Ford Case Study Solutions

1. The world automobile industry has experienced a downward trend in profitability since the
1960s. (The appendix shows that between 1980 and 2009, the trend of ROE for the leading
producers was mostly downward.) What changes in the structure of the world auto industry
have caused competition to intensify and profitability to decline?
2. How is the structure of the world automobile industry likely to change over the next five
years (2016-20)? What effect will these changes have on competition and profitability in the
industry?
3. Are there any segments of the world automobile market that you think will offer superior
profitability over the next five years?
4. Looking longer term (to 2026), what factors do you think will drive the evolution of the
automobile industry?
5. Which factors will determine which companies will be most successful in the automobile
world during the next ten years (i.e. what will the key success factors be)?

Answers

Answer 01:

The world Automobile Industry had experienced a downward trend in the profitability since
1960s, as depicted in the figure below.

Understanding the reasons for the decline in profitability:

1. Evolution of the Auto Industry:

The early automobiles featured diverse designs and technologies. The first
“horseless carriages” were precisely that: they followed design features of existing
horsedrawn carriages and buggies while embodying a variety of competing
technologies.The internal-combustion engine vied with steam-propulsion and electric
 motors, and automakers experimented with different approaches to transmission,
steering, and brakes. Gradually, technologies and designs converged.
2. Internationalization:
It was also one of the reasons that had reduced seller concentration in domestic
markets – the US market was dominated by the US Big Three, Italy was dominated
by Fiat, etc., while everyone was playing in everyone else’s backyard (with reference
to Table A1).
 The irony here is that while the entire number of auto firms has fallen, competition
between them has increased as each has diminished geographically focussed. Most
internationalization has arisen through foreign direct investment – of these new
plants have increased industry capacity, intensifying problems of excess capacity of
auto production.

3. Market saturation
Market saturation was indicated by the declining trend of production within the US,
Western Europe, and Japan (reference to Table 3). Demand lowered down by the
very fact that cars were lasting longer (Reference to Figure2 ).

Increasing capacity combined with low growth in demand has resulted in excess
capacity.
 Excess capacity encourages aggressive competition, including price cuts, as
companies are willing to require on additional business at prices that only cover
variable costs.

4. Increasing product development costs:

Increasing development costs (see Table 5) doesn’t necessarily reduce margins – if
every firm experiences increased costs, then these costs are often passed on to the
customer. These costs affect the economies of scale and thus also impact
competition. Huge new development costs are the major source of scale economies
within the industry – pay back these costs implies an outsized volume of sales. With
every producer attempting to expand sales so as to spread the growing costs of
 development , the result is intense competition, with strong price war (typically
through discounts, trade-in allowances, and low interest credit).

The five forces framework explains falling profitability over the past few decades

In particular, the focus is at a single global industry. However, if a single global industry is
identified, the intensity of competition has increased if the total number of auto producers
has fallen. The factors which was responsible was declining geographical differentiation i.e.
Internationalization by the main producers has meant that each company sells cars in every
major national market. As a result, concentration ratios in most national markets have
declined substantially. With regard to products too, the industry’s boundaries are far from
clear-cut. Official statistics distinguish between cars (automobiles) and commercial vehicles
(trucks and buses). Clearly cars and large commercial trucks are distinct products; however,
cars are often close substitutes for light trucks (e.g., pickup trucks); moreover, SUVs are
classified as trucks in some countries.

Answer 02:

The automobile industry is set to change over next five years 2016-2020, these would be as
follows:

➢ As worldwide automobile sales are taking place and demand is growing globally the
company’s sales is soaring by 5% annually!

➢ The only depressed market observed is Europe

 ➢ If excess capacities remain, market growth would not translate into profit margins for
auto manufacturing firms
➢ Introduction of electrical cars could be a possibility for newcomers to muscle in on the
market domains of the major automakers (Magna International, Tesla, Smiths
Electrical, BYD Auto and Think Global).
➢ Ford’s Focus model embodied a stronger orientation to design features and at higher
prices (compared to BMW Mini expensive small cars but that combine fuel economy,
safety and attractive design).

Answer 03: The segments of the world automobile market that might offer superior
profitability over the next five years:
Key strategies for growing

❖ Government measures in North America and Europe to stimulate demand through

incentives.
❖ Development of lean production.
❖ Solutions adapted for lower cost production.
❖ Solutions to government resistance to national plant closures (for reducing excess
capacity).
❖ Investment in new plants in emerging market countries must be more controlled (over
production).
❖ Innovation (electric, hybrid exc...) causing new demand.
❖ Market analysis (people could pay higher price for a well-designed and eco
sustainable car.
Answer 04: Looking longer term (to 2026), factors will drive the evolution of the automobile
industry are as follows:

• The transition to emissions-free individual mobility would hardly be possible without

the electrification of the drive train. First, there is the issue of local components – the
fact that cars now only emit very low levels of harmful substances, dust and noise. It
also seems that going “emissions-free” will be a global initiative: The idea is that the
electricity used to charge the vehicles will come from renewable sources to ensure
CO2-neutral mobility.
• The rapid progress made in areas such as artificial intelligence, machine learning
and deep neural networks make it possible to achieve what until recently seemed
utopian – namely the development of autonomous vehicles, which require no human
intervention even in complex traffic situations. This will completely redefine the use of
individual mobility platforms. New application scenarios are emerging that would
have been unthinkable just a few years ago.
• The next dimension is the networking of cars with the outside world – summarised by
the concept of the Connected Car. This term actually represents two concepts at
once. On the one hand, it applies to Car2Car and Car2X communication, which is the
networking of the car with other cars or with the transport infrastructure (such as
traffic lights). On the other hand, the term also covers the networking of vehicle
occupants with the outside world. In future, they will be able to communicate, work,
surf the internet or access multi-media services during the journey
• The development topics of electrified, autonomous, connected and shared will lead to
a clear increase in the rate of innovation within the automotive industry. Model cycles
of five to eight years, which have always been common in this sector, could soon be
a thing of the past. Instead, the range of models will be updated annually in order to
integrate the latest hardware and software developments. Customers will naturally
not want to buy a new vehicle every year due to the high purchase costs, the short
innovation cycles will enter the market primarily through regular upgrades of shared
vehicles.

Answer 05: The following factors will determine which companies will be most
successful in the automobile world during the next ten years, A SWOT analysis can help
to determine these factors:

Strength:

• Investments by foreign car manufacturers

• Increase in export levels
• Low cost and cheap labour
• Rise in the working and middle class incomes
• Increasing demand for European quality
• Expert skills in producing small cars
• Large pool of engineers
• Strong brand awareness of Ford
• High exposure worldwide
• Good performance in domestic markets
Weaknesses:

• Low quality compared to the other automotive countries

• Low labour productivity
• Oil consumption
• Being late in innovations
• Insufficient safety “Recall Incident”
• High interest rates and overhead level
• Production cost are generally higher than some other Asian states such as China
• Low investments in R&D area
• Local demand is still towards low cost vehicles, due to low income levels

Opportunities:

• Growing population worldwide

• Focus from the governments in improving the road infrastructure and connectivity
• Rising living standards
• Increase in income levels
• Better car technology is demanded
• Rising rural demand
• The car is a required status symbol
• Enhancing brand awareness in emerging economies (BRIC)
• Reduced debt levels
• Innovation for new models(Hybrid and Electric)

Threats:

• Less skilled labour

• Lack of technologies for Indian companies
• Increase in the import tariff and technology cost
• Increased congestion in urban areas
• Remaining in huge debts and pension liabilities
• Fierce competition in global markets
• Global slowdown in car consumption
• Increasing raw material prices