The origin of the first automobile can be traced back to1796 when a three-wheeler powered by steam was invented in France. This was followed by the invention of internal combustion engine in 1800, and the first gasoline motored vehicle was developed in 1885 by the Germans. By the end of 1895, the number of registered motor vehicles in the US was only four. The automobile industry was however revolutionized by Henry Ford, who after building his first vehicle in 1896, later developed an assembly line. The assembly line together with the mass production technique adopted by Ford enabled motor vehicles to be affordable to consumers. This element of mass production is what led to the development of other motor vehicle companies in America (Highfill, Baki, Copus, Green, Smith & Whineland, 2004). As a result, this section of the economy has led to massive job creation and subsequent advancement of the American economy.
Throughout the years, the automobile industry has experienced massive growth having a great impact on the American economy. Today, the number of new cars sold per year has become a crucial indicator of the well-being of the economy. Following the economic recession on 2007/08, the automobile industry was seriously affected, and major automobile makers such as General Motors and Chrysler all faced bankruptcy. Ford Motor Company, however, managed to weather financial crisis due to the huge cash reserve it had placed aside to cushion it against difficult financial times. This paper is going to analyze the microeconomic condition of Ford Motor Company and try to ascertain some of the factors which have made the company prosperous in the industry.
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Ford Motor Company’s Background Information
Ford Motor Company was founded by Henry Ford in 1903. Henry Ford was a great innovator who introduced the technology of mass production in the industry. In fact, Henry’s goal was to make motor vehicles affordable and accessible to the multitudes. To achieve his goal, Mr. Ford did not only work on the technology to produce more units but also deliberately lowered the company’s profit target to make more sales. By 1909, Ford Motor Company was able to sell10000 units at $ 825. Through the company’s innovation in marketing and advertisement, ownership of cars was pushed from being luxury items to becoming necessities (Davis, 2016). Ford Motor Company is the first company to introduce the eight work hours for laborers which were introduced in 1914.
The core business of the company is the production of automobiles and their service parts and also financial services. The company’s automotive industry is divided into two, the American and international segments. The international division involves the sale of Ford-brand vehicles and their related service parts across other continents other than the Americas. The American division involves the sale of vehicles within the Americas, North and South. The brands sold within the Americas include Ford and Lincoln. Another brand, Mercury was dropped in 2011. Luxury cars are sold under the brand, Lincoln. The company owns other motor vehicle companies such as Troller, an SUV manufacturer in Brazil and Ford Performance Vehicles Company found in Australia. Ford Motor Company also has ownership stakes in Mazda-2.1%, in Aston Martin-8% and Jianling 49% (Muller, 2010).
Ford has continued to focus its energies on innovation and decreasing its production cost to compete better in the industry. In its manufacturing technology, the company has incorporated video conferencing and computer assisted designs. Incorporation of these new ideas is behind the success levels the company has been enjoying. Today, based on vehicle sales, Ford Motor Company is the second largest automobile producer in the US following General Motors. Based on global revenue, the vehicle company is ranked 8th in America. By 2008, Ford Motor Company had a total of 213000 workers spread across 90 plants and facilities globally.
Supply and Demand Conditions
On average, Ford Motor Company sell more than 6 million vehicles annually and operates in five major segments namely, North America, South America, Asia-pacific and the Middle East and Africa. North America forms the largest market share for the motor vehicle company. In 2014, Ford Motor Company sold a total of 2.5 million units in the US alone. Regarding the country market share, Canada at 16% of the market and not the US take the lead. The company’s market share in the US is 15% similar to its market share in the UK (McFarlane, 2015). Regarding market growth, on the sale of vehicles, only two segments have been exhibiting room for growth. These two segments are the Asia-Pacific and Europe segments. 1.4 million Vehicles were sold to Asia-Pacific with a bulk of the amount 78% going to China. A similar number, 1.4 million was also sold to Europe posting a 5% year-over-year growth.
In 2011 the company posted $6.2 billion regarding profit, $7.2 billion in 2012, $8.3 billion in 2013 and 6.9 billion in 2014. The dip in profits in 2014 was due to challenges of currency movements and the exchange rate experienced during the year. During that year, South America had high inflation rate and the company was forced to have an operating margin of -13.2% (Catcher-Gershenfeld, Brooks, and Mulloy, 2015). In its effort to expand and grow its market share especially in the emerging nations, Ford has entered into joint venture partnership with motor companies both in Russia and China. Below is a summary of the company’s Revenue and operating income from 2010 to 2015.
