1.0 Introduction
Credit crunch, the sudden reduction in the availability of liquidity (loan or credit) in the financial market that lead to higher interest rates, has occurred at 9 August 2007 (National Council for Voluntary Organisations, 2010; Investopedia ULC, 2010; Anon., 2009). This mainly due to the housing bubble in between 2000 to 2007, that diminished the confidence of financial institutions to lend which thus increase the interest rate by 20% (Xu, 2009; Buzzle.com, 2010; Investopedia ULC, 2010). This has therefore impacted every form of businesses, as well as, the multinational enterprise - that based in one country, but has operation in foreign countries (Rugman & Hodgetts, 2003; Cavusgil, Knight & Riesenberger, 2008)
One of the multinational enterprises that being affected was Ford Motor Company, an automotive manufacturer, based in Dearborn, America, which founded and incorporated by Henry Ford on 16th June, 1903 (Iloveindia.com, 2010; Anon., 2010).
Prior to this credit crunch, Ford is aggressively investing in foreign countries and acquisition of other companies. It has begun its foreign investment after the first investment in Canada on August 17, 1904, and has started to take over other companies, such as Mercury, Volvo (Sweden), Aston Martin (UK) and a 33% of Mazda (Japan), after the first acquisition of Lincoln Motor Company in 1925 (Novelguide.com, 2010; Answer.com, 2010; The Super Cars, 2010). Furthermore, in the mid-1980, Ford has diversified into financial services, namely Ford Motor Credit Company (FundingUniverse, 2004; Anon., 2010).
Now, it has subsidiary companies in 34 countries which group into four principal regions - North America (parent country), South America, Europe and Asia-Pacific (Freeonlineresearchpaper.com, 2009; Ford Motor Company, 2008). In order to operate smoothly, Ford seeks a balance between centralized leadership and decentralized execution in its parent and host country; where, each region has its own manufacturing processes, product development systems, and other duplicative structures, but still under the general supervision of the parent company (Bazak, et al., 1998; Ford Motor Company, 2008).
Furthermore, on purpose to compete with its competitors, GM and Chrysler, Ford continuous modify its operation style. Despite the introduction of Fordism 1914, that required the contribution of employee in the form of repetitive manual assembly-line task (Zacharatos, et al., 2007; Anon., 2010), Ford also one of the foremost of just-in-time system which insisted that raw materials should purchase just as they are needed (Wilson, 1995; Daniels, Radebaugh & Sullivan, 2007).
Consequently, this innovation leadership and operation management has resulted significant grow of Ford. In 2006, Ford had 100 plants with 280,000 employees and successfully sold 6.59 million vehicles out of the 6.6 million production units (Ford Motor Company, 2007). Hence, in US, it became the second-ranked automaker with a 17.5% market share, after General Motors at 24.6%, but ahead of Toyota at 15.4% and DaimlerChrysler at 14.4%, in 2006 (Car & Bikes, 2008).
2.0 Credit Crunch impact on Ford's operation
Nevertheless, Ford is highly dependent on well-functioning credit market, the running short of cash to cover its operation due to the high interest rate that make them hardly afford to borrow, has thus acutely impacted its worldwide operation and menaced its favourable market place (Politico, 2008; Buzzle.com, 2010).
2.1 Negative Credit Crunch Impacts
2.1.1 Threaten the ability to pay the labour costs
Ford's ability to keep its skilled labour has become a concern as difficulty to obtain the extra loan has burden Ford to continue pay its high labour costs included enormously excessive pensions and health benefits to their current and retired workers, as shown in Table 1 (Becker & Posner, 2008).
Pension Fund Obligation
Employees' Benefit Obligation
U.S Plan
Non-U.S Plan
U.S Plan
Non-U.S Plan
$4450 million
$2790 million
$43130 million
$ 21613 million
Table 1: Ford's Pension Fund and Employees' Benefit Obligation (cited in Ford Motor Company, 2008)
Ford Non-U.S region companies were having slighter impact, as there are normally situated in the location, like, South area and Asia-Pacific, that cost of living is generally lower which allows Ford to pay lower hourly wages and workers' benefits plan (FTI Consulting, 2007). Ford U.S companies, in contrast, were suffered to pay the overly rich compensation-and-benefit packages to their workforces due to the requirement of UAW union that had prevailed for decades (Marquez, 2008; Bates & Bagley, 2009). In fact, this huge costs have become more burdensome in current economic, as Ford has only utilized less than 75% of its North American manufacturing capacity; it has to burn more cash because idle workers have to get paid whether they are working or not (Kiley, 2006).
