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FORD MOTOR COMPANY: THE WAY FORWARD In 2006, the Ford Motor Company confirmed plans to cut between

25,000 and 30,000 jobs in North America. The company announced that it would close 14 factories by 2012 to cut losses in North America, which reached $1.6bn (900m) in 2005. The cuts represented about 25% of staff in the region and was further bad news for the American auto industry, which had been hit hard by foreign competition. The Ford restructuring, named Way Forward, was the second largescale retrenchment since 2002, when 35,000 jobs were cut. On 24 January 2006, Ford shares rose almost 9% to $8.58 in early trading on Wall Street. As well as Ford itself, the company's brands include North America's Lincoln and Mercury, British marques Jaguar and Aston Martin, Swedens Volvo and Land Rover, bought from BMW in 2000 and Japans Mazda (of which it has virtual control with a 33% stake). Essence of Fords Vision, Mission and Values Fords vision was to become the worlds leading consumer company for automotive products and services. In mission terms, it regarded itself as a global family with a proud heritage passionately committed to providing personal mobility for people around the world (Company Report, 2004). The companys values are expressed through anticipating consumer needs and delivering outstanding products and services that improve peoples lives, driven by a customer focus, creativity, resourcefulness, and entrepreneurial spirit. Other values comprise: respect and value of everyone's contribution; health and safety of employees; leadership in environmental responsibility; positive contribution to society; superior returns to our shareholders. Background to the Restructuring The North American operation had been struggling against fierce competition from Asian manufacturers, high labour and raw material costs, and consumers shift from high-margin sport-utility vehicles as oil prices soared.

Fords rival General Motors indicated in 2005 that it would cut 30,000 jobs from its north American workforce. Waves of job cuts had devastated cities built on industry. As a result, Detroit - Ford and GMs home town was regarded as the poorest big US city. Bill Ford Jr., the chief executive, said: These cuts are a painful last resort. In the long run, we will create far more stable and secure jobs. We all have to change and we all have to sacrifice. But I believe this is the path to winning. Fords global auto business lost $1bn, the massive losses in North America outweighing gains in Europe, Asia and elsewhere. Ford Europe and the Premier Automotive Group, which includes Jaguar, Volvo and Land Rover, reported a combined profit of $36m, after making a loss of $626m in 2004. Excluding North America, our automotive operations made great progress in 2005 said Mr Ford. (David Teather, The Guardian, 23 January 2006) In 2005, Ford made $2bn profit, down from $3.5bn in the previous year. Like GM, Ford made most of its profit from its finance arm, which lends money to car buyers. Fords market share in the US, its biggest market, fell for the 10th straight year in 2005 to 17.4%. The group had an 18.3% share in 2004 and a 24% share in 1990. US motor vehicle sales (millions) for the period 1998 to 2004 were as follows:
U.S. Motor Vehicle Sales 1998 Cars Light Trucks Total LV 8.1 7.4 15.5 0.4 16.0 1999 8.7 8.2 16.9 0.5 17.4 2000 8.8 8.5 17.3 0.5 17.8 2001 8.4 8.7 17.1 0.4 17.5 2002 8.2 8.7 16.9 0.3 17.2 2003 7.6 9.0 16.6 0.3 16.9 2004 7.5 9.3 16.8 0.4 17.3

Med/Heavy Trucks Total All

Source: Ward's Automotive Reports

Fords Globalisation Plan 2000 In April 1994, Englishman Alex Trotman, the first non-American to make it to the top in Ford, announced that the company was to become a single global entity. He stated if we are going to go from second to first place, which I truly believe we

