An Analysis of Ford Motor Company

Introduction

Ford Motor Company is among the oldest and most renowned automobile manufacturers in the world. The company was founded by Henry Ford and is well known for its success in introducing modern automobile industry which opened up mass-market opportunities for cars.  It was incorporated in 1903 by twelve investors among them Henry Ford. It was reincorporated in 1919, when the Ford family took full control of the Business. Ford Foundation was launched in 1936 and took over as the sole stockholder, up until 1956 when the first public sale of shares was made. Forbes has placed Ford Motors Company as the filth most valuable automotive company globally and as the seven largest car producer. The company has over 90 manufacturing plants found in different regions all over the world. Their main products are passenger cars and light commercial vehicles such as vans and trucks. It also produces tractors. The company’s headquarters are based in Dearborn, Michigan. 

The company engaged in limited diversification in the 1950’s and 1960’s. The main operations we re-focused to automotive concerns and financial services in the 1990’s. Ford Motors acquired Jaguar luxury brand of cars and Aston Martin in the 1990’s. In its lists of acquisitions was Hertz Corporation for car renting in 1994, Volvo automobiles in 1999 and Land Rover in 2000. The company later acquired a stake at Mazda Motor Corporation. In the early 2000’s, the company started experiencing financial upheavals that led to the sales of some of its brands. Aston Martin was offloaded from its financial books in 2007, and later Jaguar and Land Rover were acquired by Tata Motors, an Indian company. During the 2008 global crisis, Ford Motors experienced challenges as the country’s auto industry was struggling. The company had to receive government back-up to avoid collapse.  The company has had to restructure to ensure its survival. This paper is an analysis of the financial aspects of Ford Motors and how the financial soundness of the company is affected by different factors such as government regulations, risks, demand, nature of products, and other factors.

Below is a graph showing the trends of Ford Motor Company Net Income Quarterly and company price.

Source of Risks and Uncertainty to Ford Motors Operations

The industry is susceptible to the financial crisis, recession, and geopolitical events which cause a reduction in industry sales volume especially in the USA, Europe, or China. The automobile industry has typically high levels of fixed structural cost. This implies that relatively small changes in the products sold have a material effect on the cash flow and profitability. It also means that the company faces a risk in case the sales levels decline significantly as this will largely affect the financial conditions of the company. 

Another risk that faces the company is related to the likelihood that new products being launched by the company have lower-than-anticipated market acceptance. Despite market research being conducted before launching these products, some external factors may be beyond the control of the company. The customers are cautious to factors such as price, quality, styling, safety, and performance. With the increased presence of customers on the online platforms, mere allegations against the products may cause negative effects on the reputation and acceptance of the products. 

The industry is faced with a risk of having excess capacity and volatile currencies which have increased the level of competition. The automotive industry has production capacity that may go beyond the current demand. In 2016, it was reported that the automotive industry had an excess of 32 million units in capacity globally. This prompted most players within the industry to start offering market incentive schemes in an effort to maintain and expand their market share.

There is a likelihood of changing customer preference from larger cars, which Ford can produce in a profitable manner, to vehicles that may be beyond Ford’s current production ability. The ever increasing fuel prices, reduction in performance in the construction industry, and government actions may pull people away from consuming products within Ford’s range. This is likely to affect the sales of the company, which will translate negatively on the company’s financial condition.

How Government Regulations Affect Ford’s Operations

Different polices and regulations enacted by different governments globally have diversified effects on the business and operations of Ford Motor Company. Government regulations in the automobile sector have a direct influence in the appearance of the cars, the design of components, safety standards adhered to, and general performance of the vehicles. This regulation, in turn, ends up affecting the production costs. They also inhibit the manner the marketing of the cars is carried out. 

Government regulations are put in place in an attempt to guarantee the safety of consumers and protect the environment. Some government regulations have addressed issues such as the heating system, safety necessities such as seatbelts, airbags, and crumple zones among others. Effecting these proposals comes with different design limitations and consumes space in a vehicle as the component recommended has to be fitted in the car. This limits the scope of the designers in coming up with new concepts car development (Kotzegger, 2013). 

Laws and regulations have been developed on fuel efficiency. The Corporate Average Fuel Economy (CAFÉ) represents a bunch of national specifications on fuel efficiency for motor vehicles in the country. This was established in 1970 after the Arab oil embargo. These rules and policies were amended in 2012 by adjusting the required fuel efficiency to 54.5 miles per gallon by 2025. In order for the products of Ford Motors to fit these specifications, a substantial investment is required (Ford Motor Company, 2016). 

