Questions and Topics We Can Help You To Answer:
Paper Instructions:
A formal, in-depth case analysis requires you to utilize the entire strategic-management process. Assume your group is a consulting team asked by Ford management to analyze its external/internal environment and make strategic recommendations. You will be required to make exhibits/matrices to support your analysis and recommendations.
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The completed case must include: (Use these as your headings within your paper. Place your work under each heading, following APA 7)
External Analysis
SWOT Analysis
Porter’s 5 Forces
2 sources
CASE 17
FORD: NO LONGER JUST AN AUTO COMPANY?*
In January 2017 Ford Motor Company celebrated a major milestone as the F-Series became the top-selling truck in the U.S. for the 40th consecutive year—all told, 26 million trucks sold since January 1977. The F-Series had also been the best-selling vehicle in the U.S. for 35 years straight.1 In February 2017, the F-Series, which included the Super Duty and the all-new F-150 Raptor, hit an all-time annual sales record of 65,956 vehicles.2 The F-150 was named 2017’s Autobytel buyer’s choice full-size truck, Edmunds most wanted full-size truck, Cars.com best pickup truck, U.S. News & World Report best truck brand, Kelley BlueBook Best Buy truck, and the Motor Trend Truck of the Year. Commenting on these results, Todd Eckert, Ford truck group marketing manager said, “what’s made the F-Series so successful is the Ford truck team’s ability to anticipate the needs of our customers better than anyone else—how those needs change, what’s most important, and what they need to do to move forward. Their insights help us design, engineer and build America’s best-selling trucks.”3
The ability to anticipate customers’ needs is crucial to any company’s long-term success, but especially in the capital-intensive, consumer-driven, globally competitive automobile industry. As the major players from Asia, Europe, and the U.S. jockey for position in the sales of traditional trucks and cars, smaller, more innovative companies such as Tesla, Elio Motors, and start-up Faraday Futures are creating concept cars that address consumers’ interests in alternative fuels, low operational costs, and self-driving autonomous designs that leave the passenger free to use in-transit time for other more productive pursuits.
Self-driving cars are reported to be coming as early as 2018 to the global roadways; and in 2017 Ford Motor Company was in this business big-time, testing its fleet of 30 autonomous cars in Arizona, California, and Michigan.4
Ford Motor Company CEO Mark Fields announced in January 2015 that Ford would be using innovation “not only to create advanced new vehicles but also to help change the way the world moves by solving today’s growing global transportation challenges.”5 Given the increasing disruption in the industry, and the obligation to return value to understandably concerned investors, Mark Fields had some significant decisions to make in the coming years.
Fields had been promoted to CEO in July 2014 on the retirement of Alan Mulally, widely hailed as one of the “five most significant corporate leaders of the last decade,” and architect of Ford’s eight-year turnaround from the brink of bankruptcy in 2006.6 It was Mulally who created the vision that drove Ford’s revitalization: “ONE Ford.” The ONE Ford message was intended to communicate consistency across all departments, all segments of the company, requiring people to work together as one team, with one plan, and one goal: “an exciting viable Ford delivering profitable growth for all.”7 Mulally worked to create a culture of accountability and collaboration across the company. His vision was to leverage Ford’s unique automotive knowledge and assets to build cars and trucks that people wanted and valued, and he managed to arrange the financing necessary to pay for it all. The 2009 economic downturn that caused a financial catastrophe for U.S. automakers trapped General Motors and Chrysler in emergency government loans, but Ford was able to avoid bankruptcy because of Mulally’s actions.
Mulally had groomed Mark Fields as his successor since 2012, instilling confidence among the company’s stakeholders that Ford would be able to continue to be profitable once Mulally stepped down. Even with this preparation, CEO Fields was still facing an industry affected by general economic conditions over which he had little control and a changing technological and sociocultural environment where consumer preferences were difficult to predict. And rivals were coming from unexpected directions. Fields would have to anticipate and address numerous challenges as he positioned the company for continued success.
Attempts at repositioning Ford had been under way for many years. In the 1990s, former CEO Jacques Nasser had emphasized acquisitions to reshape Ford, but day-to-day business activities were ignored in the process. When Nasser left in October 2001, Bill Ford, great-grandson of company founder Henry Ford, took over and emphasized innovation as a core strategy to reshape Ford. In an attempt to stem the downward slide at Ford, and perhaps to jump-start a turnaround, Bill Ford recruited industry outsider Alan Mulally, who was elected president and chief executive officer of Ford on September 5, 2006. Mulally, former head of commercial airplanes at Boeing, was expected to steer the struggling automaker out of the problems of falling market share and serious financial losses. Mulally created his vision of “ONE Ford” to reshape the company and in 2009 C-108finally achieved profitability. He committed Ford to remaining “on track for both [Ford’s] overall and North American Automotive pre-tax results to be breakeven or profitable”8 in the coming years. Mulally was able to sustain this success past the initial stages of his tenure, and maintained profitability up until his retirement in June 2014.
