FREE ESSAY ON AUTOMOBILE INDUSTRY

AUTOMOBILE INDUSTRY

Industry Analysis 
The automobile industry began with Henry Ford's production of the Model T in the early
1900's. With the creation of the assembly line, cars became cheaper and quicker to
produce, thus making them affordable for many people. There were originally 500 auto
manufacturers. By 1908, there were only 200; and in 1917 only 23 remained. This vast
reduction was due to large amounts of consolidation within the industry. 
Currently, the major competitors within the industry are Ford, DaimlerChrylser, General
Motors (GM), Honda, Toyota, and Volkswagen. A few United States (US) manufacturers
produce 23% of the world's vehicles while Japan is responsible for 21%. The tendency for
the industry is to be a global producer of automobiles; parts can be made throughout the
world and assembled in many different places. The trend of consolidation has continued
throughout today. Presently, this is evident in the recent acquisition of Chrysler by
Daimler-Benz in late 1998, thus forming DaimlerChrylser. These consolidations have proved
beneficial to consumers since companies have been able to reduce costs and pass those
savings on to the customers. Some of the other major examples of consolidation are Nissan
selling off a controlling 37% interest to Renault; General Motor's 49% ownership of
Isuzu; and Ford's 33% majority of Mazda. Other efforts to become more competitive have
translated into the European Union dropping trade barriers and European carmakers
employing cost reducing efforts. American manufacturers have seen 2-3% growth over the
last few years. Some current trends are the explosion in popularity of the Sport Utility
Vehicle (SUV) and big luxury vehicles. 
In the future the global car market is full of potential. There are currently 44 million
vehicles and by the year 2002 experts estimate that number will grow to 64 million. That
growth is not expected to be in the US, rather in countries such as: China, India, The
Pacific Rim, South Africa, and South America. In America, a current trend is for the
neighborhood car dealer to be purchased by a large manufacturer, such as GM, so cars can
be sold through retail outlets. Other future endeavors include low emission cars, which
are expected to provide expansions in sales. Some major automakers are investing in fuel
cells, devices that convert liquid hydrogen into electricity, hoping to make future
vehicles more environmentally friendly. The automobile industry will see more changes in
the next 10 years than it has in the last 100.
Economic Climate 
In the past, the oversized vehicle was the body-style of choice among American consumers.
In the 1970's, oil shortages led to an increase in demand for more fuel-efficient cars,
thus the sub-compact car became popularized. After 1979, Japan's efficiency at producing
this type of car allowed them to take 30% of the U.S. automobile market away from
American manufacturers.
In 1999, total industry sales have risen 8%2. Now, unprecedented competition has
pressured firms to reduce costs. This competition is a result of the mass consolidations
occurring among worldwide automotive manufacturers. These immense companies are able to
offer many styles and options, but so many options come at a cost. This could become a
problem for them as more informed consumers insist on lower prices and more add-ons. The
World Wide Web, which allows consumers to thoroughly research and purchase automobiles
from home, has become an essential ingredient to any successful automakers arsenal, and
will continue to play a large role in the 21st Century. 
The luxury vehicle segment has grown more competitive, yet maintains large profit margin
potential. American buyers have been showing increased interest in European and Japanese
manufacturers. A study in 1990 revealed 11% of Americans wanted to purchase European
luxury cars, a number that has increased to 23% in 1999. 
The Sport Utility Vehicles (SUV's) segment has emerged as one of today's hottest markets
through its increased sales. North-American consumers in higher income brackets are
choosing, with increasing frequency, to put SUV's in their garages. 
Minivans market share was 8% in 1998, which was down 12% from 1991. This is a result of a
shift in consumer demand away from these vehicles. Overall market analyst consensus is
that minivans have entered the mature stage of the product life cycle. 
Pick-up trucks, uniquely American vehicles that span all of the consumer target markets,
show good potential for domestic manufacturers. U.S. manufacturers have sustained
unparalleled sales in this segment due to the popularity growth of trucks. 
The largest and most important product segment in the automotive industry is mid-size
cars. It is an area of intense competition for car sales in the United States. Popularity
for mid-size vehicles is due to consumers' preference for luxury cars they cannot afford
and compacts that they do not like. 
