External Factors Affecting Ford Motor Company Essay, Research Paper

Introduction

The purpose of this report is to examine the external factors affecting Ford Motor Company within the last four years. Dr. John L. Waltman has authorized this report. It is based on secondary sources, mainly gathered through the First Search Periodical Index. Authorized Publication includes Wall Street Journal, Financial Times, New York Times, and sources from the Internet. This report examines and analyzes these three external factors:

vConsumer Demand

vIncreased Fuel Costs

vVisteon’s Spin Off

Consumer Demand

Ford Motor Company’s profits had been low in 1996. The company’s consumers were demanding increased quality and option at low prices. Ford was forced to cut costs. Ford also planned to reduce their product development time. The consumers demand for higher quality and more options had a major impact on Ford.

Consumer Demand Brings Low Profits

In 1996 consumers were demanding better vehicles for lower prices and Ford Motor Company’s Profits were low. Fords was not meeting these consumer demands. A Rubber and Plastic News article stated that this puts the company under a lot of pressure to cut costs (9,24). Ford Motor Company’s vehicles were not in demand and sales were low. Ford Motor Company’s profits were affected by this consumer demand.

Suppliers were a part of the plan

Ford Motor Company’s customers were demanding a better product for a cheaper price. A Rubber and Plastics News article stated that Ford’s suppliers play a major role in the plan to cut costs (9,24). Ford was forced to cut cost to be able to bring back the profit. Ford Motor Company and its suppliers were working together to cut costs. Not only did this consumer demand affect Ford, it also affected Ford’s suppliers.

Decreased Development Time

The need to cut cost had affected the company in many ways. Ford’s need to cut cost impacted their decision-making. A Rubber and Plastics News article stated the company was going to reduce cost by cutting vehicle development time (9,25). This was another impact that consumer demand had on Ford Motor Company.

Increased Fuel Costs

Ford Motor Company is the second largest automotive manufacturer in the world (3). Half of the Companies income is from selling high margin vehicles that are not very fuel efficient (13,47). Prices for fuel are increasing and have caused consumers to demand more fuel efficient vehicles. A recent Indonesian Commercial Newsletter states that fuel prices are decided politically and not by market demand (10,7). Concerns about global warming have also affected the automotive industry. This has caused Ford to change its construction of its Sport Utility Vehicles (SUV) and to use more magnesium parts.

Federal Fuel Standards

In 1997 there was a global warming conference to be held. Many of the issues to be discussed were the automotive industry and low fuel costs. It was the concern of many nations to raise the standards of emission levels. This article also states that President Clinton propose to reach the 1990 emission levels between 2008-2012. The Germans proposed to cut CO2 emission below the 1990 level. While the British proposed to reduce the CO2 emission by 20% (13,49). It was also the concern at the conference to raise fuel prices. Fuel prices affect consumer behavior and if the prices are too low then that will increase consumers driving time. In an Automotive Industries article chairman of GM Jack Smith states “Gasoline Prices are too low. That drives the behavior of buyers” (13,49). If fuel prices increase and federal fuel standards change that will affect all of the automotive industry.

The regulations have imposed fines on automotive manufactures, such as Ford Motor Company. If the manufacture breaks the law, then they pay fines. In an Automotive News article reporter Harry Stoffer states that Ford Motor Company is adding on two manufactures that routinely pay fines for breaking federal fuel standards (12,51). Also stated in this article is that Ford’s policy is to meet the law and not pay any fines (12,51). This new addition to Ford Motor Company is going to acquire some change on the company’s part. The emission regulation is affecting Ford Motor Company by imposing fines on the company.

Change in Sports Utility Vehicles

Ford is looking for ways to make its SUV more environmentally friendly. A New York Times article stated that Ford released a report on its corporate citizens status that states that SUV’s affect global warming and produced more chemicals that create smog than cars (4,A1). The SUV is one of the high margin vehicles that attribute to half of Ford’s profit (13,47). A Plain Dealer article reported that in 2003 Ford plans to introduce an electric-gasoline powered SUV (6,1-C). The consumer’s concern about global warming and increasing fuel pricing is affecting Ford by increasing the need for Ford to become more and more environmentally friendly.

Increased Use of Magnesium

The federal fuel standards along with fuel prices are increasing. In an American Metal Market article reported by Al Wrigley stated that with increased fuel cost and consumer becoming concerned about fuel efficiency, Ford Motor Company would boost its content of magnesium parts (15,4). Magnesium is a lightweight metal and the use of it in the engine will create more fuel-efficient vehicles. Also stated in this article is that consumers demand for a more fuel-efficient automobile has become the biggest influence for weight reduction at Ford, even more than federal fuel standards (15,4).

Visteon’s Spin Off

The third and final factor is that Ford Motor Company and Visteon Automotive Systems Subsidiary are to become two separate companies. This has affected Ford in many ways. Ford is to distribute its Visteon shares to its shareholders. Ford is now reviewing prices from Visteon to bid to cut costs (8,26). Ford will be able to concentrate wholly on its manufacturing business. The separation of Ford Motor Company and Visteon Automotive Systems Subsidiary is to take place later this year.

Low Stock Prices

The separation of Ford Motor Company and Visteon Automotive Systems Subsidiary will leave Ford with shares to distribute. In an Investor Relation Business article the editorial staff reported that Ford has $10 billion reserved for distributing to shareholders (2,9). This article also stated that Ford’s stock prices have been low (2,9). A Wall Street Journal article states that Ford’s shares dropped $3 to $51.4375 at the end of the day on Friday (5,A3). The shares that are distributed will impact the price for Ford Motor Company’s common stock.

Starting in the year 1998 the prices for Ford Motor Company’s common stock have been declining. Figure 1 shows the decrease starting in 1998 to 1999. Figure 2 shows the decrease from the middle of 1999 to present.

Figure 1 (Source: 14)

1994 to 1999

COMPARISON OF FIVE-YEAR CUMULATIVE SHAREHOLDER RETURN

FORD, GENERAL MOTORS AND S&P 500 SK INDEX

199419951996199719981999

FORD100108127199376353

GENERAL MOTORS100129140166202255

S&P 500100138169226290351

Figure 2 (Source: 7)

Mid-1999 to Present

INVESTools Chart for Ford Motor (F)

The separation of the two companies will leave Ford with shares to distribute. The shares that are distributed will increase Ford Motor Companies stock prices.

Bid for Lower Prices

It seems as though Ford Motor Company and Visteon Automotive Systems Subsidiary are already two separate companies. A Financial Times London Edison Financial Times article stated that Ford had launched a market-pricing review in a bid to cut costs (1,28). Analyst’s states that price cuts are likely to be substantial (8,26). A Visteon official stated that the company is ready to compete on price (11,2). The separation had had a positive affect on Ford Motor Company. It is allowing Ford to try to receive low costs.

Concentration on Core Business

The separation of the two companies is taking away Ford’s parts business. The spin off of visteon will allow Ford to concentrate on its core business (2,9). Ford will distribute its Visteon shares to its shareholders and will no longer be a parts company. The separation will cause Ford to be strictly a manufacture and rely on outside supplier for its parts.

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