The Turnaround Ford Motor Company

Ford Motor Company was launched in a converted factory in 1903 with $28,000 in cash from twelve investors. It would go on to become one of the world’s largest and most profitable companies. It is one of the largest family-controlled companies in the world and has been in continuous family control for over 100 years. Ford Motor Company is an American multinational corporation and the world’s third largest automaker based on worldwide vehicle sales. Its overseas business encompasses only one truly global brand, Volvo of Sweden, other than the Ford brand itself, but it also owns a one-third controlling interest in Mazda.

Its former subsidiaries, Jaguar and Land Rover, were sold to Tata Motors of India in March 2008. Lincoln and Mercury are also Ford’s major brands in the US, but not in the rest of the world. In 2007, Ford became the third-ranked automaker in US sales after General Motors and Toyota, falling from number two slot for the first time in over fifty years. Ford was the overall seventh-ranked American based company in the 2007 Fortune 500 list, based on global revenues in 2006 of $160. 1 billion. In 2007, Ford revenues increased to $173.

9 billion, while producing over 6. 5 million automobiles. Also in 2007, Ford received more initial quality survey awards from J. D. Power and Associates than any other automaker, with five vehicles ranking at the top of their categories, and fourteen vehicles ranked in the top three. Ford pioneered methods for large-scale manufacturing of cars, large-scale management of an industrial workforce, and the assembly line. During the 1990s, Ford sold large numbers of vehicles, focusing on more profitable pickups and SUV’s in a growing US economy with low fuel prices.

In the last several years, legacy healthcare costs, higher fuel prices, and a faltering economy led to falling market shares, declining sales, and shrinking profit margins. Most of Ford’s corporate profits came from financing consumer automobile loans through its credit division. By 2005, bond rating agencies had downgraded the bonds of Ford to junk status, citing high health care costs, rising gasoline prices, market share loss, and dependence on declining SUV sales for revenues. Profit margins had decreased on large vehicles due to increased incentives in the form of rebates or low interest financing, to offset declining demand.

Ford was also slow to recognize the growing trend to smaller more fuel efficient cars and failed to retool its factories in a timely manner. Ford moved to introduce a range of new vehicles built on universal car platforms, rather than the traditional body-on-frame truck chassis. Ford also developed alternative fuel and high efficiency vehicles, such as the Escape Hybrid. Ford announced that it will team up with Southern California Edison to examine the future of plug-in hybrids in terms of how home and vehicle energy systems will work with the electrical grid.

In December 2006, the company raised its borrowing capacity to almost $25 billion, essentially pledging all corporate assets as collateral to secure a needed line of credit. In order to control its ever expanding labor costs ,one of the most expensive in the world, the company and the United Auto Workers, agreed to a contract settlement in November of 2007 giving the company a substantial break in terms of its ongoing retiree health care costs and other economic issues.

The agreement included the establishment of a company-funded, independently run trust to shift the burden of retiree health care off of the company’s books, thereby improving its balance sheet. However, this arrangement will not begin to take effect until January 1, 2010. Ford reported its largest annual loss in company history in 2006 of $12. 7 billion, and estimated that it would not return to profitability until 2009. However, Ford surprised Wall Street in the second quarter of 2007 by posting a $750 million profit. Despite the gains, the company finished the year with a $2.

7 billion loss, largely attributed to finance restructuring at Volvo. In March 2008, Ford announced that it had reached an agreement to sell its Jaguar and Land Rover operations to Tata Motors for $2. 3 billion. Ford will then be responsible to contribute up to US $600 million to the Jaguar and Land Rover pension plans. On January 23, 2006, Ford announced its new business strategy, “The Way Forward”, which includes resizing the company , dropping some unprofitable and inefficient models, consolidating production lines, shutting factories and eliminating over 30,000 jobs.

These cutbacks are in alignment with Ford’s approximate 25% decline in U. S. automotive market share since the 1990s. In September 2006, Alan Mulally was named the new CEO of Ford. Alan Mulally has an engineering degree in Aerospace and an MBA from MIT. He spent 37 years at Boeing, and many credit him with being able to turn around the struggling aerospace company. His critics comment his aerospace experience does not translate well to the automotive industry. In fact, he studied the production model processes of Toyota and incorporated it into Boeing Corporation.