can do, it will be because of this plan ... this is designed to ensure our success in the next 20 years. (The Times -24 April, 1994). As a first step, Ford planned to merge its North American and European vehicle businesses into a single grouping, namely Ford Automotive Operations (FAO). This was designed to unify product development, manufacturing and marketing and sales operations, each under a single executive with the aim of eliminating costly duplication of design, engineering and development of similar cars, engines and components in America and Europe. The plan involved the formation of five vehicle programme centres to control product development. One centre, located in Europe, would cover the Fiesta, Escort and Mondeo classes (small and medium sized cars) and the other four would be located in America (see Appendix 3). Fords European operations had incurred losses of $291 million in 1996, despite increased sales in most European markets, where Ford was the best-selling single brand. The companys chairman Alex Trotman, pointed to the intensely competitive European market and the shift to cars at the lower end of the market. Company total profits rose to $4.4 billion from $4.1 billion in 1995, in a year that included the launch of a number of new vehicle models, among which was the successful Jaguar XK8. There were two sets of targets in Ford 2000. The first was financial, while other targets concerned communication and creativity. Whereas previously strict and precise financial controls were in place, most managers had the sums they could spend on their own authority increased fivefold. Decisions that used to mean committees deliberating for weeks could be taken by individuals. Most important, the company was encouraging designers, engineers and production people to work in teams on new product development. The aim was to avoid one group designing parts that could not be manufactured or marketed. On the financial side, the company estimated that globalisation would produce savings of around $3 billion a year. These savings would come from lower-product engineering and development costs, from the more rapid spread of best practice and from pruning the companys suppliers. The company hoped that eventually, 250 firms would account for 80% of its purchases world-wide.

By mid 1998 Ford had made substantial progress on restructuring, redesigning and/or reducing costs in certain processes, reflected in improved profitability (see Table 1). All of the new processes that the company had adopted were seen to be driven by two critical elements lowering costs and creating greater value. These were aimed at making Ford the best automotive company in the world, as defined by its employees, customers, and shareholders. In respect of the latter, Ford paid particular attention to dividend yield and the price of Ford shares. Table 1 Profitability 1994-97 ($m)
1997 Automotive Sales Net income 122,935 4,714 1996 118,023 1,655 1995 110,496 2,056 1994 107,137 3,913

In April 1999 Ford unveiled a 1 billion agreed bid for UK based Kwik-Fit, Europes top car-repair chain. The announcement followed the companys entry into insurance, retailing and body shops, in addition to launching a bid for the Royal Automobile Club (RAC) roadside recovery business. In October 1998, Ford went into insurance by forming a joint venture with Norwich Union and it was hoped that the venture, FordInsure, would insure 25% of the 5m Ford vehicles on Britains roads by 2002. In November of that year, Ford joined the Keswick familys Jardine Motors Group in a joint-venture retailing business. These activities came close on the heels of completing a $6.45 billion acquisition of Volvos car business. Jac Nasser, who succeeded Sir Alex Trotman as chief executive of Ford at the start of 1999, was the architect of Fords expansion into services. He considered that Ford could not produce the best value cars if it was not prepared to get more involved in servicing and repairing them after their warranties expired. Ford was conscious of what it considered to be the tremendous amount of downstream revenue and profit opportunity that it was missing. Also, this type of business required substantially less capital commitment than say, building a new assembly plant. The object was to capture more of the value chain for the whole life of the vehicle. Fords main existing non-manufacturing businesses were F-Credit, traditionally the lender of last resort to car buyers during a recession, and Hertz, its quoted rental-company offshoot.

Since taking over, Mr Nasser hired outsiders for top posts in design, manufacturing, engineering and marketing passing over many long serving managers. He also tied executive compensation to share performance for the first time since Ford went public in the 1950s. One new manager was Michael Lombardi, the former head of British Petroleum service stations. He was charged with Ford Quality Care, a programme designed to improve and standardise dealer repairs in America. Another new appointment was Wolfgang Reitzle, who joined Ford after leaving German based BMW, following a boardroom power-struggle. Reitzle headed up Fords new Premier Automotive Group, which brought together the company's four luxury brands (Jaguar, Aston Martin, Volvo and Lincoln) into a single organisation. The Picture in 2000 In 2000 Fords total company sales revenue established a company record of $170 billion, a 6% increase over 1999. Worldwide vehicle unit sales were up 3% from 1999 and topped 7 million units for the second time in company history, setting a new sales record. During the year the company purchased the Land Rover business from the BMW Group and AB Volvos worldwide passenger car business (Volvo Car). In 2000, approximately 17.8 million new cars and trucks were sold in Fords nineteen primary European markets, down from 18.2 million units in 1999. The company was ranked second in the U.S. market with a combined car and truck market share of 23.7%, down slightly from 1999. It was also ranked fifth in the European market with a combined car and truck market share of 10%, down slightly from 1999. The resulting net income/(loss) from continuing operations ($millions) was as follows:

