Economic Analysis of the US Automobile Industry

The Ford Motor Company

Abstract

In this paper, I have provided an economic analysis of the US automobile industry, with a particular focus on the economic environment that the Ford Motor Company operates in. The paper commences with a brief company overview, before exploring the impacts that recent conditions in demand and supply have had on the automobile giant. Then, the paper explorers Ford’s production costs and core competitive advantages. Also, the paper factors in the risk of new entrants and substitute products within the auto industry. I have also explored the market shares held by Ford and other firms in the auto industry, and the general market structure of the industry. Ultimately, I have given recommendations on what the Ford Motor Company ought to do to be able to predict its future.

Introduction: The Ford Motor Company

The Ford Motor Company is a global automobile company headquartered in the US, founded by Henry Ford in 1903. The organization commercializes their vehicles and automobiles under the banner of popular Ford, Volvo, and Mercury brands, while the Lincoln brand is used for the larger proportion of luxury vehicles. In the recent times, Ford Motor has released classic models such as Ford Mustang and Ford GT, which have made the organization stand out as one of Detroit’s big three. Although Ford may not have been so dominant in previous decades, with a capital of $50129.9 million, a total of 199,000 individual employees, and a total sales volume of 6.6 million automobiles in 2015, Ford remains to be a key player in the auto industry (Pereira, 2017). In this paper, I will explore various aspects within the economic environment of The Ford Motor Company.

Impact of Recent Supply and Demand Conditions on Ford

 Following the recent 2007-08 financial crisis, the international automobile industry saw a decline in demand for cars. As a result of the crisis, automobile sales plunged to a low that had not been witnessed for around three decades. Albeit, the US government intervened and provided financial assistance to local automotive manufacturers. However, Ford did not apply for a financial bail-out. The condition was even more severe considering that the prices of fuel had as well risen. The increase in fuel cost compelled ordinary consumers to change their automobile demand, and henceforth no longer preferred to purchase larger vehicles such as SUVs, which have a tendency to consume more fuel. At this juncture, Ford found itself confronted by harsh economic times given that the company is a popular producer of pick-up trucks and SUVs. Since then, Ford embarked on an ambitious plan to deliver to its consumers electric and hybrid vehicles as a solution to cope with the tough fuel economy, and to reduce the impact of oil on the environment.

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Again, in 2016, Ford was compelled to decrease its production following a decline in the general demand for new vehicles in the US market. Essentially, in the automobile market, consumers are given a wide scope of products to select from. There are many vehicle manufacturers such as Toyota, Honda, GM, among others, and hence the supply for input products decreases. As a result, once the cost of supplies increases the prices for automobile products increases proportionately. For instance, during the 2007-08 global crisis, the cost of supplies escalated, which prompted automakers, such as Ford, to raise their prices, while the customers’ purchasing power weakened to an extent that the company’s profitability was affected negatively.

Entry Barriers for New Firms Wishing To Join the Industry

In spite of the somewhat consistent transformations within the auto industry, the look of fresh commercial opportunities and the broad scope of commodities that are available to the customers make the vehicle manufacturing sector one of the world’s most densely concentrated market. In 2013, the big five automakers: GM, Ford, Toyota, Volkswagen, and Hyundai, claimed a 49 percent share of the market (Kallstrom, 2015). Such a situation can best be explained through the presence of a strong barrier for new entrants into the market. The main entrance barrier for new firms into the auto industry is economies of scale. Due to the magnitude of the structure of costs and in order to gain profits from the auto products, manufacturers must sell a massive quantity of automobile units, or a few units but at a premium price. These two types of options pose a challenge due to the fact that cars are usually the second biggest purchase for buyers after a home, and in such an expensive purchasing decision, the price and brand can influence a consumer’s purchasing decision. Since organizations within this sector comprehend that dynamic, they invest in aggressive advertisement strongly. In 2015, three of the top ten organizations that spent most in advertisement were automobile firms (Business Insider, 2015). Other than the cost of entry, the cost of exit is as well a determining factor for entry of new firms into the auto industry. For instance, Ford is reported to have spent $750 million when it closed down its Belgium factory (Ewing, 2018). Therefore, new market players have to consider both the entry and exit costs before entering the automobile industry.

