen.
Ford Continues to Rely on Generous Incentives and Credit as Incentives for Vehicle Purchase
Since 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.[35] 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.[36] At the same time, Ford continues to offer greater incentives through 2008 in response to the difficult sales environment.[37] 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.
Continuously Rising Commodity Prices Affect Ford's Production Costs, Resulting in Increasing COGS
Due 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.[38][39][40][41] 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.
Market Share
| Manufacturer | May-06[42] | May-07[43] | May-08[43] |
| GM | 25% | 24% | 19% |
| Toyota | 15% | 17% | 18% |
| Ford | 17% | 17% | 15% |
| Chrysler | 13% | 13% | 11% |
| Honda | 9% | 9% | 12% |
| Nissan | 6% | 6% | 7% |
| Hyundai | - | 5% | 6% |
| BMW | - | 2% | 2% |
| Volkswagen | - | 2% | 2% |
| Daimler | - | 1% | 2% |
| Manufacturer | Rank | 2007 | 2008 | Change in Production | Manufacturer | Rank | 2007 | 2008 | Change in Production |
| GM | 1 | 13.0% | 11.9% | -11% | Suzuki | 11 | 3.6% | 3.8% | 1% |
| Toyota | 2 | 11.8% | 13.3% | 8% | Chrysler | 12 | 3.5% | 2.7% | -25% |
| Volkswagen | 3 | 8.7% | 9.3% | 3% | Daimler | 13 | 2.9% | 3.1% | 4% |
| Ford | 4 | 8.7% | 7.8% | -13% | BMW | 14 | 2.1% | 2.1% | -7% |
| Honda | 5 | 5.4% | 5.6% | 0% | Mitsubishi | 15 | 2.0% | 1.9% | -7% |
| PSA | 6 | 4.8% | 4.8% | -4% | Kia | 16 | 1.9% | 2.0% | 2% |
| Nissan | 7 | 4.8% | 4.9% | -1% | Mazda | 17 | 1.8% | 1.9% | 5% |
| Fiat | 8 | 3.7% | 3.6% | -6% | Avtovaz | 18 | 1.0% | 1.2% | 9% |
| Renault | 9 | 3.7% | 3.5% | -9% | Faw | 19 | 1.0% | 0.9% | -6% |
| Hyundai | 10 | 3.6% | 4.0% | 6% | Tata | 20 | 0.8% | 1.1% | 36% |
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.
References
- ↑ 1.0 1.1 Ford 2007 Annual Report
- ↑ Motor Daily: US Automakers Continue to Lose Market Share
- ↑ The Economist: Ford's European arm lends a hand
- ↑ The Auto Channel: Strong Sales of Focus, Fiesta And Commercial Vehicles Lift Ford of Europe
- ↑ NY Times: Ford to Make Broader Bet on Small Cars
- ↑ CNN: Ford executives say new models are on way
- ↑ CNN: Ford executives say new models are on way
- ↑ U.S.-led group in talks to buy Ford's Volvo: source
- ↑ Ford 2008 Annual Report
- ↑ Ford 2008 Annual Report, page 1
- ↑ The Economist: Ford's European arm lends a hand
- ↑ The Economist: Ford's European arm lends a hand
- ↑ Ford Surpasses Honda in Initial Quality
- ↑ 2008 Ford 2008 Annual Report, page 14
- ↑ Ford Credit Press Release
- ↑ Bloomberg: Ford Said to Seek as Much as $6 Billion for Volvo
- ↑ Bloomberg: Ford Said to Seek as Much as $6 Billion for Volvo
- ↑ Business Week: Will Ford Need to Sell its Stake in Mazda?
- ↑ 19.0 19.1 19.2 Ford Gains While Rivals Falter
- ↑ Ford U.S. September Auto Sales Fall 5 Percent
- ↑ Ford Sept. sales fall 5.1 percent
- ↑ Without Clunker Program, Auto Sales Fall Back
- ↑ Ford Posts $1 Billion Third-Quarter Profit
- ↑ [http://www.baltimoresun.com/business/sns-200911031341mctnewsservbc-auto-ford-mk24069nov,0,2927340.story Home > Business Ford's new models lead to stronger October sales]
- ↑ Ford Sells $2.5 Billion of Convertible Notes to Reduce Debt
- ↑ 2008 Ford 2008 Annual Report, page 2
- ↑ WSJ: Ford Taps European Style
- ↑ WSJ: Ford Plans Small-Car Retooling
- ↑ Ford Q2 2008 Earnings Call
- ↑ Ford Q2 2008 Earnings Call
- ↑ US News: 2010 Ford Fusion Hybrid Reviews, Pictures and Prices
- ↑ autobloggreen: Ford introducing more six-speed transmissions
- ↑ Ford Q2 2008 Earnings Call
- ↑ Ford 2008 Q2 Earnings Call
- ↑ NY Times: Auto Industry Feels the Pain of Tight Credit
- ↑ MSNBC: GM, Ford don't drop leasing, but make changes
- ↑ Ford Q2 2008 Earnings Call
- ↑ US News and World Report: Car Prices About to Increase
- ↑ Business News Americas: Aluminum prices jump to US$1.48/lb
- ↑ The Economic Times
- ↑ "Commodity & Option Prices and 20 Year Charts"
- ↑ [http://oica.net/wp-content/uploads/world-ranking-2007.pdf OICA - World Motor Vehicle Production, 2007]
- ↑ [http://oica.net/wp-content/uploads/world-ranking-2008.pdf OICA - World Motor Vehicle Production, 2008]
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