Growth and Recent Financial Trend of Ford Motor Company - Essay Example

?Ford Motor Company Item Most Important Recent Financial Trend The most important recent financial trend for Ford Motor Company is its unit salesgrowth and profitability for the 3rd consecutive year since 2009. Even as the industry aggregate unit sales declined in 2009, Ford earned profits equivalent to $ 2.7 billion. In 2010, this auto manufacturer earned a net income of $ 6.5 billion. And by 2011, net profits soared to $ 20.2 billion. In 2008, as a result of a recession, and the entire Auto Industry sales went down to its lowest level, Ford had reported a Net Loss of over $14.7 billion. As can be see in Chart 1 which compares the aggregate Industry Sales in number of units sold to the individual major players, the entire industry suffered and each player reflected a steep decline in the number of automobiles sold until 2009. Auto Unit Sold in ‘000s Years Chart 1. Aggregate Industry Sales vs. Individual Players USA Auto Manufacturing Industry In 2009, GM (Isidore, C. 2009) and Chrysler (Epiq 2009) applied for bankruptcy. Toyota (Toyota 2012) also lost substantially. The performance of Ford was therefore not comparable to these competitors because, unlike the other players, Ford profited in 2009. And it was because Ford retrenched and operated after closing three (3) plants, had lower cost and expenses, and at profitable level to match the demand. Thus, Chart 1 was meant to show how Ford performed along with the industry performance and the industry players’ performance in terms of Units Sold. What cannot be seen in any chart is what Ford did to earn starting 2009 up to the present. It had nothing to do with competitive designs or pricing strategies, although such strategies helped. But GM also adjusted the design to shift to smaller vehicles. After the recession, individual auto manufacturers like General Motors, Chrysler, Nissan, and Ford realized increases in sales by 2010 and 2011 annual reports. Details of the units sold appearing in Table A show that in terms of market share growth, these auto manufacturers performed as follows: 2010 2011 Market Share (MS) Growth MS2010 Less MS2009 Market Share (MS) Growth MS2011 Less MS2010 Cumulative Growth 2011 Base Year= 2009 GM 19.14% ( 0.78% ) 19.66% + 0.52% ( 0.26% ) Chrysler 9.34% + 0.43% 10.69% + 1.35% +1.78% Nissan 7.86% + 0.46% 8.19% + 0.33% +0.79% Ford 16.49% +0.57% 16.58% + 0.09 % + 0.66% Ford Motor Company has the 2nd biggest market share next to General Motors as of the 2011 yearend. The lead of GM over Ford was reduced during the downturn and recovery years. As a matter of fact, Hitt, Ireland and Hoskisson (2012, p.138) shows the market share of GM to be 19.2 in 2010 and 19.9% in 2011. But the NADA (2012) statistics show a lower market share for GM equivalent to 19.14% in 2010 and 19.66% in 2011, whereas the data of Ford Motor Company in the same years were fairly accurate at 16% in 2010 and 17% in 2011 due to the round-off. Thus, Ford realized both growth in the Net Income and growth in its market share of the US auto sales. Details of market shares and number of vehicles sold each year in the USA came from the National Automotive Dealers Association of USA. See Table A below and in the following page. Table A. New-Vehicle Sales & Market Share by Manufacturer [Source: NADA 2012. New-Vehicle Sales & Market Share by Manufacturer. National Automotive Dealers Association, p.9. Viewed October 24, 2012 @ http://www.nada.org/NR/rdonlyres/C1C58F5A-BE0E-4E1A-9B56-1C3025B5B452/0/NADADATA2012Final.pdf ] How Ford Motor Company actually profited in 2009 even while sales declined for the entire industry and for individual players can be explained by the initiative of its management to retrench and operate at a more profitable level, seeing the industry declining demand for automobiles. Ford Motor Company retrenched by closing three plants and operating with lower capacity. This resulted in the reduced Total Assets in 2009 and 2010. The lower cost and expenses by 2009 