In 2014, as CEO Mark Fields took over, challenging global conditions meant 2014 year-end profit saw a 56 percent drop from 2013—meaning Fields had work to do. In 2015, Fields continued the focus on ONE Ford, highlighting the idea that ONE team, working with ONE plan, could achieve ONE goal, profitable growth for all. By successfully launching 16 new global products, opening the last of ten new plants to support growth in Asia Pacific, and seeing profitable global business unit performance in every region except South America, Ford had the most profitable year ever in 2015, and 2016 was just slightly lower, and the second best ever. The 2016 full year net income of $4.6 billion was down from 2015 due to a one-time pre-tax pension re-measurement. Adjusted pre-tax profit would have been $10.4 billion, on par with 2015. (See income statement in Exhibit 1.)
EXHIBIT 1 Ford Motor Company and Subsidiaries: Income Statement
For the Years Ended December 31,
2014
2015
2016
Revenues
Automotive $ 135,782 $ 140,566 $ 141,546
Financial Services 8,295 8,992 10,253
Other
—
—
1
Total revenues
144,077 149,558 151,800
Costs and expenses
Cost of sales 125,025 124,041 126,584
Selling, administrative, and other expenses 11,842 10,502 12,196
Financial Services interest, operating, and other expenses
6,878
7,368
8,904
Total costs and expenses
143,745 141,911 147,684
Interest expense on Automotive debt 797 773 894
Non-Financial Services interest income and other income/(loss), net 76 1,188 1,356
Financial Services other income/(loss), net 348 372 438
Equity in net income of affiliated companies
1,275
1,818
1,780
Income before income taxes 1,234 10,252 6,796
Provision for/(Benefit from) income taxes 4 2,881 2,189
Net income 1,230 7,371 4,607
Less: Income/(Loss) attributable to noncontrolling interests (1) (2) 11
Net income attributable to Ford Motor Company
$ 1,231
$ 7,373
$ 4,596
EARNINGS PER SHARE ATTRIBUTABLE TO FORD MOTOR COMPANY COMMON AND CLASS B STOCK
Basic income $ 0.31 $ 1.86 $ 1.16
Diluted income 0.31 1.84 1.15
Cash dividends declared 0.50 0.60 0.85
Note: Figures in millions, except per-share amounts; year-end December 31.
Source: Ford Motor Company 10K filings.
But in 2016 CEO Mark Fields decided to restructure, creating a new focus, expanding the company’s scope from C-109vehicles to “mobility,” through business model innovation. Of interest in the income statement shown in Exhibit 1 is the presence, for the first time, of an “Other” revenue item, representing the newly operational Ford Smart Mobility LLC, a subsidiary formed to design, build, grow, and invest in emerging mobility services. Designed to compete like a start-up company, Ford Smart Mobility LLC was planning to design and build mobility services on its own, and collaborate with start-ups and tech companies as needed to pursue opportunities.
Going into 2017, Ford was guiding profits lower, primarily because of this intent to invest in the emerging mobility services opportunities. The ONE Ford legacy of Mulally was being adapted. In 2015, the plan had identified the following objectives:
Aggressively restructure to operate profitably at the current demand and changing model mix.
Accelerate development of new products, service, and experiences customers want and value.
Finance our plan and maintain a strong balance sheet.
Work together effectively as one team.
The new vision was to make “people’s lives better by changing the way the world moves,” and the strategy was to deliver top quartile shareholder returns through automotive and high-growth mobility businesses.9 Ford intended to do this by focusing on those strategic priorities in both the core business and emerging opportunities that would fortify, transform, and grow business:
Fortifying the automotive “profit pillars” of trucks, vans, commercial and utility vehicles; delivering updated performance vehicles such as the Ford GT and Mustang.
Transforming the underperforming Lincoln, Continental and Navigator luxury products, and repositioning small vehicles in developed markets through redesign; focusing on the needs of emerging markets.
Growing investments in emerging opportunities, especially in electrification, autonomous vehicles, and mobility services.
In 2017, reminding investors of the company’s long-term legacy, Fields pointed out a history going back to founder Henry Ford of “democratizing technology,” not just making products for people who could afford luxury vehicles, but using technology to solve problems of mobility and access, providing not only products but also transportation services that made people’s lives better.10 So, although Ford would always sell cars, CEO Fields was making big bets in autonomous technology (self-driving cars), electric vehicles, and other transportation services such as urban mobility solutions via ride-sharing, bike-sharing, and customized interior vehicle experiences serving multiple customer needs.