The emission laws are other government regulations that have gained popularity lately. To be compliant with the laws on emission, set required investments in catalytic converters and other devices designed to help reduce the emission by the car must be adopted. This significantly increases the production costs of the cars and affects the market price of the vehicles.

Inputs for the Production Process at Ford Motors Company

In the assembly plant for automobile production, only the final steps of the manufacturing process are conducted. In this step, different components from over 4,000 external suppliers such as company-owned part supplies are transported to the assembly by truck or rail. Different inputs are required for different parts of the vehicles. 

The chassis (which is the frame where other parts rest) of a vehicle requires the metallic components. Other inputs necessary for this include, the suspensions, axles, drive shafts, gearboxes, steering box components, wheel drums, and braking systems (Kotzegger, 2013). The main body of an automobile requires a multitude of panels and braces (which are them linked by welding or bolting), doors, deck lids, trunk lid, and bumpers. The cars also require being coated with several layers of paint. The interior designs require inputs such as the windshield, steering column and wheel, vinyl tops, pedals, carpeting, and seats (Kotzegger, 2013). Other inputs include engine, battery, tires, anti-freeze unit and gasoline. 

A major issue facing Ford Motors in inputs acquisition is a guarantee of quality by automotive parts suppliers. Auto part suppliers were affected by the global crisis forcing some to shut down. Upon resuming operations, they have been operating around the clock to meet consumer demand. This has resulted in a challenge to the quality of the parts produced. The company previously faced problems in managing its suppliers. This saw the company reduce the supplier base. Sourcing from different suppliers creates a risk of achieving compliance goals (Kotzegger, 2013). 

New Product

With its famous, F-150 car, Ford Motors has experienced a best sales experience. The vehicle is famous due to its tough, smart, and capable design. To continue this lead, Ford Motors in 2015 raised the standards again by developing a version of the F-150 with new capabilities such as high strength steel frame, and military grade aluminum alloy body (Ford Motors, 2016). These qualities combined increased the strength and durability of the vehicle, and at the same time decreased its weight by up to 700 pounds. The new product is a lighter stronger truck that is very capable. The engineers in developing this model perfected the process of heat treating and hydroforming skills to come up with the aluminum alloy body.

Despite the heavy investment in producing the aluminum-bodied Ford F-150, the sales of the new product were relatively low. The total sales of the Ford’s F-Series in 2014 were 753,851. This increased to 780,354 in 2015 when the F-150 aluminum-bodied truck was produced. In 2016 the sales for the F-series had hit 820,799. The sales for the first three quarters in 2017 have already hit 658,636. With the launching of the new product, the sales levels considerably increased but not with the expected level. The sales indicated above include the collective sales level for F-150, F-250, F-350, and F-750 (Ford Motor Company, 2016).

Price Changes for Ford’s Products

Ford Motor Company has been known for its better pricing initiatives initiated by Lloyd Hansen, the vice president of revenue management at the company at that time.  The previous efforts by the company to improve the profits had focused on cost minimization, which is a key factor of the profit function. Lloyd did an analysis by making an additional 1% of the net profit margin on the price. This was found to contribute to a 33% increase in net income and 45% cash flow which collectively increased the market value of the company by 45%. 

The pricing strategy adopted from this analysis involved encouragement and provision of incentives to the sales team for their effort on the most profitable vehicles, the introduction of discount packages for the up-sell customers, use of cross-selling finance from Ford Credit, and development of a new mix of fleet vehicles for sale. These strategies were tested in 1998 in the US where the sales went beyond the target by over $1 billion unlike other regions using normal pricing strategy which failed to hit their target by over $300 million. 

In 2010, Ford Motor Company had another change in the pricing strategy. The strategy in pricing this time focused on having prices that capture the high value of the products. From this, the operating of a single vehicle in North America increase from $2265 to 2905 between the first and second quarter.  Another focus in the pricing strategy involved providing consumers with a variety of choices in terms of high margin and high-value products related to communications systems, entertainment systems, and other upgrades. There was also different pricing introduced through unique differentiation. This was introduced to target the customers who were ready to pay higher premiums for extra features such as style, quality, fuel efficiency, and advanced technological features. The strategy involved proper management of supply to prevent excess inventory which would end up affecting the market prices for the products. Application of the new pricing strategies saw more than half of Ford’s $ 2.1 billion operations profits for the second quarter in 2010 increase (Mohammed, 2010).