All of these vehicle segments combine to form an industry in which consumers have
continuously changing tastes. Recent years show that, for those manufacturers who can
compete worldwide, profit and growth potential will be ever present. The company who is
able to produce vehicles incorporating the most recent technologies at the lowest cost
will find themselves with the competitive advantage.
Firm Analysis
General History of Ford:
Ford Motor Company's first car was sold on July 23, 1903. In 1906, the first Model T was
made available and the millionth car was produced on December 10, 1915. Production of
trucks and tractors began in 1917. Ford became the first international company when they
started exporting cars to Europe. Within 10 years Ford had plants in 5 countries. In
1956, Ford went public with the largest stock issue of all time; 10.2 million shares. The
Ford family still retains 34% of the firms voting stock. Ford's finance subsidiary, Ford
Motor Credit, was formed in 1959 and is the number one auto finance company worldwide.
The Thunderbird, a two-seater sports car, was produced in 1954. A revolution was started
in 1964 when Ford unveiled the Ford Mustang. It was the first time the world had seen a
sporty car with a youthful touch. The 70's were a time for quality reflection,
assessment, and improvement. In 1980, Ford introduced the Escort, which was their first
attempt at a car that could be globally marketed. The 80's were also the decade in which
the Taurus made its first appearance. Ford then developed the "global car" referred to as
CDW27. It was a highly sophisticated car that sent all over the world with only slight
modifications for various regions. In 1987, Ford earned record profits of $4.63 Billion
and three years later they suffered their largest one-year loss of $2.3 Billion. Ford
makes vehicles under the following names: Volvo, which was bought in 1999; Aston Martin,
acquired fully by 1994; Jaguar, which was bought in 1990; Mercury, production began in
1938; and Lincoln, which was purchased in 1922. In addition, Ford owns a controlling 33%
stake in Mazda; 81% of Hertz, which is the number one rental car company in the US; and
Ford Motor Company of Canada, Ltd. Currently, Ford is the #2 maker of cars and trucks
worldwide. They are also the world's largest truck manufacturer and are ranked by Fortune
500 as the second largest industrial corporation. 
Ford's three major subsidiaries are Hertz, Ford Credit, and Visteon. Hertz is the U.S.'s
largest rental car company. They have seen five years of record profits and seven
straight years of increased earnings. Ford Credit is the world's largest automotive
finance company. In 1998 its earnings were $1.1 billion, an increase from last year.
Visteon is a component manufacturing operation with annual sales of nearly $18 billion. 
Future Plans:
According to the company, Ford's prime focus in the 21st Century will be on the consumer.
Ford's management stated, "Our vision is to be the world's leading consumer company that
provides automotive products and services." In addition, Ford has made a deal with
Microsoft in an effort to take advantage of the MSN CarPoint service. In addition, Ford
recently announced an agreement with Yahoo! which will allow car owners to register their
cars online. Their plans project that cars will be able to connect within 3 years. That
online service is known as "24-7." With this service car owners will see such benefits
as: being able to get service reminders, information on credit accounts; and real-time
traffic reports. Voice-activated Internet access is also projected to be available within
3 years. With that service, things like email capabilities and direction retrieval will
be possible in a "hands-free" atmosphere. Ford is also trying to expand in the area of
e-commerce. Their focus is on five areas: Telematics, Business to Consumer, Customer
acquisition, Customer retention, and Business to Business. Ford is striving to make
advances that will keep it competitive in a global market during the information
revolution.
Financial Analysis: 
General
Ford has shown a steady pattern of sales growth from 1994 to 1997, growing at 5-7% each
year. However, in 1998 sales were down 6%. In 1999, sales were up 14% from the previous
year, giving them an average over the 94-99 period of 5.4% growth. Profit margin has
remained steady, always ranging between 7% and 9%, slightly above the industry average.
Cost of goods sold has remained around 72%, which shows consistency within Ford's
manufacturing plants. 