This vision of a seismic shift in personal transportation was fully supported and even driven by Ford’s executive chairman Bill Ford, who had championed the concept of increased mobility back in 2009 when the only things to invest in were “parking and municipal ticketing solutions”11 Now, in 2017, Bill Ford was supporting the company’s movement beyond selling vehicles to investing heavily in mobility services. As the initial architect of this shift, Bill Ford predicted the company could make profit margins of up to 20 percent on new services, more than double what it had traditionally made selling cars and trucks, but the ultimate goal, beyond making money, was to improve people’s lives. In doing so, Bill Ford would be protecting his great-grandfather’s legacy.12
History of the Ford Motor Company
In 2017, Ford Motor Company, based in Dearborn, Michigan, had about 201,000 employees and 62 plants worldwide. It manufactured or distributed the automotive brands Ford and Lincoln across six continents, and provided financial services via Ford Motor Credit. In 2017, it was also aggressively pursuing emerging opportunities with investments in electrification, autonomous vehicles, and consumer mobility. It was the only company in the industry where the company name still honored the vision and innovative legacy of its founder, Henry Ford.
American engineer and industrial icon Henry Ford had been a true innovator. He didn’t invent the automobile or the assembly line, but through his ability to recognize opportunities, articulate a vision, and inspire others to join him in fulfilling that vision, he was responsible for making significant changes in the trajectory of the automobile industry and even in the history of manufacturing in America. Starting with the invention of the self-propelled Quadricycle in 1896, Ford had developed other vehicles, primarily racing cars, which attracted a series of interested investors. In 1903, twelve investors backed him in the creation of a company to build and sell horseless carriages, and Ford Motor Company was born.
Starting with the Model A, the company had produced a series of successful vehicles, but in 1908 Henry Ford wanted to create a better, cheaper “motorcar for the great multitude.”13 Working with a group of hand-picked employees, he designed the Model T. The design was so successful, and demand so great, that Ford decided to investigate methods for increasing production and lowering costs. Borrowing concepts from other industries, by 1913 Ford had developed a moving assembly line for automobile manufacture. Although the work was so demanding that it created high employee turnover, the production process was significantly more efficient, reducing chassis assembly time from 12 ½ hours to 2 hours 40 minutes. In 1904, Ford expanded into Canada, and by 1925 Ford had assembly plants in Europe, Argentina, South Africa, and Australia. By the end of 1919, Ford was producing 50 percent of all the cars in the U.S., and the assembly line disruption in the industry had led to the demise of most of Ford’s rivals.14
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The Automotive Industry and Ford Leadership Changes
The automotive industry in the United States has always been a highly competitive, cyclical business. In 2017 there were a wide and growing variety of product offerings from a growing number of manufacturers, including the electric car lineup from Tesla Motors, self-styled as “not just an automaker, but also a technology and design company with a focus on energy innovation.”15 The total number of cars and trucks sold to retail buyers, or “industry demand,” varied substantially from year to year depending on general economic situations, the cost of purchasing and operating cars and trucks, and the availability of credit and fuel. Because cars and trucks were durable items, consumers could wait to replace them, and, starting in 2016, the average age of light vehicles on U.S. roads was over 11 years. Partly due to this, replacement demand was forecasted to stay fairly flat for 2017 and beyond. Any increase in sales would be aided by an improvement in the general economic situation, reduced gasoline prices, and lower interest rates for car loans. However, sales in U.S. markets had not belonged only to U.S. manufacturers for some time.
In the U.S., Ford’s market share had dropped over time—from almost 25 percent in 1999 to 15.5 percent in 2011,16 with major blows to market share in the light-vehicle segment. Going into 2017, although still losing ground at 14.9 percent, Ford claimed the second spot in the U.S. market, just behind GM and ahead of Toyota. (See Exhibit 2.)
EXHIBIT 2 Sales and Share of U.S. Total Market by Manufacturer, 2016
Automaker Units Sold % Change Market Share
General Motors 2,723,667 −2.5% 17.2%
Ford Motor Company 2,361,426 −0.2% 14.9%
Toyota Motor Corporation 2,206,359 −2.4% 13.9%
FCA/Chrysler Group 2,051,796 −0.6% 12.9%
Honda Motor Company 1,477,465 2.9% 9.3%
Nissan Motor Company 1,411,680 4.9% 8.9%
Hyundai-Kia 1,305,945 2.8% 8.2%
Volkswagen Group* 525,176 −4.6% 3.3%
Daimler 343,695 0.6% 2.2%
BMW-Mini 327,711 −10.2% 2.1%
Jaguar-Land Rover 92,531 22.7% 0.6%
Total 15,850,640 0.04% —
Red font indicates declining year-over-year volume.
Source: Automakers & Autonews.com as of 12/1/2016.
