Ford and the world automobile industry in 2012 At the beginning of 2012, the Chief Financial Offi cer of Ford Motor Company, Lewis Booth, was reviewing his fi nancial forecasts for 2012-16. Ford’s turnaround since the crisis of 2007-8 had been remarkable. After a loss of $14.7 billion in 2008, Ford earned net profi ts of $6.6 billion in 2010, and it looked as though Ford’s profi t for 2011 would exceed this. The recovery had been much more rapid than Booth had expected. Ford’s business plan of December 2008 projected that it would not break even until 2011.1 Booth attributed the speed of the turnaround to three factors: fi rst government measures in North America and Europe to stimulate demand through incentives for scrapping old cars and subsidies for purchasing new, fuel-effi cient models; second, the recovery of demand in several major markets including China, India, Brazil and the US; third, Ford’s own restructuring. The “One Ford” transformation plan introduced in 2006 had closed plants, cut Ford’s workforce from 295 000 at the beginning of 2006 to 148 000 at the end of 2011, sold Jaguar, Land Rover and Volvo and a large chunk of Mazda; integrated Ford’s global activities; and accelerated product development including an increasing emphasis on smaller cars. Despite these successes, Booth looked to the future with much trepidation. Ford’s performance over the next fi ve years would depend on three main factors: Ford’s ability to continuing success with its One Ford strategy, the state of the world economy, and developments in the global automobile industry. On the fi rst of these, Booth had few doubts. On the second, he realized that, for all the uncertainty, there was little that Ford could do other than closely monitor the unfolding economic situation and be prepared to adapt to unforeseeable events. On developments in the global automobile industry, Booth was perplexed. The collapse in industry profi tability in 2007-9 and descent into bankruptcy of General Motors and Chrysler was not simply a consequence of the fi nancial crisis. It also refl ected www.foundationsofstrategy.com CCASE02.inddASE02.indd 1 229/02/129/02/12 44:27:27 PPMM the massive structural problems of the industry—most notably, too many fi rms with too 2 much capacity chasing too little demand. The catastrophic declines in industry revenues FOUNDATIONS OF STRATEGY OF FOUNDATIONS and profi ts in 2008 promised a major industry restructuring. Daimler’s CEO had predicted that 2009 would be a “Darwinian year” for the auto industry. Yet, the industry’s pre-crisis structure survived almost intact. The Financial Times commented: [I]nstead of natural selection, something else happened: governments around the world, from Canada and Brazil to Russia and South Korea, stepped in with prodigious amounts of cash to keep car plants open and assembly lines running. All told, automakers have benefi ted from well in excess of $100 billion of direct bail-out funds or indirect state aid . the biggest ever short-term intervention in manufacturing . (T)he money has prevented a necessary shake-out in an industry that has long had too many producers. Consultants at PwC estimate the industry has the capacity to build 86 million units this year, almost a record—and 31 million more than the 55 million vehicles that it will sell.2 Even before fi nancial crisis hit, the fi nancial performance of the industry was dire: between 1990 and 2008 the world’s fi ve biggest auto makers (GM, Toyota, Ford, Daimler- Chrysler and Volkswagen) had earned on average a net margin of 1.1%; their return on invested capital and together they had destroyed billions in shareholder value. However, despite the lack of exit or consolidation by the leading auto makers, it was clear that the structure of the industry was far from remaining static. The shifting of demand from the mature industrial nations to the growing markets of Asia, Eastern Europe and Latin America was accompanied by the emergence of new competitors from these same regions. Meanwhile, new technologies and environmental concerns—including the growing use of all-electric vehicles—wereredirecting the industry’s development path. Understanding how these diff erent forces would impact the overall profi t potential of the world automobile industry