2.1.2 Threaten the ability to pay the supplier costs
Moreover, Ford faced difficulty to pay its supplier, as the supplier who also facing tighten credit, has passed the increased cost in aluminium, resin, steel, and rubber (FTI Consulting, 2007), to Ford, where, indeed, steel alone has already cost Ford an approximately $500 extra per vehicle (ACEA, 2008). Ford, with no extra credit, has thus compelled to extend its payment and put pressure to the supplier for lower part prices (Olexa, 2009).
However, due to the uniquely interdependence among automakers and their suppliers in this auto industry, supplier's bankruptcy would cause a chain-reaction of breakdown across the industry (Reid, 2008; Manufacturing.Net, 2009). Hence the delay payment that increased the bankruptcy of suppliers who rely heavily on automakers - 25% of US and 10% of Europe auto suppliers; will eventually hit Ford at the end, as it does not had buffer stocks to response against upheaval in the market given the "just-in-time" systems it has implemented (KPMG International Coorperative, 2010; Intellpuke, 2009; Bates & Bagley, 2009). Subsequently, Ford may run short of part and could not able to produce vehicle and response to the customers demand (Bates & Bagley, 2009; Reid, 2008; Cook, 2001).
2.1.3 Decrease consumer spending and lower demand
Furthermore, over 60% banks have tightened standard for consumer credit (KPMG International Coorperative, 2010; Ford Motor Company, 2008). In 2007, the approval rate for auto loans in U.S was about 83%, yet, it has plunged to only 22% in 2008 (Vlasic & Bunklye, 2008). Also, Ford itself is unwilling to offer attractive new lease (ACEA, 2008), as the declined public term securitization markets and asset-backed commercial paper have significantly impaired their ability to support consumer financing needs (Politico, 2008). Hence, about 6000 orders for Ford vehicles have been cancelled by customers due to the inability to secure finance (Baxter, 2008)
Meanwhile, even with financing, customers opted to purchase longer loans so to sustain their monthly payments and other everyday expenditures (John, 2010; Jones, 2008). This could add pressure to Ford since more car buyers are locked into longer car loans; the demand for new cars will be delayed - 18% of people are delaying their purchases up from 9% in 2006, which thus stalled Ford's sales units, as shown in the Table 2 (Jones, 2007; Jones, 2008).
Location
Year
2007 (units)
2008 (units)
Percentage Change
Increase/(Decrease)
Ford North America
2890000
2329000
(19.41%)
Ford Southern America
438000
435000
(0.69%)
Ford Europe
1918000
1820000
(5.11%)
Ford Asia-Pacific
535000
464000
(13.27%)
Table 2: Ford's sales units in 2008 and 2009 (cited in Ford Motor Company 2008; Ford Motor Company, 2009).
Even though all Ford companies were facing lower sales result; Ford in South America, Europe and Asia-Pacific have slighter impact compared to its parents country (North America), due to the government incentive schemes that help to alleviate the dropping sales units. For example, in Europe, government provides, Banger for Cash Program that give a subsidy of 2000 euro (US$2700) for consumer who buys a new car (Industry Week, 2009); while in Asia-Pacific, government also cut taxes for new vehicle purchase (Giardina, et al., 2010.).
2.1.4 High excess capacities and high debts
Moreover, the deteriorate customers' demand for new vehicle has augmented the excess capacity which causing extra costs burden on idle workers and unused equipments. It has more tremendous impact in North America with an excess capacity of 44% compared to Ford Europe of 23%, because, prior to the credit crunch, the easy access to low-interest loan and a booming stock market that created the unprecedented sales has upshot a faulty prediction in Ford North America that the demand will continued increase and thus expanded its capacity to produce more cars (Ford Motor Company, 2008; Arbor, 2010).
Hence, owing to these excess capacity and tighten credit, Ford has to increase the liabilities costs in term of labour and supplier and using debt financing to cover these extra costs and other daily expenses, which thus increased total debt to $25846 millions, a 2.5 times more than its stockholders' equity of negative $17311 million (Lessard, et al., 2007; Ford Motor Company, 2008).