Originally dominated by the “Big 3” Detroit-based car companies, Ford, General Motors, and Fiat/Chrysler, competition in the United States had intensified since the 1980s, when Japanese carmakers began gaining a foothold in the market. To counter the problem of being viewed as foreign, Japanese companies Nissan, Toyota, and Honda had set up production facilities in the United States and thus gained acceptance from American consumers. Production quality and lean production were judged to be the major weapons that Japanese carmakers used to gain an advantage over American carmakers. Starting in 2003, because of innovative production processes that yielded better quality for American consumers, Toyota vehicles had unquestionably become “a better value proposition” than Detroit’s products.17
Back in 1999, Ford Motor Company had been in good shape, having attained a U.S. market share of 24.8 percent, and had seen profits reach a remarkable $7.2 billion ($5.86 per share) with pre-tax income of $11 billion. At that time people even speculated that Ford would soon overtake General Motors as the world’s number-one automobile manufacturer.18 But soon Toyota, through its innovative technology, management philosophy of continuous improvement, and cost arbitrage due to its presence in multiple geographic locations, was threatening to overtake GM and Ford.
In addition, unfortunately, the profits at Ford in 1999 had come at the expense of not investing in Ford’s future. Jacques Nasser, the CEO at that time, had focused on C-111corporate acquisition and diversification rather than new vehicle development. By the time Chairman Bill Ford had stepped in and fired Nasser in 2001, Ford was seeing decline in both market share and profitability. By 2005, market share had dropped to 18.6 percent and Ford had skidded out of control, losing $1.6 billion, pre-tax, in North American profits. It was obvious Ford needed a change in order to adapt and survive. Observers believed the Ford family would take action to prevent further losses: “Ford may need a strongman . . . a Ford characteristic—the ‘prime minister’ who actually runs the company under the ‘constitutional monarch,’ a member of the Ford family.” It was speculated that Mark Fields, named head of Ford’s North American operations in 2005, might be tapped to take that job.19
The Ford empire had been around for over a century, and the company had not gone outside its ranks for a top executive since hiring Ernest Breech away from General Motors Corporation in 1946.20 Since taking the CEO position in 2001, Bill Ford had tried several times to find a qualified successor, “going after such industry luminaries as Renault-Nissan CEO Carlos Ghosn and DaimlerChrysler chairman Dieter Zetsche.”21
Among large corporations, it had become fairly common to hire a CEO from outside the family or board. According to Joseph Bower from Harvard Business School, around one-third of the time at S&P 500 firms, and around 40 percent of the time at companies that were struggling with problems in operations or financial distress, an outsider was appointed as CEO. The reason might be to get a fresh point of view or to get the support of the board. “Results suggest that forced turnover followed by outsider succession, on average, improves firm performance.”22 Bill Ford claimed that to undertake major changes in Ford’s dysfunctional culture, an outsider might be more qualified than even the most proficient auto industry insider.23
In 2006, Alan Mulally was selected as the new CEO and was expected to accomplish “nothing less than undoing a strongly entrenched management system put into place by Henry Ford II almost 40 years ago”—a system of regional fiefdoms around the world that had sapped the company’s ability to compete in a global industry, a system that Chairman Bill Ford couldn’t or wouldn’t unwind by himself.24
Mulally set his own priorities for fixing Ford: Ford needed to pay more attention to cutting costs and transforming the way it did business than to traditional measurements such as market share.25 The vision was to have a smaller and more profitable Ford. The overall strategy was to use restructuring as a tool to obtain operating profitability at lower volume and create a mix of products that better appealed to the market.
By 2011, Ford had closed or sold a quarter of its plants and cut its global workforce by more than a third. It also slashed labor and health-care costs, plowing the money back into the design of some well-received new products, like the Ford Fusion sedan and Ford Edge crossover. This put Ford in a better position to compete, especially taking into consideration that General Motors and Chrysler had filed for bankruptcy in 2009, and Toyota had recently announced a major recall of its vehicles for “unintended acceleration” problems.26 Ford’s sales grew at double the rate of the rest of the industry in 2010, but entering 2011 its rivals’ problems seemed to be in the rearview mirror, and General Motors, especially, was on the rebound.