He has begun integrating these manufacturing processes into Ford Motor Corp. Mulally has a reputation as a cost-cutter and an efficiency aficionado and has brought that approach to Ford where he shed 46,000 jobs in North America alone. He has solid experience in customer satisfaction, manufacturing, supplier relations, and labor relations. Mulally has his work cut out for him to turn the struggling car manufacturer around and make it profitable once again. Mulally’s goal is to return Ford to profitability by year 2009.

He recently hired the Chief Marketing Officer from Toyota to rebrand the Ford products. He hopes to continue to increase the quality of the products recently rated as high as Toyota by JD Power and Consumer reports. Mulally would like to create vehicles that can be manufactured globally instead of regional products and also decrease the amount of options available to consumers. Some Ford brands were offered with 128 different options on the interior alone, which increased production costs significantly. In the last 3 years, Ford has trimmed $5 billion in operating costs in North America alone.

But, there is room for improvement on there balance sheet. Ford’s total assets are valued just over $279 billion, while their liabilities are valued at just over $273 billion, leaving stockholder equity at $5. 6 billion. This is an improvement from 2006 where there total liabilities were greater than there total assets. There long term debt is $168. 53 billion. Ford’s current ratio, which measures the ability to meet short term debt, is 1. 18. The debt to equity ratio which measures a company’s financial leverage is 29.

94, which can be attributed to the huge losses of 2006 and 2007. They have made great strides from 2006 by reducing there long term debt by $4 billion. Ford’s book value per share is 2. 564. Ford has improved there operations, but there heavy debt load is a concern. There interest expenses have been increasing during the 2005 through 2007 period. This can be attributed to there losses and there bonds being rated as junk. They have recently been extended more favorable credit terms and this should improve there net income and income statement.

They have also been able to build up a substantial cash position of over $22. 77 billion and increase there cash flow, while lowering there accounts receivables. They have made steady progress in reducing there inventories. Some key statistics used as valuation measures are as follows: they have a forward P/E ratio of 15. 28, Price/Sales of . 10, Price/Book of 3. 2, profit margin of -1. 39, operating margin of -1. 97, and Enterprise Value/EBITDA of 15. 412, Gross Profit of $29. 87 billion with EBITDA of $10. 52 billion.

The automotive industry is very competitive and Ford has much to do to gain ground on its competitors. The current economic environment does not bode well for the industry as a whole. GM recently reported over $3 billion in losses, while Toyota announced its annual profit would drop for the first time in nine years. Industry analysts predict real growth for the industry will come from emerging markets such as Brazil, China, and Russia. Toyota is the leader in the industry in terms of gross margin, operating margin, and net income.

Ford recently stunned Wall Street with a first quarter profit announcement of $100 million. This was well ahead of analysts’ expectations and the stock surged . 90 a share or 15% in one day. Ford’s first-quarter profit occurred in a period when General Motors, which began its revamping more than a year before Ford, lost $3. 3 billion. Adding to the optimism was last week’s announcement by billionaire investor, Kirk Kerkorian that he had quietly bought 100 million Ford shares and was offering to buy 20 million more.

Mulally has done a great job at Ford cutting costs, improving efficiency and production, and bringing new designs to the market. Additionally, they have reached agreements with some of there major suppliers to get more favorable prices. Ford was paying on average more than $800 on supplies per car than its competitors. They are rolling out new models like the Ford Flex, Lincoln MKS, Ford F-150 in North America and the Ford Kuga and Fiesta in Europe. What remains to be seen is if the new designs they are preparing to launch are a hit with consumers and it translates into increased sales.

With the rising price of gas, consumers are spending less, which will impact big ticket items such as automobiles. More consumers are purchasing hybrid cars to combat these rising costs. Ford needs to continue to improve its operations in North America and continue to gain market shares in other parts of the world such as China. Mulally’s strategy of focusing on Ford’s core model and divesting itself of other models is a risky one, but one he enjoyed great success with at Boeing. The Ford family is staking there future on it.