would be a key determinant of Ford’s fi nancial performance in the coming years. Development of the world automobile industry3,4 The growth of demand and production Vehicles powered by internal-combustion appeared in Europe during the 1880s—Gottlieb Daimler and Karl Benz were among the fi rst. By the end of the 19th century, hundreds of small companies were producing automobiles both in Europe and in America. www.foundationsofstrategy.com CCASE02.inddASE02.indd 2 229/02/129/02/12 44:27:27 PPMM During the 20th century the industry followed diff erent development paths in 3 diff erent parts of the world. The U.S. auto industry grew rapidly during 1910–28 and 1946–65 before reaching market saturation (see Figure 1).The automobile industries of IN INDUSTRY AUTOMOBILE WORLD THE AND FORD Western Europe and Japan also experienced maturing of their markets with production peaking in 1989–90. In all the advanced industrial countries the increased longevity of cars dampened market demand (see Figure 2). Despite declining output in the advanced industrialized countries, the world automobile industry has continued to grow (see Figure 3). This growth has been the Figure 1 U.S. motor vehicle production, 1900–2008 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 2012 4,000,000 2,000,000 0 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1967 1970 1975 1980 1985 1990 1995 2000 2005 2008 Trucks and Buses 0 750 6,000 74,00 321,7 530,6 575,3 697,3 754,9 655,6 1,337 1,249 1,194 1,751 1,539 1,692 2,272 1,667 3,464 3,718 5,634 7,228 7,656 6,733 Passenger Vehicles 4,192 24,25 181,0 895,9 1,905 3,735 2,787 3,273 3,717 69,53 6,665 7,920 6,674 9,305 7,436 6,546 6,712 6,400 8,002 6,049 6,350 5,542 4,321 3,777 Passenger Vehicles Trucks and Buses Figure 2 Median age of passenger cars in the U.S. Source: R. L. Polk & Co. www.foundationsofstrategy.com CCASE02.inddASE02.indd 3 229/02/129/02/12 44:27:27 PPMM World motor vehicle production, 1965–2008 4 Figure 3 80 60.0% FOUNDATIONS OF STRATEGY OF FOUNDATIONS 70 50.0% 60 40.0% 50 40 30.0% 30 20.0% Total (millions of units) 20 US and Canada as % of total 10.0% 10 0 0.0% 1965197019751980198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008 World Total US & Canada as % of Total result of growing output from the newly industrializing countries—notably Korea, China, Brazil, and India. (see Table 1). As a result, the proportion of world output contributed by the traditional production centers—the US, Western Europe, and Japan—fell from 77% in 1994 to 40% in 2010 (see Table 2). Table 1 World motor vehicle production by countries and regions (% of world total)1 AU: We have deleted repetition of 1960 1989 1994 2000 2005 2008 2010 Table 1. U.S. 52.0 23.8 24.5 22.2 20.0 18.6 12.9 Plz check. Western Europe 38.0 31.7 31.2 29.9 28.4 20.7 14.6 Central and E. Europe 2.0 4.8 4.3 4.6 5.4 9.5 7.7 Japan 1.0 18.2 21.2 17.7 17.0 16.7 12.6 Korea n.a. 1.8 4.6 5.0 5.3 5.5 5.6 China n.a. n.a. 2.7 3.5 5.7 13.3 24.0 World total (millions) 12.8 49.5 50.0 57.4 66.8 69.4 76.1 Note: 1 Motor vehicles include automobiles, trucks and buses. Source: A. K. Binder (ed.), Ward’s Automotive Yearbook, 2011, Wards Communications, Southfi eld MI, 2011. www.foundationsofstrategy.com CCASE02.inddASE02.indd 4 229/02/129/02/12 44:27:27 PPMM Leading automobile-producing countries (thousands of cars; Table 2 5 excludes trucks) FORD AND THE WORLD AUTOMOBILE INDUSTRY IN IN INDUSTRY AUTOMOBILE WORLD THE AND FORD 1987 1990 1995 2000 2005 2008 2010 China n.a. n.a. 356 620 3118 6341 9494 Japan 7891 9948 7664 8363 9017 9916 8307 Germany 4604 4805 4360 5132 5350 5532 5552 Brazil 789 663 1312 1348 2009 2561 2828 Korea 793 987 1893 1881 2195 2436 2793 U.S. 7099 6077 6338 5542 4321 3777 27311 India n.a. n.a. 394 541 999 1507 2317 Spain 1403 1679 1959 2445 2098 2014 1951 France 3052 3295 3051 2883 3113 2144 1914 Mexico 266 346 710 1130 846 1217 1386 Russia2 1329 1260 834 967 1288 1469 1208 U.K. 1143 1296 1532 1641 1596 1448 1274 2012 Czech Rep. n.a. n.a. 193 428 599 933 1070 Canada 810 1072 1339 1551 1356 1195 967 Poland 301 256 260 533 527 840 799 Italy 1701 1874 1422 1442 726 659 573 Notes: 1 The production data for the US do not include the large volumes of pick-up trucks and SUVs produced by the e automobile companies but classed as trucks. 2 U.S.S.R.