North American Auto Auto Outside North America - Europe - South America - Rest of World Total Automotive Outside North America Visteon-related postretirement adjustment Total Automotive Sector U.S. Market Share European Market Share Financial Services

2000 4,886 (1,130) (240) 108 (1,262) 3,624 23.7% 10.0% 1,786

1999 5,418 50 (444) 87 (307) 4,986 23.8% 10.2% 1,516

1998 3,997 151 (278) 179 52 (125) 4,049 24.6% 10.0% 1,187

Automotive Sector Unusual items accounted for more than $2 billion in costs over the period 1998-2000. These included: structuring costs in Europe; inventoryrelated profit reduction for Volvo and Land Rover; write-down of assets associated with joint venture; write-offs in Kia Motors Company; employee separation costs, lump-sum payments and contracts; transfer of transmission plant. The yearly costs are broken down as follows: Unusual Items 41 In spite of this, Ford achieved an additional $500 million in total cost reductions in worldwide Automotive operation for the Year 2000, making a total reduction of $3.7 billion in the 3-year period. Fords financial targets for 2001 were as follows: Total Company - Total Shareholder Returns Top quartile of S&P 500 over time - Revenue to Grow $5 billion Automotive - North America Achieve 4%+ return on sales - Europe Achieve 1%+ return on sales Financial Services - Ford Credit Improve returns and grow earnings 10% Beyond 2000 In April 2001, Ford reported a 41 per cent slump in first-quarter profits, caused partly by concerns in America over the safety of its Explorer sports utility vehicle. The company was forced to spend $500 million recalling some of the 2000 $1,258m 1999 $265m 1998 $600m

Firestone tyres fitted as standard to the Explorer after they were linked to more than 170 deaths and 500 injuries in the USA. The company has not disclosed how much it has spent settling lawsuits related to the accidents. Fords worldwide vehicle sales fell 6 per cent to 1.8 million, while revenues fell 1 per cent to $42.4 billion. The US company also lost market share during the first quarter (Chris Ayres, The Times, 20 April 2001). Although Fords profits of $1.13 billion, or 60 cents a share, were disappointing, they beat the forecasts of many Wall Street analysts. Fords poor results came despite a strong performance in Europe. Buoyant sales of the Mondeo family car and Transit van helped to generate European profits of $88 million, compared with a $3 million loss in the same period the previous year. Sales for the region rose 22 per cent to $8.7 billion. In the same period, Fords major US competitor, General Motors, saw its car market share has plunge to 28% (48% in 1978) and both companies were under pressure from increased competition and rising unemployment. GM is responded to by slashing 15,000 jobs, phasing out its Oldsmobile brand and reducing European capacity by 400,000 units a year. Also, both companies had spun off their parts divisions, but GMs Delphi was a much bigger business than Fords Visteon. However, Fords better performance over its main rival was attributed to its acquisition of a series of Aston Martin, Jaguar and Volvo. The addition of these companies enabled Ford to maintain its American market share at a steady 23%, even though its native brands had been suffering. GMs foreign acquisitions had been in the form of minority stakes in companies such as Fiat, Fuji Heavy Industries (maker of Subaru), Isuzu and Suzuki, so they add nothing to GMs sales figures. (Garth Alexander The Sunday Times, 13 May 2001).