Ford's borrowing can be explained by its leverage ratios. Ford's debt ratio has remained
relatively steady over the last 5 years. 1998's debt ratio was 82.65%. This shows how
they were relying heavily on borrowed funds to finance operations. This is further
evinced by Ford's debt-to-equity ratio of 4.77 in 1998, which is up from past years.
Compared to the 1.97 industry average, Ford's number appears quite high. Ford's
times-interest-earned for 1998 was 3.68, an increase from previous years. This could be
due to the $15,955 million gain Ford recorded as a result of the spin-off of their
interest in The Associates, Inc. 
The liquidity of Ford, indicated by its current ratio of .41, shows that they have many
current liabilities. This number is much lower than the industry average of 1.8. Ford's
quick ratio has trended upward over the last 4 years, with 1998 finishing at .29. This
is, again, below the industry average of .90. With a company as large as Ford, having as
many current liabilities as they do is not necessarily an indication of a problem. 
Dupont
Ford's efficiency can be determined by examining the asset turnover ratio and the days
inventory held ratio. These show how effectively Ford is using its assets. The asset
turnover ratio for Ford has averaged .71 times over the last 5 years. 1998 turnover was
.79 times. The days inventory held ratio for Ford has fluctuated over the past 5 years.
Ford's reduction from their 1994-1995 average of 25.79 days to 22.25 in 1996 was a
significant improvement. Their further reduction to a 1997-1998 average of 19.07 shows a
continued effort by Ford to reduce inventory costs. Days sales outstanding (average
collection period) in 1994-1997 saw a range of 8.23 days to 9.24 days. Ford improved this
number significantly in 1998 to 6.49 days.
Ford's profitability is measured by the net profit margin, rate of return on assets
(ROA), payout ratio, and rate of return on common shareholder's equity (ROE). Ford's net
profit margin for 1998 was 9.48%, which is their best return in the last 5 years. Their
increasing profit margin means the company is allowing more sales dollars to become
profit dollars. The ROA for Ford in 1998 was 5.02%, compared to the industry ROA of 3.1%.
This indicates that Ford is making above average use of their assets relative to other
auto manufacturers. Although this rate in comparison looks good, it is Ford's lowest ROA
in 4 years. The ROE for Ford in 1998 was at 27.07%. Taking into account the industry's
average of 16.8%, Ford appears to be maintaining a high level of shareholder wealth. The
payout ratio measures the percentage of earnings that are paid out as dividends. In 1998,
Ford paid out .10 of its earnings to shareholders. This is down from .29 in '97 and from
.41 in'96. Research and Development costs for 1998 and 1997 were $6.3 billion, which was
4.4% and 4.1% of their sales, respectively. These expenditures are a necessary cost for a
firm such as Ford. 
Market Data
Market-value ratios indicate what investors believe the company is worth. Ford's 1998
price/earnings (P/E) ratio of 12.64, meaning investors are willing to pay $12.64 per each
dollar of earnings. This has more than doubled from 1997, a positive signal from
investors to Ford management. Market-to-book value for 1998 was 1.74. This is
significantly higher than in the previous 5 years. This means that Ford is worth 74% more
than stockholders of the past and present have invested. 
Impact of Unions
Unions play a large role within the Ford Motor Company, employing vast numbers of its
workforce. The United Auto Workers (UAW) union represents these employees. From
management's viewpoint, the effects of having the UAW can be both positive and negative.
Employees with representation, who reap the benefits of a strong and organized labor
union, are more satisfied, and therefore more efficient, employees. Negative effects
occur when labor disputes threaten to cripple a company as a result of strikes and
walkouts. In order to prevent such potentially disastrous events, Ford could be forced
into expensive compromises that could erode profit margins. For this reason, Ford has at
its disposal $22 billion in cash in order to limit the threatening power of its unionized
employees.
Effect of Economic Conditions:
One of the economic conditions that Ford faces is interest rate swings. Since the
majority of sales are made to consumers on credit, interest rate fluctuations tend to
affect individuals' willingness to spend large amounts of disposable income and are
therefore a concern to Ford. In addition, in order to comply with pollution and hazardous
waste control standards, Ford will spend $74 million in 2000 and $73 million in 2001. By
2004, Ford expects to have spent $348 million total on these compliances.
