Ford Motor Company is one of the largest automotive companies in the world. They had total sales of over 5.6 billion cars worldwide in 2011 and have over 16% of total market share in the United States alone ("Market share and sales," 2012). Maintaining a presence of this magnitude requires a substantial network of supply for both parts and labor. It is also essential that they be able to sell their products throughout the world, not just in the United States, so a global presence and supply chain must also be maintained. Pressure to increase sales and extend brand recognition has caused increased pressure on the supply lines, while the ongoing economic conditions have made it more difficult to continue to improve revenue. In spite of these existing external and internal pressures, Ford continues to produce some of the best known models in the world, including the Mustang and Focus.
Supply and Demand Issues and Market Structure
When the recession hit in late 2008 and early 2009, the automotive industry was one of the hardest hit and the three largest U.S. manufacturers, Ford, Chrysler and GM, were in danger of going bankrupt. With the economy in turmoil and most Americans fearful that they would even have jobs for the foreseeable future, purchasing a new car seemed to most people to be an unnecessary luxury that they simply could not afford at the time. The immediate impact of all this was a sharp decline in automotive sales that led the "Big Three" to Washington, D.C. In search of an economic bailout. Ford accompanied the other companies in 2008 to petition Congress to step in even though they had already secured private financing before the economic collapse happened, so they did not need federal money. Ford believed that all the companies had to be saved in order to preserve the industry supply chain and ultimately GM and Chrysler received federal funding for a managed bankruptcy and emerged stronger than before (Healey, 2012).
The ability to avoid federal funding helped Ford in several other ways, aside from simply preserving their well-established supply chain. The general public perception of the company was that it was the only one of the "Big Three" that had managed to avoid bankruptcy and, as a result, must be the best managed of the major car manufacturers. There has been a general backlash against the bailouts with many consumers turning towards Ford who never had considered them before, simply because of the fact that they eschewed federal money. AT the very least Ford has been positioned as the strongest U.S. auto manufacturer for the time being.
However, as Chrysler and GM emerge from bankruptcy, they are seeking to re-establish their position as major automotive companies and recapture their market share. To do this they have implemented tough cost-cutting measures and introduced major purchasing incentives, such as steep discounts and favorable financing. Though Ford has tried to resist slashing prices and matching the other companies' buyer incentives as much as possible, they have also had to cut tougher labor deals with their unions and shutter some dealerships that were redundant within their dealer system (Vlasic, 2009). These changes have allowed them to remain competitive while not having to tighten their belts as much as their main competitors have.
A major blow to the supply chain of all manufacturers, including automotive, was dealt when an earthquake struck Japan and inflicted a large amount of damage to that nation's manufacturing capabilities. This earthquake highlighted a flaw in the automotive industry's supply chain strategy. The loss of a single manufacturer of electronic sensors forced Ford and other companies to temporarily lay off workers at several plants (Lee & Pierson, 2011). This also led to a decrease in inventory which was exacerbated by the industry's tendency to only provide just-in-time inventory that allows manufacturers to better manage supplies (Lee & Pierson, 2011). This disaster exposed the flaws in the supply chain that could potentially cause problems in the future. Globally disseminated manufacturing may decrease costs, but the loss of any single part can shut down the entire manufacturing process.
The domestic automakers have always had to battle with many cheaper alternatives from foreign competitors, such as Toyota and Honda, and needed to alter their strategies to compete, often by improving fuel economy. Recently some new competitors have emerged in the automotive industry to challenge the existing oligopoly. Of these, Tesla Motors is presents the most direct challenge to the "Big Three," offering a fully electric car that consumes no gasoline. While the industry has embraced hybrid vehicles, they have yet to perfect completely battery-powered cars. As a result, Tesla presents a viable alternative to traditional automotive manufacturers and they have tried to protect themselves by forcing Tesla to compete on an uneven field. The domestic automakers tried to place some barriers to entry in their way. When Tesla tried to operate its own company-owned dealerships in several states many dealers filed suit against them alleging that they violate laws that are designed to prevent companies from opening their own sites to compete with independent dealers (Hindman, 2012). Tesla continues to fight these suits and show no signs of giving up any time soon.
Risks and Reactions
Aside from the economic conditions in the U.S. And abroad and the increased competition, Ford faces many challenges to their continued improvement in sales figures and overall business standing. Most notably, the volatility in gas prices will continue to affect the sales of all manufacturers. Gas prices have steadily risen over the past several years, even as the world is gripped by one of the worst recessions in memory from around $80 a barrel in 2012 to over $100 in 2011 ("Ford Annual Report," 2012, p.28). Major storms, unrest in the Middle East, and production interruptions have all contributed to the rising prices, making it difficult to predict where the price might eventually settle. Consumers, who have for the most part avoided purchasing new vehicles until the worst of the economic downturn has passed, are now turning away from larger less fuel-efficient vehicles in favor of smaller, lighter cars and hybrid vehicles. While this hurts the overall bottom lines for manufacturers who make more money on the larger, more expensive vehicles, it does present an opportunity as well ("Ford Annual Report," 2012, p. 28). Ford saw August 2012 sales increase 12.6%, mostly on stronger sales of its small Focus and Escape, the smallest SUV available in its lineup (Vlasic, 2012).
For the most part it is the larger vehicles that tend to command the highest prices and be the most profitable ones in the company's lineup. In North America, the large, more profitable brands have an average contribution margin of 130% of the total average contribution of all vehicles, compared with 70% for the smaller vehicles ("Ford Annual Report," 2012, p.28). As Ford continues to expand its offerings throughout the world and especially to emerging markets like Brazil, India, China, and Russia, it is the smaller vehicles that make up the largest segment of sales ("Ford Annual Report," 2012, p.28). Sales of these vehicles are expected to dominate these newly-developed regions and continue to outperform larger vehicles in the United States and Europe, mostly due to rising gas prices. This will ultimately lead to smaller average per unit margins because of the lower margins on small cars in comparison to medium and larger vehicles ("Ford Annual Report," 2012, p.28).
While international unrest can have a damaging effect on gas prices, it can also adversely affect the production located in other countries. This not only directly affects Ford production plants located throughout the world, but, also, any of its suppliers who could potentially be unable to fill orders. It is not always possible to predict where such unrest may occur and, in the case of a single supplier of components or materials, it could cause every facet of the production mechanism to grind to a halt. The diversification of parts and components manufacturers is, therefore essential to keeping the company running. If there are a number of areas from which to get a part or material, a single catastrophic event or government intervention cannot completely halt production, though it may still slow it down a bit. However, it is far more cost-efficient to limit the number of suppliers, making it smaller and more easily managed. Ford has decreased the total number of suppliers from 3,300 in 2004 to 1,350 in 2011, with an eye to reducing the total number to 750 eventually ("Ford Annual Report," 2012, p.29).
Because of the economic downturn of the last several years there has not been sufficient automotive production to meet the current capacity capabilities of automakers in the light vehicle sector. The two most profitable regions for automakers, the United States and Europe, have an excess capacity of 26% as an estimated percent of production ("Ford Annual Report," 2012, p.28). This excess, unused capacity coupled with the introduction of many new products has…