In January 2002, Ford announced a new series of incentives in response to the move by GM to offer $2,002 rebates on virtually all its models. The high costs of incentives was blamed for much of the companys loss in the fourth quarter. Fords response was to offer $2,500 on the top selling sport/utility vehicle Explorer on most versions of the F-150 pickup, the nations best selling vehicle, and a $2,000 7

incentive on many other models. The company also announced that the Ford Escort and Mercury Cougar compact cars, Mercury Villager minivan and the Lincoln Continental would be phased out by the end of 2002. In addition Ford was looking to sell a number of what it termed non-core assets, eliminating some operations such as forging parts. It expected this to raise $1 billion while other cost-cutting measures include everything from the sale of some of its corporate jets to eliminating food and beverages at many internal company meetings. Despite all the cuts, Ford executives insisted the cost-cutting measures were only a small part of their turnaround plans for the company. They said that they are maintaining investment in research and development in order to meet goals of an average of 20 new models a year for the next several years (Chris Isadore, Cable News Network, 11 January, 2002). In 2003, Ford, which owned one-third of Mazda, decided to base its Futura and nine other forthcoming Ford, Mercury and Lincoln models on the Mazda 6. The Futura would be launched in 2005 to replace the fading Taurus in Fords continuing effort to overtake the Honda Accord and Toyota Camry, the leading midsize family sedans in the United States. Ford sales boomed in the 1990s because of its big, truck-based vehicles such as the F-150 pickups, Ford Explorer, Ford Expedition and Lincoln Navigator, but its car models suffered. Sales of the Taurus and its sister vehicle, the Mercury Sable, peaked in 1992 but after 18 years, despite a redesign in 2000, sales fell by 50 percent.

It was considered that the Ford-Mazda collaboration would help both companies become more efficient, although the bigger benefit for Mazda would come when the Ford started using its I-4 engine. In the same way that Jaguar and Volvo retained their brand presence, although they both belonged to Fords Premier Automotive Group, Mazda intended to retain its separate identity through its sports cars such as the RX-8 and its well known rotary engine.

The US Industry and Market In 2004 market shares for the Detroit 3 (GM, Ford, and the Chrysler unit of DaimlerChrysler) fell to a new low of 58.5 percent, while Japanese brands reached a new high of 30.6 percent and Korean brands climbed to 4.1 percent (U.S. Department of Commerce, June 2005). Manufacturers were using more novel marketing such as heavy discounting and complementary offers. For example, the VW Phaeton had a $10,000 rebate and Ford offered a free computer with the purchase of some Ford Focus vehicles. Both GM and Ford attempted to streamline their operations by closing plants and consolidating manufacturing lines, but continued to invest heavily in new assembly plants and equipment for both manufacturing and product technology. GM focused on increasing its manufacturing flexibility using new manufacturing technology that allowed vehicles based on different platforms to be built on the same assembly line. In contrast, Ford invested in a Chicago-area Supplier Park, to provide more flexibility at its Chicago assembly plant, which had previously produced the Ford Taurus and Mercury Sable, but was then adapted to produce the Ford Five Hundred and Freestyle and Mercury Montego. Europe The European consumer expects a model that is different both in terms of design and technical characteristics, with diesel motors being very important and accounting for 43% of the market. In the United States light trucks represent nearly one-half of automobile sales whereas this is less than 5% in Europe and mini-cars are very present in Japan (30%). A rationalisation drive that was already underway began to take on a new strategic dimension insofar as it was now guided by the search for a closer relationship to the market, something that involved setting up new relationships with end-users (makeand deliver- to-order approach). New vehicle profit margins having been squeezed, manufacturers have had to build up a greater presence in customer services.

Structural changes enabled manufacturers to consolidate their positions not only in their local regional market (stagnation of Japanese market share, financial losses by American subsidiaries) but also in other markets via alliances or mergers (in particular the Renault-Nissan alliance and the Daimler Chrysler merger). Some suppliers are relatively independent from manufacturers and therefore oriented towards a number of different clients (unlike the historical link between Ford-Visteon and Toyota-Denso, for example). This is true for large multinationals like Bosch and for medium-sized family companies and small firms. Thus, the European industry has moved towards a type of modularisation and specialization, which is evidence of cooperation between firms. In this context the co-operation can be seen at assembly level, with suppliers parks and suppliers presence on-site and on manufacturers assembly lines (a trend that is less developed in the other two Triad regions); and also at the design level, with the advent of co-design practices that associate manufacturers with suppliers or with engineering service firms (Groupement de Recherches Economiques et Sociales,

