In a present day of global warming, environmental issues, labor unions, and other impacts, the automobile industry is in an era of instability and change. Ford Motor Company has been traditionally considered one of the “Big Three” in the auto industry, but they are not adapting as well as hoped to the changing industry, and will have to strategize to survive in a struggling industry.
There are many different risk factors for Ford and its competitors. In this paper we will look at two competitors for Ford that are also considered to be members of the “Big Three” and coincidently, are not adapting to changes in the auto industry as quickly as other competitors. These other companies are General Motors (GM) and Daimler Chrysler. We will also look at the general group of foreign car manufacturers who are steadily acquiring market share from the Big Three.
The first major risk for the auto industry in general is that of global warming and a growing concern for environmental issues among consumers. This is a risk that is spread among the entire auto industry, not just Ford Motor Co. Consumers are becoming more aware of the impact the auto industry has on the environment, and making their purchasing decisions with that on the criteria.
Another factor involved with the auto industry, is a pressure on the companies ability to increase prices. Due to excess capacity and the ability of Japanese and Korean auto manufactures to mass produce and thus lower cost prices, many companies in the auto industry are producing vehicles at little to no profit due to the inability to raise prices.
A major risk or concern for North American auto makers is the employee’s health care expenses. For Ford, in 2006 their health care expenses for U.S. employees and dependants was $3.1 billion, and with $1.8 of that in postretirement health care. Ford feels that although steps have been taken to lower their health care expenses, the cost to the company will continue to rise for the foreseeable future.
Foreign car manufacturers have on average lower health care and employee costs, giving them an advantage over Ford, GM, and Daimler Chrysler. Ford Motor Co is hoping to take steps to offset the costs of employee benefits; however, this could also lead to negative publicity for the company. Foreign auto makers are able to maintain lower costs with non-unionized and on average, younger employees.
The next risk factor for the auto industry is commodity and energy price increases. Steel and resin (plastic) are the two most used commodities for auto manufacturers, and they are products in high demand for many industries. Rising awareness of sustainability and rising demand for these products has lead to recent price increases, and it is estimated to continue this trend.
This factor targets all of the auto industry, but again hits the big three and other auto manufacturers harder then it does some of the foreign car manufacturers. Japanese auto makers have long been seen as efficient smaller car manufacturers, where the “big three” have moved to the larger SUV type vehicle.
By building smaller vehicles, Japanese auto makers reduce their dependency and therefore their costs on steel and resin. The second risk coming from the comparative sizes of vehicles being manufactured by the auto makers is the cost of gasoline. As the price of gasoline increases, consumers are looking more towards smaller vehicles, and going with an auto manufacturer traditionally associated with smaller vehicles, such as Honda or Toyota, as compared to the big truck and SUV manufacturers that the Detroit manufacturers are linked with.
The fifth risk for US auto manufacturers is the depreciation of the US dollar, a trend that has been occurring since 2002. Many of Ford’s models are built in foreign countries, putting pressure on the pricing of the vehicles. Despite a depreciation of the US dollar, and prices lowering, Ford finds itself unable to lower the prices of the vehicles to match the depreciation due to its high costs from foreign manufacturing.
In the category of other economic factors, issues such as a contraction within the housing industry, CO2 emission standards, crowded market place for new cars and trucks, more efficient production by foreign companies (Toyota’s Total Production System which is a just-in-time production that other companies have attempted to emulate with little success) and a downward trend in buying are all risk factors that the entire industry needs to take into consideration.
The first video watched on Hoovers.com is a video with Ford’s CEO Alan Mulally, the first of two. The CEO was at an auto show, introducing a new cross over vehicle. Risks that are alluded to in this interview are centered on the large truck and SUV markets versus the smaller vehicles and cross over vehicles that are being produced. A major problem Ford had seen in the past was that consumers and industry analysis had not seen them as moving forward into the future, and matching consumers wants and demands as well as some of the foreign manufacturers.