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
| Revenue in USD mill |
128,954 |
136,264 |
134,252 |
146,917 |
144,077 |
149,55 |
| Operating income mill |
5.2 |
8.3 |
4.7 |
3.7 |
2.6 |
5.4 |
Adapted from Morning Star 2016
Ford obtains 80% of its supplies from about 100 suppliers. Its main suppliers include NHK Spring from Japan, which supplies the company with stabilizer suspension linkages, Valeo Electric and Electronic Systems from Poland, which supply starter assemblies and Flex-N-Gate Seeburn from Canada which supplies door hinges and arms. Other suppliers include Autovil from Spain supplying airbags, U-shin Europe from Hungary, which supply steering columns, Chaidneme from Venezuela supplying mufflers and exhaust systems and Summit Plastics from China supplying instrument panel components. American Companies working with Ford include Dee Zee supplying running boards and Warn Industries supplying axle assemblies.
The influence of suppliers on for is quite moderate. The company’s focus on reducing cost production and production of standardized parts for different Ford models has been fruitful. In 1997, the company managed to cut its production cost by about $1 billion. This managed to put the company in the good position regarding accessibility of the company’s spare parts and possibility of its inventory not being in the market. The high number of suppliers in the market also works for Ford since the suppliers have a limited bargaining power on Ford. Most of these suppliers are based in countries outside the use hence have low forward vertical integration. As such, they are not better placed to control the distribution of their product or sale of their products to Ford. The company also produces some of its material which they use to build their cars and related spare parts (Ferguson, 2015).
Building on the founder’s idea of innovation, the company must focus on ways through which they can minimize cost while at the same time maintaining their efficiency. Its innovation should not be the reason to hike its prices. As such, the company needs to abolish its use of reverse engineering and development of new cars since this put them behind their competitors when it comes to originality. Despite having a controllable amount of suppliers, the financial outlay in the sector has always been high. This pushed the company to delve in financial services where Ford lends money to automakers companies or dealers and even consumers. The risk involved in this has been substantially low with good returns. In 2014, the company managed to raise a net of $1.9 billion from its lending wing. This profit margin has been the reason why Ford has been contemplating to stop automobile manufacturing and focus on money lending. However given the fact that vehicle has remained a necessity in the current world Ford still have room for improvement regarding number and quality of cars made and market growth especially in developing and emerging nations.
Price Elasticity of Demand
Price elasticity of demand is the measure of consumer sensitivity towards changes in prices of a particular product. As the prices of the automobile, like in our case Ford, rises, the demand for the vehicle brand will decrease. Due to the increase in price consumers will either prefer to postpone the purchase of the car or go for a cheaper model elsewhere. As such, the price elasticity of demand of automobile the US is a good measure of how the market behaves. Stiff competition in the market has consumers a very price sensitive and the frequently changing of prices of automobiles forces us to calculate elasticity on these similar products at a given time rather than on the same product at different periods. Other than the change of price of the automobile, there are other factors which will influence the decision of a consumer when buying a vehicle. These include things like fuel consumption of the car, insurance, and infrastructure or the type of road where the consumer is going to drive the car.
Over the years since 1995, Ford Motor Company has been losing its market share. The reason behind this has been the increased production of units made by other motor companies. The only way of ensuring profits in an industry where fixed cost are very high is to increase production to ensure economies of scale. The strategy of Ford Motor Company has however been to make more money from the sale of fewer cars. As such, they have produced fewer cars and charging a bit higher prices compared to their competitors. The percentage increase of Ford vehicle prices leads to a huge percentage decrease of its buyers who prefer to go for other brands. This is quite dangerous since given the company’s strategy; the higher prices could discourage buyers forever.
Cost of Production
The cost of production for motor vehicle companies is higher than their counterparts in foreign countries. This is informed by the relatively strong American currency and the cost of labor. Most of the workers in America are under labor unions, the United Auto Workers Union, and as such have higher bargaining power when it comes to their salaries and other fringe benefits. Given its huge workforce, the company has been held back by labor costs. In 2009 Ford jumped a major hurdle when they manage to bargain with the workers union and reduced average minimum wage from $70 per hour to $55 per hour. Legacy cost of pensions and health benefits of its employees have been one big cost which has been giving the company problems (Senna, 2013). Compared to other companies in the US, Ford still has the highest cost structure. In 2006, it reported an operating loss of 12.6 billion which coincided with diminishing market share.