2004)

China China maintained a positive but smaller growth rate over the period 2002 2004. While sales grew at a rate of 15 percent in 2004, this was less than previous annual growth rates of nearly 40 percent. This decline was due to several factors. The Chinese Central Government followed policies that tightened credit and slowed the overall economy. The more restrictive consumer loans resulted in less auto buyers. In addition, the market is caught in a cycle of price reductions where consumers expect the price to be lower the longer they wait to buy. On the supply side, Volkswagen announced plans to invest another $6 billion, GM an additional $3 billion and DaimlerChrysler $1 billion. Ford, from a relatively small base, planned to invest an additional $1.5 billion (U.S. Department of Commerce, June 2005).

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The Global Perspective In 2003, global sales of passenger cars and trucks were 57 million units. Sales are concentrated in the developed markets with the USA and Europe accounting for 62 percent. Global players, such as GM, Ford and DaimlerChrysler dominated and the USA was the largest market with sales of 17 million units in 2003. Intense global competition together with significant excess capacity in the developed markets has depressed the profits of the global automobile makers compelling them to strongly enter the emerging markets such as China and India, where economic growth is creating huge demands. This same competition has increased consolidation in the industry and technological alliances are increasing as companies see vehicle platform sharing as a means of cutting time-to-market and costs. Finally, they have to face the challenges of increased globalization and the ever-increasing emission and safety standards. If the global economic recovery gains in strength then the automotive industry will prosper in future years. But, if oil prices stay high then the global economy could slip into a recession and create high uncertainty for the industry. (Global Automotive, ReportSURE, October 2004) After several years of intense activity on the mergers and acquisitions, DaimlerChrysler revised its Asia strategy as its major partner, Mitsubishi, continued to lose profit. DCs share of Mitsubishi dropped from 37 percent in 1999 to 19.7 percent in 2004. The Renault/Nissan merger success continued with Nissans global sales up nine percent and global production up 15 percent over the period 1999 to 2004. Nissans U.S. sales increased 46 percent over the same period, going from 677,212 units to 985,989; while Renault net income increased 565 percent, from 565 million Euros in 1999 to 3,551 million Euros in 2004.

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Long term, the mature markets were adding no more than 1 percent annually to their ability to absorb additional output. In contrast, opportunities in the developing world especially in Asia were more buoyant. None the less, trade barriers existed almost everywhere and the major manufacturers continued to seek local partners and to look for outright acquisitions, mergers, and non-equity cooperative ventures. Despite these challenges, Ford planned to meet the priorities it had set in 2005 which were: Continuing to deliver exciting new products. Improving quality and customer satisfaction. Holding overall costs at 2004 levels. Improving market share and revenue in all regions. Improving results at all automotive operations.

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APPENDIX 1

Summary of Operations ($millions except share data)


Total sales and revenues Income/(loss) before income taxes Provision/(credit) for income taxes Minority interest Income/(loss) from continuous ops Income/(loss) from discontinuous ops Effects of change in accounting principle Net income/(loss) Automotive sector Sales Operating income/(loss) Income/(loss) before taxes Financial Services sector Revenues Income/(Ioss) before taxes Share Data ($) Net income/(loss) per common share (basic) Cash dividends Share price range (NYSE Composite) High low 2000 169,298 8,387 2,750 127 5,510 (2,043) 3,467 2001 160,654 (7,325) (2,064) 24 (5,285) (168) (5,453) 2002 162,258 1,064 342 367 355 (333) (1,002) 1,980) 2003 164,338 1,339 123 314 902 (l43) (264) 495 2004 171,652 4,853 937 282 3,634 (147) 3,487

140,621 130,601 134,120: 138,260 147,134 5,276 (7,471) (60.4) (1,556) (177) 5,421 (8,762) (1,054) (1,908) (155) 28,677 2,966 30,053 1,437 28,138 2,118 26,078 24,518 3,247 5,008