Mulally set three priorities: first, to determine the brands Ford would offer, second to be “best in class for all its vehicles,” and third to make sure that those vehicles would be accepted and adapt[able] by consumers around the globe: “if a model was developed for the U.S. market, it needed to be adaptable to car buyers in other countries.”27 Mulally said that the “real opportunity going forward is to integrate and leverage our Ford assets around the world” and decide on the best mix of brands in the company’s portfolio.28 The “best mix of brands” appeared to have been established going into 2011, after brands such as Jaguar, Land Rover, Aston Martin, and Volvo were all sold off, and the Mercury brand was discontinued. Ford also had an equity interest in Mazda Motor Corporation, which it reduced substantially in 2010, retaining only a 3.5 percent share of ownership. This left the company with only the Ford and Lincoln brands, but the Lincoln offerings struggled against Cadillac and other rivals for the luxury car market. Mulally acknowledged that this needed fixing, and forecast a date of 2013 for real changes in the Lincoln lineup.29
In 2014, thanks to Mulally’s vision and perseverance, Ford maintained its position. Ford had introduced 24 vehicles around the world, including the new Mondeo in Europe, but although still profitable, net income was down $4 billion from 2013. Even though Ford maintained its number two position in Europe, behind Volkswagen, major losses had occurred in that sector, primarily due to Russian economic instabilities. South America had also seen losses due to currency devaluation and changing government rules. In addition, Ford’s push into Asia-Pacific, specifically China, was behind schedule. North American sales, while still strong, had resulted in operating margin reductions due to recalls and costs associated with the relaunch of the F-150. The one real bright spot was in financial services. Ford Motor Credit, the financing company that loans people money to buy new cars, saw its best results since 2011.30
As Mark Fields took over as CEO in 2014, he pointed to the ONE Ford plan as essential to Ford’s future: “our ONE Ford plan is build on compelling vision, comprehensive strategy, and relentless implementation, all leading to profitable growth around the world.”31 The actions of Mulally and now Fields, in enacting the ONE Ford plan, had attracted many long-term investors who believed in the strategy. Going into 2015 the financials, especially the balance sheet, appeared strong, and because of this, the company was able to reinstate and subsequently boost the dividend to shareholders, rewarding those investors who had stayed the course. Through 2016, going into 2017, the balance sheet stayed strong. (See Exhibit 3.)
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EXHIBIT 3 Ford Motor Company and Subsidiaries: Sector Balance Sheets
December 31, 2015
December 31, 2016
ASSETS
Cash and cash equivalents $ 14,272 $ 15,905
Marketable securities 20,904 22,922
Financial Services finance receivables, net 45,137 46,266
Trade and other receivables, less allowances of $372 and $392 11,042 11,102
Inventories 8,319 8,898
Other assets
2,913
3,368
Total current assets
102,587 108,461
Financial Services finance receivables, net 45,554 49,924
Net investment in operating leases 27,093 28,829
Net property 30,163 32,072
Equity in net assets of affiliated companies 3,224 3,304
Deferred income taxes 11,509 9,705
Other assets 4,795 5,656
Total assets
$ 224,925
$ 237,951
LIABILITIES
Payables $ 20,272 $ 21,296
Other liabilities and deferred revenue 19,089 19,316
Automotive debt payable within one year 1,779 2,685
Financial Services debt payable within one year 41,196 46,984
Total current liabilities
82,336 90,281
Other liabilities and deferred revenue 23,457 24,395
Automotive long-term debt 11,060 13,222
Financial Services long-term debt 78,819 80,079
Deferred income taxes
502
691
Total liabilities
196,174 208,668
Redeemable noncontrolling interest 94 96
EQUITY
Capital stock
Common Stock, par value $.01 per share (3,976 million shares issued of 6 billion authorized)
40 40
Class B Stock, par value $.01 per share (71 million shares issued of 530 million authorized)
1 1
Capital in excess of par value of stock 21,421 21,630
Retained earnings 14,414 15,634
Accumulated other comprehensive income/(loss) (6,257) (7,013)
Treasury stock
(977)
(1,122)
Total equity attributable to Ford Motor Company
28,642 29,170
Equity attributable to noncontrolling interests
15
17
Total equity
28,657 29,187
Total liabilities and equity
$ 224,925
$ 237,951
Note: Figures in millions.
Source: Ford Motor Company 10K filings.
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Starting in 2016, CEO Fields began restructuring, and the cash flow reflected this. (See Exhibit 4.) Fields kept watch over an increasingly volatile landscape while strategizing for investments in areas of emerging opportunities. Going into 2017, Fields stated that Ford needed to be “very, very prudent, disciplined” in how cash was used to transform the business.32 The forecast for 2017 showed total automotive operating cash flow remaining positive through 2018, with the overall cash balance expected to stay at or above the company’s minimum target of $20 billion.33