2.2 Positive Credit Crunch Impacts
2.2.1 Surpass its competitors
Nonetheless, other than these negative impacts, credit crunch has provided a chance for Ford to surpass its two main competitors, GM and Chrysler, in US. These two competitors have been hit with a steady stream of negative news, including growing concern that they may need to file bankruptcy protection, which dampen customers' confidence as no one is willing to purchase car from a bankruptcy company (Dolan, M., 2009). Furthermore, GM and Chrysler have asked for government's bailout, while Ford in contrast, not demand for government bailout loan, but mortgage its assets to acquire extra capital, has therefore, received a better and favourable responses from investors and taxpayers since Ford did not take their money to overcome its own tremendous problems (Miller, 2010).
2.2.2 New Emerging Market
Additionally, dramatic credit crunch that diminished consumer purchasing power have led to a more analogous of customer requirements around the world, where, consumers become more preferable to purchase low-cost fuel-efficiency cars instead of truck and SUVs, which is not only polluted but also causes more costs burden as the gasoline prices has currently increased to over $4 per gallon (Ford Motor Company, 2009; Business Pundit, 2010; Giardina, et al., 2010; Hilmiton, 2009). This preference shift has created a new emerging market to Ford Europe and Ford Asia-Pacific whose have efficiency in making tight and economical small cars, such as Fiesto, which has successfully sold more than 3.4 million in Europe (English, 2008). It also generated an opportunity to Ford to share this strength to other region, such as Ford US market that heavy rely on the truck and large SUV (Ford Motor Company, 2008).
2.3 Company Performance during the credit crunch
Conclusively, insufficient credit support that led to dampen car sales and higher costs burdensome has caused severe problem in Ford's liquidity. It has burned $18943 million of cash to continue sustain its suppliers and skilled labours which thus given a negative cash flow of $14301 million in 2008, and is expected to run out of money by 2010 if the credit crunch does not improve (Ford Motor Company, 2008; Bruce, 2008).
Furthermore, despite the high cost and low sales in some regions, Ford enjoyed opportunities in certain regions, hence, the company performance in profitability and market share is uneven in all regions, as shown in Table 3.
Profit / (loss)
Market Share
2007
2008
2007
2008
Ford North America
($4139 million)
($10248 million)
14.6%
14.2%
Ford South America
$1172 million
$1230 million
10.7%
9.7%
Ford Europe
$744 million
$970 million
8.5%
8.6%
Ford Asia-Pacific
$2 million
$4 million
2.3%
2.0%
Table 3: Profit and Loss, Market Share in all regions (cited in Ford Motor Company, 2008; Bruce, 2008)
Some regions are still enjoyed profitability result, yet, it cannot cover the high lost in its parent country and resulted a net loss of $11823 million in 2008, compared to the net loss of $4970 million in 2007 (Ford Motor Company, 2008; Bruce, 2008), whereas, net market share has also decreased to 15.1% in 2008 compared to 15.5% in 2007, which thus gave a chance for Toyota to take over its second-ranked automaker in US with a 16.8% market share (Krebs & Visnic, 2009).
3.0 Strategies to respond to the credit crunch impacts
In order to avoid continuous outflow of cash and sustain the market place, Ford has introduced the One Ford plan that consists of several strategies for the company as a whole as well as for each region company to overcome the negative impacts and to exploit its positive impacts (Politico, 2008).
3.1 Restructuring strategy - Ford North America and Ford Europe
Since both regions were being impacted more heavily, where, car sales declined most extremely and operation costs became more burdensome; Ford began to restructure its operation through downsizing the production units, number of employees, excess capacity, and number of suppliers so to match the shrinking demand and achieve cost reduction (Hitt, Ireland & Hoskisson, 1996; Urban, 2008).
Ford North America
Ford Europe
Number of Production units cut
418000
283000
Number of Plants close down
17
-
Number of Employees layoff
39000
600 in Spain and shift to four-days week in UK
Number of Suppliers cut
1700
Table 4: Downsizing plan in Ford North America and Ford Europe (cited in Politico, 2008; Industry Week, 2009; Fleming, S., 2008; Henry, J., 2009).
References to Table 4, the restructuring process was more gentle in Ford Europe due to the government incentive schemes, example, Bangers for Cash program, which help to encourage more sales revenue that enable Ford to cover part of its costs (Giardina, et al., 2010). Contrary, in Ford North America, which has suffered the most compared to other region; will continue restructuring to become leaner and more efficiency through layoff extra 25000 to 30000 workers and cut extra 14 idle plants by 2012 (Lehrer, 2006), even though, it has successfully reduced more than $5 billion operating costs and shaved $1.8 billion from its supply bill, with the plan shown in Table 3 (Minahan, 2007; Bates & Bagley, 2009; Giardina, et al., 2010).