Profitability

At Ford Motor Company, the financial success depends on the profitability of the vehicles sold, which is pegged to the vehicle line. For the company’s products, larger cars attract higher prices and are more profitable than smaller vehicles, across and within different vehicle categories. In North America, the company reports that larger cars had an average contribution margin of about 135% for all vehicles as compared to the smaller cars which have lower contribution margins. Government regulations such as fuel efficiency and emissions increase the cost of production which directly reduces the contribution margin. 

The net income for the company during the last three years has been $1,231 million, $7,373 million, and $4,596 million for years 2014, 2015, and 2016 respectively (Ford Motor Company, 2016). The company attributes the changes in the profitability of the business to various factors which include wholesale unit volumes, the profit margin for each vehicle which is under the influence by market factors, raw materials required and their cost, costs from clients’ warranty and other services, and cost of implementing the safety measures.  The profitability of the company is also influenced by the high population of fixed costs that makes small changes in the wholesale unit volumes to have material effects on the overall profitability.

Competitive Environment

In its annual report, Ford Motors identifies that the global automotive industry has many players with none having a claim to being the dominant producer. It is, however, important to note that among these automobile players, some manufacturers have a significant portion of the total sales in selected countries especially those of origin. According to Ford Motors Company (2016), the main players contributing to the competitiveness of the automobile industry include Fiat Chrysler Automobiles, General Motors Company, Honda Motors, Hyundai-Kia Automotive Group, PSA Peugeot, Renaults-Nissan B.V, Suzuki, Toyota Motor Corporation, and Volkswagen AG. 

The automobile sector tends to have a very competitive pricing environment. This is made worse by the industry’s excess capacity especially in Europe and Asia. This excess eventually trickles down to other markets. An effect of the market can be noticed where the decreased value of the Yen for the last three years has stiffened the competitive pressures in other markets, for example. The stiff competition in the automobile industry forces the producers to offer discounts and different marketing incentives to have a steady share in the market while maintaining production levels (Zeller & Gillis, 1995). 

The management at Ford Motors Company notes that the excess capacity combined with the proliferation of new products being featured in key segments is bound to increase the pressure between the producers to adjust their prices. An analysis of the North American market shows that the industry has been undergoing restructuring in the recent past to enable the manufacturers to match their production with demand. New entrants from China and India are bound to intensify the competition.

Mistakes by Ford

In one of the litigations against the company, some mistakes by the company have come out. On such case is the Transit Connect Customs Ruling. This case was determined by the US Customs and Border Protection (CBP) in 2013. The ruling was that the Transits that had been imported as passenger wagons but later converted into cargo vans had to be subjected to a duty fee of 25% that was the standard charge for cargo vehicles. This was opposed to the 2.5% duty charged on passenger vehicles. This implies that Ford needs to pay 25% duty of importing Transit Connects that would be adjusted into cargo vehicles, and the CBP requires the difference in duty earlier paid to be cleared. In this deal, Ford Motors exposed itself to more tax and duty liability in excess of 22% (Ford Motor Company, 2016).

Some other mistakes that the company may have committed either by omission or commission relate to environmental matters. The company has received varied notices as per different federal and state laws for costs linked to hazardous substance storage, recycling, and dumping sites. The company has received a notice for its Chicago Assembly Plant as well as the Dearborn Truck Plant. These were issued by the Environmental Protection Agency (EPA) and were related to violations of a number of requirements for air permits. These violations attract monetary sanctions. 

Conclusion

The discussion above has been focused on conducting an analysis of Ford Motor Company and to critically review its new products in the market, pricing strategy, profitability levels, competitive environment, and mistakes that it may have committed which would likely have monetary implications. The company has been in existence for more than a century and is ranked among the world top automobile manufacturers. The company carries out production and distribution in over 200 markets across the world. The market in the US is the largest source of the company’s revenue. The main competitors for the company include GM Motors and Fiat Chrysler Automobiles. In its pricing strategy, the company increases the operating margin for every product by 1% which was found to have a major effect on the net income, cash flow and market value of the company. The company maintains an innovative streak to help it release new products that better meet the customers’ needs and preferences. Government regulations were found to cause a significant increase in the cost of production especially in laws that relate to fuel efficiency and emission. It is also led to competition that has created a scenario with a higher capacity of production than demand.