EXHIBIT 4 Ford Motor Company and Subsidiaries: Sector Statements of Cash Flows
For the Years Ended December 31,
2014
2015
2016
Cash flows from operating activities
Net income $ 1,230 $ 7,371 $ 4,607
Depreciation and tooling amortization 7,385 7,993 9,023
Other amortization 38 (27) (306)
Provision for credit and insurance losses 305 418 672
Pension and other postretirement employee benefits (“OPEB”) expense 4,429 512 2,667
Equity investment (earnings)/losses in excess of dividends received 189 (333) (178)
Foreign currency adjustments 825 710 283
Net (gain)/loss on changes in investments in affiliates 798 (42) (139)
Stock compensation 180 199 210
Net change in wholesale and other receivables (2,208) (5,090) (1,449)
Provision for deferred income taxes (94) 2,120 1,478
Decrease/(Increase) in accounts receivable and other assets (2,896) (3,563) (2,855)
Decrease/(Increase) in inventory (936) (1,155) (815)
Increase/(Decrease) in accounts payable and accrued and other liabilities 5,729 7,758 6,595
Other
(467)
(701)
(1)
Net cash provided by/(used in) operating activities 14,507 16,170 19,792
Cash flows from investing activities
Capital spending (7,463) (7,196) (6,992)
Acquisitions of finance receivables and operating leases (51,673) (57,217) (56,007)
Collections of finance receivables and operating leases 36,497 38,130 38,834
Purchases of equity and debt securities (48,694) (41,279) (31,428)
Sales and maturities of equity and debt securities 50,264 40,766 29,354
Change related to Venezuelan operations (477) — —
Settlements of derivatives 281 134 825
Other
141
500
62
Net cash provided by/(used in) investing activities
(21,124) (26,162) (25,352)
Cash flows from financing activities
Cash dividends (1,952) (2,380) (3,376)
Purchases of Common Stock (1,964) (129) (145)
Net changes in short-term debt (3,870) 1,646 3,864
Proceeds from issuance of other debt 40,043 48,860 45,961
Principal payments on other debt (28,859) (33,358) (38,797)
Other
25
(317)
(49)
Net cash provided by/(used in) financing activities
3,423 14,322 7,458
Effect of exchange rate changes on cash and cash equivalents (517) (815) (265)
Net increase/(decrease) in cash and cash equivalents
$ (3,711)
$ 3,515
$ 1,633
Cash and cash equivalents at January 1 $ 14,468 $ 10,757 $ 14,272
Net increase/(decrease) in cash and cash equivalents (3,711) 3,515 1,633
Cash and cash equivalents at December 31
$ 10,757
$ 14,272
$ 15,905
Note: Figures in millions; year-end December 31.
Source: Ford Motor Company 10K filings.
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Ford and the Automobile Industry Changing Product Mix
Going into 2017, the entire automobile industry was facing disruption, but this wasn’t unusual. For instance, the 2009 global economic downturn and financial crisis had a significant impact on global sales volumes in the auto industry. The once-profitable business of manufacturing and selling trucks and SUVs had changed. Especially in the U.S., oil prices had been fluctuating, making it difficult to anticipate consumer demand. In 2010, this had caused a shift in consumers’ car-buying habits, reducing the demand for large vehicles.
The core strategy at Ford had centered on a change in products, shifting to smaller and more fuel-efficient cars. Ford had imported European-made small vehicles, the European Focus and Fiesta, into North America. It also converted three truck-manufacturing plants to small-car production.34 The Ford and Lincoln lines were upgraded, emphasizing fuel-economy improvement and the introduction of hybrid cars. In 2012 Ford launched six new Ford hybrid cars in North America and sold more hybrids in the fourth quarter of 2012 than during any quarter in their history. In 2014 Ford began producing its first hybrid electric car in Europe, the Mondeo Hybrid. This car was well-known to those in the U.S., being based on the North American Fusion model hybrid vehicle. By 2014, Ford was the world’s second largest manufacturer of hybrids, after Toyota.35
By late 2015 gas prices had reduced enough to spur interest in SUVs once again. This trend should have been good for Ford, given their branding emphasis on the F-150, Edge, Escape, and Explorer, but by 2013 Ford and other U.S. manufacturers had shifted production to the small and midsized cars, and in 2014 this positioning hurt Ford. With large inventories of smaller vehicles on dealer lots, U.S. auto manufacturers, including Ford, had to adjust once again to meet the demand for the newly designed cross-over vehicles. The smaller crossovers and SUVs now had greatly improved fuel economy, and were attractive to consumers due to their versatility, while the smaller sedan and compact owners were an older demographic, and less likely to be impulse buyers. These kinds of fluctuations in the industry meant automobile executives had to keep close track of trends and maximize their ability to adjust to demand.36 Ford, specifically, reconfigured plants to flex back and forth between cars and light trucks. See Exhibit 5 for shifting vehicle sales figures in the U.S. market.
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EXHIBIT 5 U.S. Vehicle Sales by Segment YTD 2017
An exhibit compares 2017 year-to-date sales with February 2017 sales by segment
Source: http://online.wsj.com/mdc/public/page/2_3022-autosales.html#autosalesB.