Furthermore, Ford North America has restructured its debt through critical contract negotiations with the UAW union (Jones, 2007), and has successfully reached an agreement with the UAW that allow Ford to modify its labour costs to $55 per hour from about $60 per hour, which will saved Ford's labour cost at least $500 million a year (Ford Motor Company, 2008; Tse, 2010). Ford can also eliminate an estimated $23 billion in retiree health care liabilities as it can transfer the responsibility for retiree health care to UAW under this new agreement (Canis & Yacobucci, 2010).
3.2 Growth Strategy - Ford Asia Pacific
Despite relentless credit crunch challenges in North America and Europe, Ford Asia-Pacific has achieved excellent result (Payne, 2010) and its sale is predicted to increase to an estimated of 35 million units by 2018 (Payne, 2010; Industry Week, 2010). Hence, horizontal growth strategy has applied in this region through developing into the new growing market, such as China, India and Thailand (Wheelen & Hunger, 2004; Zacks Equity Research, 2010).
For instance, in China, Ford has invested $510 million to expand the capacity, dealer network and supply chain (Zacks Equity Research, 2010; Industry Week, 2010). This is because Ford has recognised the chance to provide full line-up family car to China, as the car sales in China is predicted to reach 2000000 units in 2010 (Anavrin, 2006) due to the rising income of middle class that at least 300 million citizen have the capability to purchase cars (Giardina, et al., 2010; Anavrin, 2006).
Furthermore, Ford realized the opportunity to produce car with a lower cost or higher profit margin in China, because of the large population and abundant labour that lead to lower labour cost with only about $250 per month or $1.27 per hour; as well as the attractive incentive schemes introduced by the China government, such as, breaking the tariff barrier on car-imported and given some tax reduction policies for foreign-owned companies, to encourage the investment from foreign MNCs (May, 2008; Anavrin, 2006). Hence, all these costs saving and high sales demand allow Ford to cover the loss in other regions through the profit earned in this region. In future, Ford will continue focus its sales in China because with all these benefits, China will remain the largest car market (Industry Week, 2010).
3.3 One Ford Global Product Development Strategy - Ford Motor Company as a whole
Moreover, besides the increasing convergence of customer's preference on fuel-efficiency car around the world, government in most countries was not only concern on the high emission from auto industry, but also worried on the impact of credit crunch - increasing unemployment rate in auto industry (Ford Motor Company 2009; Business Pundit, 2010). Hence, instead of solely introduced the zero-emission and safety regulations, example, CAFE (Corporate Average Fuel Economy) standard in US, government has provided some incentives to the auto industry (Giardina, et al., 2010). For instance, in US, CARS (Car Allowance Rebate System) program that allows customers to exchange their less fuel-efficient used cars with the more fuel-efficient car, is to assist the ailing auto industry to improve the production, but also in accordance with the zero-emission and safety standard (Anon., 2009). Additionally, China government has given subsidies and tax credit for consumers who purchase fuel-efficient vehicles and set up electric car charging stations in its key cities, so to encourage more fuel-efficiency car buyers, enhance production and increase employment (Giardina, et al., 2010).
Hence, on purpose to fulfil the consumers' preferences change, to meet government stricter rules and to exploit benefit of government incentive schemes, Ford has introduced the global product development strategy, where, it brought together all the intellectual capability of each region to develop the new smaller and fuel-efficient car that could sell it globally (Johnson, Scholes & Whittington, 2005; Motortorque, 2010; Politico, 2008; Ford Motor Company, 2008).
It thus developed the One Ford Global Product Development System (GPDS), which consist of global product cycle plan and global product "DNA". Under this GPDS, Ford Europe engineering centres were responsible to develop the global product DNA for the new fuel-efficiency car since they have great power train engineer that capable to build small and fuel-efficient power trains (Politico, 2008; Business Pundit, 2010). After spending about $5 billion in R&D of fuel-efficiency technology (Politico, 2008; Ford Motor Company, 2008), Politico (2008), stated that, "they have developed the affordable and fuel-saving technologies - EcoBoost Engines, that use gasoline turbocharged direct-injection technology for up to 20% better fuel economy and 15 emissions and superior driving performance versus larger-displacement engines". This has therefore become the basic design of all global fuel-efficiency car for every countries, with the only divergences being due to the safety or environmental regulations, or perhaps some specify differences that are correlated to different customer's cultural (Ford Motor Company 2009; Miller, 2010).