2.34 1.80 31.46 21.69

(3.02) 1.05 31.42 14.70

(0.55) 0.40 18.23 6.90

0.27 0.40 17.33 6.58

1.91 0.40 17.34 12.61

BALANCE SHEET DATA AT YEAREND Assets Automotive sector 94,312 Financial Services sector 189,078 Total assets 283,390 Long-term Debt Automotive sector 11,769 Financial Services sector 86,877 Total long-term debt 98,646 Stockholders' Equity 18,610

88,319 102,770 115,444 116,422 188,224 187,432 195,279 188,919 276,543 290,202 310,723 305,341 13,467 106,741 120,208 7,786 13,607 106,505 120,112 5,590 18,987 100,764 119,751 11,651 17,458 89,082 106,540 16,045

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APPENDIX 2
Fords Sector Figures
Sales ($billion) Unit sales (000s) Market Share (%) Market

Sector
Ford North America Ford South America Total Ford Europe PAG* Total Asia Pacific and Africa Total Automotive

2004 83.0 3.0 86.0 26.5 27.6 54.1 7.0 147.1

2003 83.6 1.9 85:5 22.2 24.8 47.0 5.8 138.3

2004 3,623 292 3,915 1,705 771 2,476 407

2003 3,810 210 4,020 1,609 754 2,363 353

2004 18.0 11.8

2003 Market 19.2 US 11.5 Brazil

8.7 1.3/2. 3

Europe 1.3/2. US/Europe 1 Australia

6,798 6,736

* (Comprises Volvo, Jaguar, Land Rover and Aston Martin)

Automotive Business unit of income before taxes ($millions)


2004 2003

Americas . Ford North America - Ford South America Total Ford Europe and PAG - Ford Europe - PAG Total Ford Asia Pacific and Africa/Mazda . Ford Asia Pacific and Africa . Mazda and Associated Operations Total Other Automotive Total Automotive

684 140 824 65 (850) (785) (36) 118 82

196 (129) 67 (1,620) 171 (1,449) (23) 69 46

(276) (572) (155) (1,908)

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APPENDIX 3 Fords Reorganisation Plan

H o w F o rd w ill o p e ra te in 2 0 0 0 F ord A u tom o tiv e O p e ratio ns


A lign e d o b jec tive s A u to m o tive stra te g y offic e P rod u c t D e ve lo pm e nt

E u ro p e

US

US

US

US

S m a ll F W D c a r L a rg e F W D c a r RW D car P e rs o n a l u s e tru c k C o m m e rc ia l tru c k v e h ic le p ro g ra m c e ntre v e h ic le p ro g ra m c e n trev e hic le p ro g ra m c e n tre e h ic le p ro gra m c e n trev e h ic le p ro g ra m c e nt v

P rod u c t stra te g y & c y c le p la n n in g A lign e d o b jec tive s C o re P .D . D e sig n V e hic le op e ratio n s M a n ufa ctu ring A lign e d o b jec tive s M a rke tin g & s a le s P o w e rtrain op e ratio n s C om po n e nts o p e ratio n s A d van c e d m an u . en g in e e rin g W /W m a rk etin g & s ale s op e ra tio n s R eg io n a l m ark etin g & s ale s op e ra tio n s C u s to m e r c o m m s . & s a tisfa c tio n g ro up

A lign e d o b jec tive s P rod u c tio n p u rch a s in g F a cilities & no p ro d u ctio n p u rch a s in g A lign e d o b jec tive s Q u ality P roc e s s le a d e rs hip E m plo y ee re la tio ns T e ch n ic a l a ffairs

S o u rc e: in a n c ia l T im e s 2 3 /24 A p ril 1 9 94 F

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Questions 1) Discuss and justify what you feel to be the main auto industry (global) drivers, together with the corresponding generic marketing strategies and key success factors that the major suppliers should possess, if they are to be successful. 2) Discuss the rationale behind Fords 2000 globalisation plan and comment on performance over the period 1994 to 2004. 3) Drawing upon relevant issues from the case, recommend and defend a possible future marketing strategy (or strategies) for Ford.

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