made it possible for the company to generate profits starting 2009. The sales growth rate based on absolute units from 2009-2011 would be as follows: 2009 2010 2011 Units Sold (in 000s) 1656 1905 2110 Growth (base year, 2009) - 15.03% 27.42% In terms of absolute dollar amounts from 2009-2011, sales growth would be as follows: 2009 2010 2011 Total Sales (in $ billions) $ 116 $ 129 $ 136 Growth Rate (base year, 2009) - 11.2% 17.2% In terms of profitability, Ford also realized growth as follows: 2009 2010 2011 Net Income (in $ billions) $ 2.7 B $ 6.56 B $ 20.2 B Growth Rates (base year, 2009) - 142.96% 648.15% The sources of absolute figures in dollars for sales and net income were the Ford Motor Company Income Statements for 2009 and 2011 which contained 2010 data as well. Liabilities were also reduced to show improvements in the Debt-to-Equity ratio. This reduction is presented as follows: 2009 2010 2011 Total Liabilities (in $ millions) $ 201 $ 165 $ 163 Total Equity (in $ billions based on Market Value) $ 12.8 B $ 49.7 B $ 48 B Debt-to-Equity 15.7 : 1 3.32 : 1 3.4 : 1 Item # 2.Keys To Rapid Growth of Ford Motor Company The keys to Ford Motor Company’s (FMC) rapid growth were (a) the strategy of ongoing investments in research for better product designs and fuel efficiency, (b) preparations for the strategy of building up the Balance Sheet after recession in order to finance and implement the plans, and (c) the strategy of maintaining profitability at whatever is the level of demand. Hitt, Ireland and Hoskisson (2012, p. 144 and 151) did mention these corporate strategies. The 2012 Annual Report of Ford Motor Company was even clearer about these. FMC’s management had considered the earlier trend in the global environment whereby cost of fuel was apparently increasing and causing inflationary impact on various raw materials, including basic needs (Hitt, et.al. 2012, p.132). Households felt the shrinking value of their income as a result of the rising prices of gasoline. And so, research revealed that the people decided to acquire smaller vehicles and fuel efficient automobiles. This required a change in the product design as well as the technology of providing energy to vehicles. One such technology is the hybrid (fuel and electric) vehicles. Ford Fusion and Ford Focus are two of the battery-powered vehicles reported in the 2011 Annual Report. In September 2012 news, Ford Focus was one of the two vehicles reported to have increased the sales of Ford. Its sales increased by 35% (Climate Progress 2012). The plan of Ford management in response to the wants of the customers has been to gradually shift manufacturing to a greater percentage of small, fuel efficient, high tech automobiles (Ford Motor Company 2012, p.9). Hitt, et. al. (2012, p. 130) also reported that plan to shift product design of Ford in September 2006. A summary of that plan was illustrated in the following diagram: (See Figure 1.) Figure 1. Gradual Shift of Manufacturing Ford Vehicles [Source: Ford Motor Company 2012. Annual Report 2011. Print. p.9 ] As early as 2006, GM had also planned to shift to smaller vehicles. Thus, the issue about how Ford did better with its smaller vehicles was not only due to its adjustments to market preferences for small cars, but primarily because Ford reduced its operating level by retrenching and finally producing at profitable level of operations starting in 2009. Both GM and Ford has improvements in design. Unfortunately, during the impact of recession and the following years of recovery, GM operated at higher levels not required by insufficient demand. Until the present, the economy has not yet reached the lowest level of Units Sold during the years prior to the recession, 2001 to 2007. As of August 2012, GM was reported to be headed for bankruptcy again ( Woodhill, L. 2012) although the analysis was about product design issue. In this paper, the data show it is an issue about operating level. GM has not reduced itself to the reality of having a much lower level of deman compared to 