Access the text alternative for Exhibit 5
In 2015, Ford relaunched the F-150, as well as further developing 15 other global products. 2016 saw the launch of the F-150 Raptor high-performance off-road pickup truck, and the next-generation Fusion Hybrid Autonomous Development Vehicle, bringing Ford’s test fleet of these innovative designs up to 30 vehicles, making it one of the largest in the automobile industry. In 2017, the company planned to triple the size of this hybrid fleet to a total of about 90 vehicles.37 By 2017 Ford had become the top-selling plug-in hybrid brand in the U.S., and was second in overall U.S. electrified vehicle sales. To support this growth, Ford had invested $700 million and projected 700 new jobs in its Flat Rock Assembly Plant in Michigan to build autonomous and electric vehicles.38
Ford’s most successful vehicles were still the F-series pickup trucks (see Exhibit 6). In 2017, for the 40th consecutive year, the Ford F-series was ranked as America’s top-selling vehicle.39 Ford’s vehicles had proven dependable, overall. However, it appeared consumer perceptions had not kept pace with actual performance. J.D. Power and Associates found that the Ford and Lincoln brands still had large lags between actual dependability performance and consumer perception. “Producing vehicles with world-class quality is just part of the battle for automakers; convincing consumers to believe in their quality is equally important,” said David Sargent, vice president of global vehicle research at J.D. Power and Associates. “It takes considerable time to positively change consumer perceptions of quality and dependability—sometimes a decade or more—so it is vital for manufacturers to continually improve quality and also to convince consumers of these gains.”40 For 2016, the highest scoring American-branded cars in the Consumer Reports road test, reliability, owner satisfaction, and safety ratings included the Ford Fusion SE–midsized car, Ford Escape Titanium–compact SUV, and the Ford Edge SEL–midsized SUV. Models with declining reliability included the Lincoln MKX.41
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EXHIBIT 6 Best-Selling Vehicles in America, 2016
Rank Vehicle Make # Sold % Change Over 2015
1 Ford F-Series Truck 820,799 +5.2%
2 Chevrolet Silverado Truck 574,876 −4.3%
3 RAM Truck 489,418 +8.7%
4 Toyota Camry 388,616 −9.5%
5 Honda Civic 366,927 +9.4%
6 Toyota Corolla 360,483 −0.8%
7 Honda CR-V 357,335 +3.4%
8 Toyota RAV4 352,139 +11.6%
9 Honda Accord 345,225 −2.9%
10 Nissan Rogue 329,904 +14.9%
11 Nissan Altima 307,380 −7.8%
12 Ford Escape 307,069 +0.2%
13 Ford Fusion 265,840 −11.4%
14 Ford Explorer 248,507 −0.3%
15 Chevrolet Equinox 242,195 −12.8%
Source: http://www.businessinsider.com/best-selling-cars-trucks-vehicle-america-2016-2017-1/#3-ram-trucks-489418-87-18.
Globalizing the Ford Brand
Under the ONE Ford vision, Mulally globalized the Ford brand, meaning that all Ford vehicles competing in global segments would be the same in North America, Europe, and Asia.42 The company was looking for a reduction of complexity, and thus costs, in the purchasing and manufacturing processes. The idea was to deliver more vehicles worldwide from fewer platforms and to maximize the use of common parts and systems. Mulally felt he had positioned Ford to take advantage of its scale, global products, and brand to respond to the changing marketplace.43 However, each year posed new challenges.
In 2016 the U.S. auto industry had its best year ever, selling 17.55 million vehicles, breaking the annual sales record set in 2015. Going into 2017, the global marketplace for automobiles was stable, with pockets of strength, but each geographical segment had its issues. Both North American and European auto sales were subject to political uncertainty, due to policy shifts in government. The Chinese and larger Asian market was still growing, although starting to slow. Eastern European economic concerns, especially in Russia, made this a difficult area to manage. South American government regulations and currency fluctuations impacted growth there.44
The need for a global strategy was driving all major auto manufacturers to reduce the number of vehicle platforms, while simultaneously adding models in response to consumer preferences. Although the increased complexity raised costs, this more flexible approach allowed for improved product commonality and increased volume. As components could be shared between cars and platforms, this also reduced the number of suppliers. Ford had reduced its supplier base from 1,150 to 750.45 Although seemingly a positive, this could also prove costly if a major supplier had a problem, as had occurred with Japanese air bag manufacturer Takata in 2014.46 Ford had to recall 850,000 vehicles for airbag problems in 2014, at a cost of $500 million.47 Likewise, in 2016 a door latch recall cost Ford nearly $600 million.
For Ford, 2016 saw a record profit in Europe and the second-best profit in Asia-Pacific. For operations outside North America, on a combined basis, Ford generated a profit of $421 million, nearly double the previous year, and the best result since 2011. CEO Fields attributed this to strengthening brands and adjusting the mix of vehicles in each market, “focusing on the higher margin segments where consumer interest is particularly strong.”48 In Europe, especially, Ford saw double digit growth in sales of its commercial vehicles, specifically the Transit cargo van. (See Exhibit 7.)
EXHIBIT 7 Ford Performance by Region
A bar chart
Source: Ford 10-K.