Subsequently, through this strategy, Ford has simplified the process, reduced core platforms and achieved economies of scale as it is now able to share products, engines and parts across global markets (Henry, 2009), which thus reduced 60% in engineering costs and 40% in capital costs (Ford Motor Company, 2009), and hence, boost operating profit margin from 7% to about 13% (Saporito, 2010)
3.4 Company performance after carried out the strategies
As a result of continuously restructuring, Ford has reduced its structural cost by $5.1 billion in 2009, exceeding its target of $4 billion (Ford Motor Company, 2009). Furthermore, as the introduction of new lines fuel-efficiency cars, online shoppers that looking at Ford vehicles have increased to 22%, equal to the percentage looking for Toyota, which helped Ford to close the gap with Toyota in 2009 and has even outsold Toyota in 2010 by extra 55301 units (Canis & Yacobucci, 2010).
Conclusively, this increase in sales together with the lower costs, has not only improved the cash flow by $19.2 billion over 2008 and resulted a negative $300 million in 2009, but also improved its pre-tax profit to $1212 million in 2009 from $11823 million loss in 2008 (Ford Motor Company, 2009; Ford Motor Company, 2008), and thus, strengthen the market share in each region, as shown in Table 5.
2008
2009
Ford North America
14.2%
15.3%
Ford South America
9.7%
10.2%
Ford Europe
8.6%
9.1%
Ford Asia Pacific
2%
2%
Table 5: Market Share of each region in 2008 and 2009 (cited in Ford Motor Company, 2009)
The favourable market share in each region has increased the Ford net market share in 2009 to 15.8 %; which is ahead of Chrysler at 8.5%, and has closed the gap with GM's and Toyota's market share at 20.1% and 17.9% respectively (Krebs & Visnic, 2009). With this result, Ford believed, it is in the right move, hence, it will continue its restructuring plan, increasing extra fuel-efficiency car by 26% across the entire vehicle line in 2012 (Ford Motor Company, 2008; Urban, 2008), as well as further strengthen its economies of scale through cutting the nameplates from currently 97 different Ford models available to a more manageable 20 by 2013 (Taylor, 2009; Daye & VanAuken, 2009).
4.0 Conclusion
As a company in which each region and each business unit ran independently for decades, One Ford plan that not solely concentrate on restructuring the high cost division and tap into the high sale region, but also foster the cooperation among the regions to produce the new global vehicle, is an extremely makeover (Overby, 2010). Nevertheless, it has proven to be successful as it has helped to avoid continuous increasing in the cash deficit to cover costs of labour, supplier and excess capacity, and also triumph to exploit into new market and attract new customers, which thus, help them to close the gap with their competitors.
However, they should not complacent with its current piece-meal improvements and short-term financial goals (Wee & Wu, 2009), as Ford is still suffering in the uncertain external environment, for instance, China is still persevering on its communist and totalitarian policy, which might be obstacles to foreign investments as it has no guarantee that it will continue the open policy and sustain the rapid GNP increase (Anavrin, 2006). Also, in Europe, the expiration of incentive schemes in the upcoming years may causes the dramatically decline in auto sales as customers are depending on more incentives to purchase vehicles in current credit crisis (Giardina, et al., 2010).
Hence, Ford should apply the continuous improvement (Kaizen) cultural into its working environment, where, it should never accept the status quo; yet, should regularly reviews and analysis the PESTLE influences and identifies the areas that need to pay attention and pursue opportunities to improve the organization (KAIZEN Institute Consulting Group, 2010; Johnson, Scholes, & Whittington, 2005). For this reason, the collaboration throughout the entire value chain is necessary, as close relationship with the supplier will allow Ford to identify and solve potential problems in the supplier's process, product shipment and movement into production at Ford plant (Teresko, 2006); whereas, close reaction with customers through regularly listen to customers' feedback will provide a deeper, customer centric understanding that helps Ford to identify ways to improve quality process and product development; thus, increase customer loyalty and maintain business competitiveness (Hayes, 2010; Clark, 2009).