2001-2007. Building up of the Balance Sheet was deemed crucial because the global scenario had shown signs of instability since the time of the recession. Without the means to fund ongoing research to improve product designs and technology, Ford can be caught up with lack of funds to meet the opportunities. Thus, FMC maintained sound liquidity with its Ford Credit Company. Its management paid debts to reduce indebtedness and maintained billions of dollars in cash ready to finance its operations to meet the targets. Perhaps the most difficult part of the strategy is maintaining profitability even at times when sales reflect a decline in demand. And yet, in 2009, FMC managed to profit at a low level of sales affecting the entire industry. In response to the 2008 economic decline, FMC restructured itself Aside from converting manufacturing plants into producers of small vehicles from being producers of large vehicles, FMC announced the closure of three plants in 2009 in North America. Even the Ford Credit Company staff had to be retrenched by 1,200.(Ford Motor Company 2009, p.16-17) Item # 3.Evaluation of Strategies Ford Motor Company management considered the global economic crisis and its impact on the strengths and weaknesses of the auto manufacturer. According to the 2009 Annual Report (Ford Motor Company 2009, p. 15) there is a correlation between per capita income growth and consumer spending for new vehicles. The economic decline resulting from higher fuel cost and higher commodity prices would logically mean less demand for new vehicles. Even if there was stimulus fund, credit remained tight. Thus, consumers would tend to avoid being tied up with monthly bills for new cars. To maintain profitability, Ford actually retrenched in 2009. And then it operated at a profitable level. Furthermore, great value was given to the liquidity by debt management. It will should be recalled that after Ford lost $ 12.6 B in 2006 (Hitt, Ireland and Hoskisson 2012, p. 130), anticipating the continued decline of the Auto Industry, the company loans $ 23.6 B and used its North American assets as security to allow for research and development for the restructure of product design of its vehicles. When the sales improved, Ford started paying debts. This was done in preparation for recovery of demand which would need high production level when the opportunity arises. By then, Ford will be able to secure a leveraged loan for the purpose of operating at higher level of production. The company will also be able to raise funds for expansion by selling shares of stocks. It is authorized to issue 6 billion shares while less than 4 billion had already been issued. With the profitability and liquidity, FMC can hope to convince Stocks buyers to buy common shares of FMC. In the Stock Market. One Ford is a good strategy of consolidating resources for the global operations of the company because it enabled the organization to secure funds against a bigger leverage and therefore bigger funding for its global operations. Following this strategy, the Annual Reports made FMC look very profitable and very liquid. Using the most recent 2011 Annual Report, for example (See Figures 3 and 4.), a brief highlight of Assets, Liabilities, Equity, and Net Income would make FMC’s performance look impressive with a few calculations. Figure 3. Ford Motor Company Income Statement Figure 4a. Ford Motor Company Balance Sheet2 2010-2011 Figure 4b. Ford Motor Company Balance Sheet 2009 Using the FMC Balance Sheets and Income Statements, the profitability and liquidity can be verified as follows: 2009 2010 2011 Equity ( 6 Billion common shares authorized; + Class B = 530 M authorized) ($ 6.5 B) deficit; 3.3 billion shares ($ 0.64 B) deficit; 3.8 billion shares $ 15.7 B; 3.8 billion shares Stock Price1 (lowest-highest) $ 1.84 / share $ 9.86 / share $ 9.94/ share $16.56 / share $ 9.54 / share $ 15.73 / share Return on Investment (ROI) = Net Income/Equity ; where Equity is calculated based on the Market Appraisal Value based on the highest