Access the text alternative for Exhibit 7
Regarding global growth, in Asia, Ford had developed two car plants in India, while also increasing its commitment in China, having invested $5 billion in factories there since 2012.49 Although the Chinese market was slowing, profit margins were strong, and 2016 was the best sales year ever in China, up 14 percent over 2015, with the luxury or premium and SUV sectors seeing the most expansion. In 2016, Ford Lincoln became the fastest growing luxury brand in China.50 Ford was betting on this momentum to spur Lincoln sales, having introduced the Lincoln lineup to China in April 2014. Sales growth in this region was critical, given that Ford was late to the China market, with a 2014 share of less than 5 percent, while General Motors controlled 15 percent. Although Ford collaborated with Chinese manufacturer Changan to produce light vehicles such as the Focus, the Lincoln would be imported from America, leaving Ford to “deal with the added cost of import duties that would leave their premium vehicles in a difficult position C-117against rivals who are already well positioned in China.”51 Offsetting this, Ford introduced the Mustang and Taurus in China during 2016, and saw strong sales of these performance vehicles. In 2017, Ford began exporting the all-new F-150 Raptor to China, making it the first high-performance off-road pickup truck to be offered there.
Going into 2017, Ford was taking a new look at how to grow in select emerging markets. Russia and South America (except for Brazil) seemed positioned for recovery, and profitable growth was possible in the Middle East and Africa. Ford was also re-evaluating its strategy and business model for India.
Looking Ahead
Although Fields was clear that he would continue Mulally’s ONE Ford legacy, with the support and ongoing vision of chairman Bill Ford, he would do this by “tailoring aspects of the company to his preferences.”52
Going into 2017, Ford Motor Company was the seventh-largest automobile manufacturer in the world, but like all others who produced a multi-vehicle lineup, Ford was facing considerable uncertainty. Global markets were hard to predict and countries were increasing regulatory requirements for safety and environmental impact. All vehicles were seeing an increase in the amount of onboard technology that required a shift in both engineering and manufacturing priorities. Worldwide manufacturers were making design changes that allowed more lean production and consolidation of suppliers, and consumers were changing how they purchased vehicles and rethinking what they wanted from the transportation experience overall.53
Several marked shifts in the overall landscape were occurring: the interest, worldwide, in electric or alternative-fueled vehicles; the development of autonomously controlled cars that were also personally connected to a user who might not be the driver; the reduction in demand for actual automobile ownership in favor of rental or on-demand transportation options. These shifts created opportunities but also challenges for entrenched car manufacturers. Twenty companies were actively pursuing the development of self-driving cars in 2017, and although some of the big auto manufacturers were among them, including BMW, Toyota, Volvo, Nissan, Daimler, Audi, Honda, Hyundai, PSA Groupe, General Motors, and Ford, other technology giants such as Apple, Google, Baidu, Nvidia, and Bosch were entering the race.54
Partnerships were inevitable: GM was partnering with Lyft, Ford with Uber, which was trying out the Ford Fusion autonomous vehicle. Ford had put Amazon’s virtual digital assistant Alexa in its cars. Ford had invested in Velodyne, a company that developed lidar remote-sensing technology for self-driving cars, and in artificial intelligence software firm Argo AI. Ford had acquired an app-based, crowd-sourced, ride-sharing service, Chariot. Ford had teamed up with Motivate, the global leader in bike-sharing to include the FordPass mobility network in the Ford GoBike commuting transportation option. Through its innovation and research centers, Ford was also developing strategies in fleet and data management, route and journey planning, and telematics, all in an effort to help solve congestion and help move people more efficiently in urban environments.55
These fundamental changes in the industry required leadership that could anticipate trends and allocate resources wisely, all while crafting a vision for the future that could inspire all relevant stakeholders to support and promote the company’s success. Alan Mulally’s “ONE Ford” slogan C-118had helped the automaker avoid bankruptcy and return to a position of financial strength in the industry. Mark Fields’s shift seemed to be toward TWO Fords, refocusing the company into both an automaker and a transportation services provider. In October 2016, Fields had said the ONE Ford strategy was “foundational” but that the company had to “evolve.” This evolution included plans to offer 13 new electric vehicles by 2020 and a self-driving car ready for commercial use by 2021, and to experiment with ways to provide innovative solutions to transportation and mobility problems in cities across the globe.56 To do this, Ford had “amped up” innovation efforts inside the company, encouraging its employees to file over 3,200 patents in 2016, more than any other automaker.57
Unfortunately, investors were not buying this vision: Ford’s stock had fallen by about 30 percent since Mulally’s departure in 2014. Despite record earnings in 2016, investors were not sure how the new strategy would play out. One analyst pointed out what others were saying: “They have a lot of the right initiatives; they’re doing something in every box. The difference from the Mulally days is there isn’t a single message that is more than just public-relations, tying it all together.”58 Mulally’s message had been clear, focusing all efforts around a common goal and returning the company to the “basics of auto making.” Fields appeared to be positioning the company to take on rivals from other industries, and investors wondered what bike-sharing and artificial intelligence had to do with the car business. Even though the new ventures developed as part of the new Ford Smart Mobility LLC were expected to deliver margins of 20 percent or more, this financial result was not projected to occur until 2020 at least. Some thought Fields needed to “take bolder action,” expressing a more “cohesive narrative or game plan.”59