SWOT Analysis:
Being such a well-established company, Ford has come to possess many strengths. Their
brand name is recognized and respected worldwide. The immense size of the company gives
them economies of scale in all of their production facilities and administration
procedures. Additionally, Ford's three strong subsidiaries make them a well-diversified
company. Their ownership interests in numerous other companies complete their
diversification status. Ford has product lines whose breadths and depths make it possible
to reach all target markets. Their use of in-house suppliers helps reduce inventory costs
so they are able to utilize these extra savings elsewhere. 
Ford's large size could also be a source of weakness to them. This is because of the
possible bureaucracy within the company; "red tape" that may make changes difficult to
accomplish. Another implication of their size is that timely reactions to changes in the
industry could be hard to come by. A more tangible weakness is that in 1998 sales were
down from the previous two years. 
The opportunities for Ford lie in their ability to lead the automotive industry in a
global expansion. Their use of technology will allow them to accomplish this task.
Internet and E-Commerce are two examples of technological opportunities available to
Ford. Examples of their attempts to lead the industry were mentioned previously. 
The threats that face Ford include an increasing number of well-informed consumers
attributable to the availability of information on the web. The demand for higher quality
vehicles at cheaper prices has forced the automobile manufacturers to become more
efficient and competitive. Honda, GM, and Chrysler are Ford's main competitors in the
industry. Even though the worldwide automotive market is very large the companies in this
industry are fiercely competitive for every part of the market.
Summary:
For the past 5 years, Ford has been a leader in the automobile industry. They are the
number one maker of cars and the number two maker of trucks in the world, assuring them a
strong market share. Their estimated 17.11% long-term annual growth rate shows they do
not face a going concern problem and that they expect to be profitable for many years to
come. Between 1997 and 1998, net income rose by 10%, as did earnings per share and
dividends per share. Between those two years, the common stock price rose by 31% and
total shareholder returns by 32%. Vehicle unit sales and the total company sales and
revenues were both down by 1% in 1998.
Current stock price:
Ford is traded on the NYSE under the symbol F. As of March 17th 2000, Ford's current
stock price was listed at $44.625. This is close to its 52- week low of $40.25. The 52-
week high was $67.875. With 1,222 million shares outstanding, this gives Ford a market
capitalization rate of $54,531 million. Dividends per share were $1.84 and earnings per
share were $5.86. Thus, our Price/Earnings Ratio is 7.61. Average daily trading volumes
for Ford are 4,022,000 shares.
A regression analysis of Ford produces a beta of 1.0151. This beta appears correct when
compared with well-known financial news providers' estimates. Data from the last two
years, most recently being January 1st, was used to find a market return of 20.90% and a
risk-free rate of 1.49%. Inserting these numbers into the Capital Asset Pricing Model
(CAPM), a resulting stock price of $52.81 emerges. Using published betas for a comparison
reference, the CAPM produces stock values between $37.61 and $54.38 and a
weighted-average of $50.09. Using the January 1st stock price of $52.75, it appears that
Ford's stock is correctly valued. This makes sense, considering that Ford is a large,
widely held, and often-analyzed firm. 
Bibliography
Sources
Web Sites:
http://www.askjeeves.com
http://www.astonmartin.com/
http://www.auto.com
http://www.bloomberg.com
http://www.cbs.marketwatch.com/
http://www.cnbc.com
http://www.cnnfn.com
http://www.fool.com
http://www.ford.com/
http://www.fortune.com
http://www.hoovers.com
http://www.jaguar.com
http://www.lincolnvehicles.com
http://www.mazdausa.com/
http://www.mercuryvehicles.com/
http://www.morningstar.com
http://www.msn.moneycentral.com
http://www.quicken.com
http://www.smartmoney.com
http://www.thestreet.com
http://www.uaw.org
http://www.volvocars.com/
http://www.yahoo.com
http://www.zacks.com
Books:
Brealey, Richard A., and Myers, Stewart C. Principles of Corporate Finance. Sixth ed.
McGraw Hill, New York, ? 2000.
Brigham, Eugene F., and Houston, Joel F. Fundamentals of Financial Management. Second ed.
Dryden, New York, ? 1999.