The second Ford video with CEO Alan Mulally shows the outcome of Ford’s realization that they need to concentrate on other markets and producing new vehicles. For the first time in two years, they are in the black for the current quarter (at the time of this video). However, when asked if the trend will continue, the CEO acknowledges that because of having to reduce production during the 3rd quarter (due to a lower buying trend) that it is a difficult time for them.
This CEO interview illustrates that when risk factors are analyzed and considered as real risk factors to the company, steps can be taken to improve on those. Ford shows that they took into account various factors; environment and emissions regulations, commodity and energy price increases, and pricing and costs; and by taking all these considerations into account, they came up with a strategy to take them out of the red.
In Hoover’s videos with GM’s CEO’s Rick Wagoner, they recognize that pricing in the US is a major factor. One of the risks recognized by Ford was that they could not price to the US market as well as could be hoped due to the depreciation of the US dollar, and the pressure on the pricing from production in foreign companies.
GM has been able to price to match the US market, and therefore it has led to them increasing sales, and holding on to sales in their markets. They also recognize that the housing market is close to bottoming out, which has a negative impact on the truck market. This was one of the risks acknowledged above in the other economic risks.
The second video with the CEO looks at the earnings for 2006, which was their first full year back in black. GM was able to recognize threats, and implement plans to combat that earlier then Ford, and the results show in the earnings, however, 14 million was lost in North America, which acknowledges that the North American market while the largest market for sales, is still a difficult sell for the auto industry.
The final video with GM’s CEO talks about 2007’s earnings, with the first quarter underperforming as compared to what was predicted by Wall Street. In North America, a loss of $46 million was posted. Wagoner sees that as a result of the low housing market, the cutting of businesses that are low income for them (fleet and daily rental), a relatively weak market, as well as needing to cut back areas where efficiency will show a lower cost structure.
However, they are showing strong brand performance with their Chevy line, and the historical restructuring of their company looks to combat changing risk factors in the markets.
The auto industry is one of the most fascinating industries. Trends are constantly changing, the research and innovation pushes the market at an increased pace, the consumers are demanding, and very particular about what they ask for, but are fickle about what they actually end up purchasing. In the past, companies like Ford, GM and DaimlerChrysler could rely on their brand name and image to sell their cars for them.
Their marketing wasn’t better then the foreign companies and they allowed themselves to be stuck in a niche, without paying particular attention to what the customer desired and needed. Many of them decided that bigger was better, up until recently, continued to make oversized vehicles, ignoring the trends that were saying to get out of that market.
These companies have survived on tradition and history alone, they are gigantic companies, that are losing money, or breaking even year after year, and their brand name alone keeps them alive. This strategy, of relying on their name and not adjusting to changing times, has hurt the big three. Ford, as the number two company for many years, fell to number four, and lost $12.7 billion in the fiscal year for US in 2006.
They also announced that up to 30,000 jobs would be cut, along with the closing of 14 plants. The question is, how can other auto manufacturers such as Toyota and Honda survive without making these cuts, when all of the Big Three are reporting losses and cuts for 2007?
All the risk factors mentioned above are the reasons. It’s noted that the foreign car manufacturers are affected by few of the risks, this is because they already took into consideration these risks when they first became apparent, and moved to combat it. The Big Three relied on their name and brand loyalty and traditional strategies for too long, and had to resort to major cost cutting in order to survive.
The traditional auto industry (that of the big three) is seen to be run like a bank, with MBA’s in charge, and the new auto industry’ (that of the foreign car manufacturers) are being run by engineers and manufacturing experts. They are being run by CEO’s who understand the process, and the in’s and out’s of what is needed and wanted for a car, who also have good business sense.
So what does this say about the future of Ford and the auto industry? If Ford wants to survive past the next 10 years, restructuring is crucial. The risk factors outlined are proven to be risks, but they are factors that can be overcome. The companies that have overcome the greatest amount of these factors (the foreign companies) are showing higher profits, and are overtaking the traditional auto manufacturers.
If Ford can move quickly, strategize, and eliminate these factors, they will possibly be able to regain their position at the top, but they need to not rely on their brand name, and pay more attention to what the consumer wants and needs