The Ford Motor Company experiences the impacts of new entrants in the automobile industry. However, this particular competitive force, the effect of fresh entrants, is regarded as very weak. Various external elements contribute to the weak threat of the entry of new firms into the automobile industry, which include: a high amount of capital requirement, a high cost of conducting business, and the extreme costs of developing a brand. Organizations such as Ford typically allocate massive finances towards the establishment and maintenance of their facilities and businesses. These high financial requirements develop an entry barrier for new firms; hence, it minimizes the threat of new entrants (Ferguson, 2017). Moreover, it is quite expensive to establish a powerful brand, which may be compared to Ford. This makes it a challenge for new firms to enter the market and compete with established brands such as Ford effectively. With respect to this force, the external environment only establishes a weak threat against Ford’s existence.

Threat of Substitutes

The Ford Motor Company has felt the impact of substitute products within its market. Using this component of the five force analysis model, it is easy to determine the degree of threat that is posed by substitute products, for the Ford Motor Company and the entire industry (Ferguson, 2017). Essentially, Ford thrives in an industry that has a moderate threat of substitute products. Elements in the external environment that account for this moderate threat include the fair availability of substitute products, reasonable costs of switching between cars, and weak performance of substitutes. Altogether, these factors culminate to a moderately strong threat of substitutes. Moreover, there is a significant variety of products made by Ford, which include bicycles and public transport vehicles (Ferguson, 2017). However, the availability of these substitute products is not always the case or appropriate in particular regions or conditions. Additionally, the cost of switching between products can be termed as fair due to the fact that it is not easy for clients to switch goods; more so, if they have acquired them on loan. As well, in most situations, the Ford Company’s products have a superior performance as compared to substitutes in terms of safety and convenience.

Competitive Advantages of Ford Motor Company

Some of the aspects that contribute to the competitive advantage that the Ford Motor Company enjoys today is its decision to introduce smart cars, which have a fuel-efficient functioning system that assists customers avoid polluting the environment. As well, that meets the modern-day’s high demand for low-priced oil and less cost of maintenance. Besides, Ford has managed to deliver a synchronized technology system that enables customers to keep track of their vehicles using their smart devices. The essence of adopting advanced technology is that it facilitates a unique customer experience, which is a key competitive advantage.

Another key competitive advantage of Ford is the superior position of its products in the automobile market, which has been enabled by various aspects. Its ability to stay financially stable together with the decision not to seek funding from the government has made its customers to put more trust on the company and its brands. Also, Ford’s products are popularly accepted by customers around the globe, which has seen its customer base increase tremendously. Ultimately, Ford’s decision to produce smart cars is even more likely to increase its market share (GLG Expert, 2009). Essentially, Ford may take advantage of the economic recovery of the industry by concentrating on customer-oriented products and delivering value while making rational profits. Moreover, over several decades, Ford has established and maintained its reputation within the industry. Many customers have developed loyalty to the brand name for quite some years now and its growth and sales have recorded an increase each and every year since the organization came into being.

Market Share Held By Particular Automobile Manufacturers in the United States

According to the respective market shares held by the US automobile manufacturers, General Motors, Ford Motor Company, and Toyota Motor Corporation are the three most prosperous automobile manufacturers in the US (“U.S. market share of automobile industry | Statista”, 2018). Statistical evidence has shown that General Motors holds the largest market share in the US, at 17.6 %, of the entire light truck and car market in the US. Closely following, the Ford Motor Company holds the second largest market share in the US, 14.2%, which is similar to that of the Toyota Motor Corporation. Other automobile makers in the US include, Nissan Motor Company, which holds a 9.9% market share, Honda Motor Company, 9.6%, Hyundai-Kia holds 7.5%, Subaru holds 3.8%, while the Volkswagen group (with the exception of Lamborghini), holds a 3.7%  market stake (“U.S. market share of automobile industry | Statista”, 2018).

Market Structure of the Automobile Industry

Since there is no single dominant firm in the auto industry, within the US and beyond, the market structure for the global automobile industry is oligopolistic. That implies that most of the firms are there to claim a part of the profits and for competition purposes. Essentially, among the characteristics of an oligopoly is a huge proportion of prospective buyers with merely a few sellers (Chris Britton 2003). In the automobile industry, it is certain that the number of brands are very few while the number of buyers are very many. Besides, there are many homogenous or differentiated commodities, a characteristic of oligopolistic market structures. Essentially, automobile products are usually uniform with respect to their functionality and performance while they are differentiated in terms of pricing and branding. Also, it is typical that in oligopolistic markets the buyers are small as compared to the market, while the sellers are large. Additionally, the strong barrier of entry for new firms in the industry has established an oligopolistic market structure in the automobile industry as it has ensured that there are few sellers. In particular, the automobile industry falls under the subcategory of impure oligopolies (Goldberg, 1995). That is due to the fact that few automakers produce auto products that are not exactly the same, but are differentiated in some specification.