and lowest NYSE prices $ 2.2 B / (19.3 -6.5) = 2.2 / 12.8 = ROI=17.2 % Note: 3.3 B shares x ave. of highest and lowest stock price at NYSE = 3.3 x (1.84 +9.86)/2 = $19.3 Appraisal Value of Equity $6.561 / (59.3-0.64) = 6.561 / 49.7 ROI = 13.2% $ 15.7 B / 48.0 B ROI = 32.7% Net Income% = NIAT / Sales $ 2.7 B / 103.9 B = 2.6% $ 6.6 B / 119.2 = 5.5% $ 20.2 B / 128.2 = 15.8% Net Income per outstanding share (OS) OS = 2,992,000,000 $ 0.90 / share Note: Ave. OS given in p.75 of annual report 1.8 Billion Shares $ 1.74 / share Note: Ave. OS not given 3.8 Billion Shares $ 5.32 / share Total Debt-to-Equity = Total Liabilities / Equity $ 201.4 B / 19.3 B 5.32 : 1 Note: Equity Appraisal Value computation is shown above under ROI. $ 165.3 / 49.7 B 3.33 : 1 $ 163.3 / 48 B 3.4 : 1 B Long-Term Liability $ 133 B $ 104.2 B $ 100 B Asset Growth Rate = 1-(Total Assetscurrent yr. / Total Assetsprevious yr). TA 2009 / TA 2008 = 1 – (194.8B / 218.2 B) = 0.107 or (10.7%) 1- (164.7 B / 194.8 B) = 0.1545 or (15.45%) 1- (178.3/164.7B) = +8.26% growth [ 1 Source: Yahoo Finance 2012: New York Stock Exchange Data Base of Historical Prices. Viewed October 26, 2012 @ http://finance.yahoo.com/q/hp?s=F&a=00&b=3&c=2008&d=09&e=26&f=2012&g=m ] The assumed price of each share is based on historical statistics of the New York Stock Market price per share of stock. There has been an accumulation of losses that created a deficit in the Equity if valued at the original price of $ 0.01 per share. In order to get a more realistic ROI, the average Stock Market Value per share given a year was determined. For purposes of this exercise, the highest price in the NYSE given a specific year was added to the lowest price and then divided by 2. ] In summary, Ford Motor company defined the right way to thrive for the automobile industry during downtrends of demand. There was one key strategy that the other players of the industry did not take. And that was to retrench after a series of decline in demand in units of sales. Since 2001 all the way to 2008, there were eight (8) consecutive years of decline. Ford Motor Company responded by retrenching (closing three plants) and operating with lower cost and expenses. Like the other companies, Ford continued its R & D to adjust to the shift in customer preference and affordability. Like all other companies, Ford suffered losses due to decline in demand. The difference had nothing to do with comparative design or comparative pricing. But it was about operating at a profitable level of operations during years of economic decline. Works Cited .. Climate Progress. US Automobile Sales on the Rise, Driven by Hybrid and Electric Vehicles. OilPrice.com September 09, 2012. Web. Viewed October 25, 2012 @ http://oilprice.com/Energy/Energy-General/US-Automobile-Sales-on-the-Rise-Driven-by-Hybrid-and-Electric-Vehicles.html Ford Motor Company. Annual Report 2011. Print Ford Motor Company. Annual Report 2009. Print. Hitt, Ireland and Hoskisson. Strategic Management: Competitiveness and Globalization, Concepts, and Cases. 10th Edition. 2013, 2011. NY: Cengage Southwestern Publishers. Print. Isidore, Chris. GM Bankruptcy: End of An Era. CNN Money June 2, 2009. Viewed November 2, 2012 @ http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/ NADA. New-Vehicle Sales & Market Share by Manufacturer. National Automotive Dealers Association, 2012. Web. Viewed October 24, 2012 @ http://www.nada.org/NR/rdonlyres/C1C58F5A-BE0E-4E1A-9B56-1C3025B5B452/0/NADADATA2012Final.pdf Toyota. Annual Report 2011. Viewed November 2, 2012 @ http://www.toyota-global.com/investors/ir_library/annual/pdf/2011/highlights/ Woodhill, Louie. General Motors is Headed for Bankruptcy Again. Forbes.com August 15, 2012. Viewed November 2, 2012 @ http://www.forbes.com/sites/louiswoodhill/2012/08/15/general-motors-is-headed-for-bankruptcy-again/ Yahoo Finance. Ford vx. Industry & Competitors Statistics. Industry Auto Manufacturers – Major, October 24, 2012. Web. Viewed October 24, 2012 @ http://finance.yahoo.com/q/in?s=F+Industry Read More