The motor company has been working on reducing its costs which can be supported by the table below. The company’s cost of goods sold has been improving from 2010 through to 2014 before dipping slightly in 2015. This shows that tremendous effort has been geared towards reducing production cost. This was done through renegotiation of contracts to reduce the legacy costs and the reduction of minimal wage allowance. Huge expenses on raw material have also been lowered. This was done by an introduction on online manufacturing which focused on the development of cars using one process rather than the former method of using different sections of engineering and production. The company has also focused on coming up with smart cars which are not price sensitive.
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
| COGS |
81.00 |
83.18 |
86.18 |
87.19 |
87.60 |
84.58 |
| Operating margin |
5.16 |
8.35 |
4.69 |
3.70 |
2.60 |
5.39 |
Adapted from Morning Star 2016
However, other cost reduction strategies such as standardization of parts could predispose the company to other dangers. Such as strategy banks on consistency and taste of consumers remaining consistent for a long period. Most of the time this is not possible hence leading to high rate of obsolesce and huge losses.
Overall Market
The market share of Ford Motor Company has been reducing steadily since 1995 and today it faces stiff competition within the US from five major motor companies. These companies include General Motors, Chrysler, Toyota, Honda, and Nissan. Within the European market, the motor company’s market share has been growing. Its competitors include V olkswagen, Peugeot, Renault, General Motors and Fiat. The main factor growth and profitability in the region have been its strategy to sell smaller vehicles in the region rather than its preferred big vehicles (trucks) for the American market. Additionally, Ford vehicles seem to appeal to the European market than the American market.
Some of the strength of this company includes its global presence, its huge financial muscle and cash reserve and its power of renegotiating contracts with the labor union. Its weaknesses lie on its poor profitability compared to competitors, high completion and the huge fixed cost in the industry.
Recommendations
Given the high cost of production within America, the company should think of exporting some of its manufacturing operations, especially of the small cars which are not bringing in profits out of the US. This will help the company reduce its cost while also increase its penetration and growth of the market in the target countries. Following the market’s affinity for smaller vehicles and the world’s need for environmental sustainability the company should exploit its recent ‘EcoBoost’ technology which is in line with reduction of carbon dioxide emission and environment sustainability. This particular technology promises a 20% increase in fuel efficiency and 15 % reduction in emission of carbon dioxide. The company should also exert more effort and try penetrating the emerging markets of China and India to cover the market share lost in the Americas.
References
Catcher-Gershenfeld, J, Brooks, D & Mulloy, M (2015). The Decline and Resurgence of the U.S. Auto Industry . Retrieved from http://www.epi.org/publication/the-decline-and-resurgence-of-the-u-s-auto-industry
Davis, M (2016). How the U.S. Automobile Industry Has Changed. Retrieved from http://www.investopedia.com/articles/pf/12/auto-industry.asp
Ferguson, E (2015). Ford Motor Company: Five Forces Analysis (Porter’s Model ). Retrieved from http://panmore.com/ford-motor-company-five-forces-analysis-porters-model
Highfill, D., Baki, M., Copus, S., Green, M., Smith, J & Whineland, M ( 2004) . Automotive Industry Analysis - GM, DaimlerChrysler, Toyota, Ford, Honda. Retrieved from http://www.academicmind.com/unpublishedpapers/business/management/2004-11-000aaa-automotive-industry-analysis.html
McFarlane, G (2015). How Ford Makes Money. Retrieved from http://www.investopedia.com/articles/markets/082115/how-ford-makes-money.asp
Muller, J (2010). Ford Family's Stake Is Smaller, but They're Richer and Still Firmly in Control . Retrieved from http://www.forbes.com/sites/joannmuller/2010/12/02/ford-familys-stake-is-smaller-but-theyre-richer-and-remain-firmly-in-control/#2239702d5be9
Senna P (20013) Competitive Advantage Ford Motor Company. Retrieved from https://wpsenna.wordpress.com/2013/06/04/competitive-advantage-ford-motor-company/