Available Substitutes to Ford’s Products

Ford has many competitors as the number of vehicle brands in the US. That is due to the fact that all vehicle manufactures provide vehicles that act as substitutes to Ford’s products. There are, however, some key substitutes to Ford’s products. The main substitute is vehicles by the General Motor Company, commonly known as GM. The legendary motor company produces famous brands such as Cadillac, Chevrolet, GMC, Wuling, and Holden. The Toyota Motor company is another topmost competitor to Ford. Various brands produced under the banner of Toyota include Daihatsu, Lexus, and Ranz. Moreover, as a result of Toyota’s quality and innovation practices, its products are regarded to be the key-most substitutes to Ford’s products. Other substitutes to Ford’s products include automobiles manufactured by Tata, Daimler, Hyundai, Honda, Volkswagen, Renault, Fiat Chrysler, Nissan, Suzuki, and Tesla.

Cost of Production for Ford Motors

The financials of the Ford Motor Company are influenced by various production costs, which affect its profit margins. They include the costs of production components such as raw materials needed in the production process, and the costs incurred in installing emission sensors, fuel economy equipment, and technology. Moreover, Ford buys a broad range of raw materials from many suppliers across the world, which are used in the manufacture of its automobiles. Some of these materials are base metals such as steel, aluminum and iron castings, precious metals, such as palladium, energy such as natural gas, and resins such as polypropylene.

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Fundamentally, although the auto industry seeks technological development, diversification of corporate operations, and extension of businesses to different directions, the manufacture and sale of automobiles is still Ford’s main business activity and the key source of costs. Essentially, 47 percent of all its costs originate from the acquisition of raw materials, 21 percent from labor, 10 percent from administrative functions, and 6 percent from research and development activities (Kallstrom, 2015). Generally, the production of cars is capital intensive; hence, the adoption of mass production strategies by vehicle manufacturers such as Ford.

Recommendations on what Ford Should Consider Doing Henceforth

Ford ought to capitalize on the surging market for SUVs in the US and European markets. Essentially, the future of automobiles seems to shift away from sedans. Currently, light-duty trucks account for the larger proportion of the Ford’s sales since the beginning of the year. Moreover, the crossover section was the biggest selling unit within the United States over the last few months as compared to the next closest section, the midsize vehicles. Indeed, the sale of SUVs is not only surging in the US, but the vehicles are facing a growing demand in Europe and China. Ford Motors should exploit the opportunity established by this trend and manufacture more SUVs within Europe, which ought to enhance the mean cost of transactions and margins within the region, which is usually dominated by passenger vehicles that are less profitable.

From another perspective, Ford ought to consider enhancing its efficiency and strategy. The motor company has for a long time specialized in producing vehicles for high-value chains. As a result, the company should concentrate more on the adoption of technologies, to ensure that it stays at pace or ahead of its competitors. For instance, in future, makers of fuel dependent vehicles will likely be eliminated from the automobile industry, as the development of electric vehicles continues to advance.

One aspect that ought to be of utmost priority to Ford Motor Company is its Lincoln Brand. Essentially, Lincoln has lost much of its essence as a luxury brand, and customers have shifted their demand to fancier models of Ford. Nevertheless, it is critical to acknowledge that without worthy financial support, Lincoln could hardly match the luxury quality standards offered by brands such as Lexus, Mercedes, and BMW that are key players in this sector.

References

• Ewing, J. (2018). Ford Pays a High Price for Plant Closing in Belgium. Retrieved from www.nytimes.com/2013/11/06/business/international/ford-pays-a-high-price-for-plant-closing-in-belgium.html?mcubz=0.
• Ferguson, E. (2017). Ford Motor Company: Five Forces Analysis (Porter’s Model) – Panmore Institute. Retrieved from www.panmore.com/ford-motor-company-five-forces-analysis-porters-model. 
• Goldberg, P. K. (1995). Product differentiation and oligopoly in international markets: The case of the US automobile industry. Econometrica: Journal of the Econometric Society, 891-951.
• Kallstrom, H. (2015). Market Realist. Retrieved from www.marketrealist.com/2015/02/shift-growth-global-automotive-industry/. 
• Pereira, P. J. G. (2017). Valuation of Ford Motor Company and a study of its industry (Doctoral dissertation).
• U.S. market share of automobile industry | Statista. (2018). Retrieved from www.statista.com/statistics/249375/us-market-share-of-selected-automobile-manufacturers/.