Essay: Financially analyse the automotive industry, using Ford as a sample company for the analysis

1 Automotive Industry Overview
The aim of this report is to financially analyse the automotive industry, using Ford as a sample company for the analysis. The Automotive Industry is comprised mainly of passenger automobile and light truck manufacturers. Most companies have broad dealership networks in developed as well as emerging countries through which they sell their vehicles in the global market. Automotive manufacturers produce a variety of makes and models, although the brand integration is limited at the levels of a dealership, marketing, and advertising. Many of the of the companies are global and operate production facilities in multiple geographic regions (Publishing, V.,2018).
The UK’s automotive labour market is the most productive the EU, producing vehicles to cater both, domestic and export demand (automotivecouncil.co.uk.,2018).
1.1 Global Industry Overview
The Automotive Industry is a widely diversified and continuously developing industry that started in the 1860s. It comprises of a wide range of companies and factories that handle design and development, manufacturing, marketing, and selling of all kinds of vehicles and vehicular parts like engines, etc. Automobiles are also a highly dependable mode of transportation in most developed and developing countries. The United Kingdom is one of the few countries worldwide that is able to design and build vehicles from start to finish.
1.1.1 The United Kingdom (UK) Automotive Overview
Based on various reports from The Society of Motor Manufacturers and Traders (SMMT), one of the largest and most significant traders’ association in the UK, and other sources, the automotive industry is one of the largest and leading industries in the country. It contributes close to 12% revenue to UK’s economy. SMMT also indicated that the industry employs close to 1 million people as per the 2017 report, in its engineering and manufacturing, supply and operational chain throughout the country with a promise of creating thousands of jobs for the masses in the near future. Therefore, the automotive industry is vital to UK’s economy and beneficial to the citizens, communities, and the global market as it is among the top 15 automotive manufactures in the world. The graph below summarises the general performance of the industry annually from 2007 to 2017. The information shows an overall significant increase in UK’s economy’s turn over, a value of exports with increased invested net capital in the industry.
Figure 1: The United Kingdom Automotive Industry Performance
The UK has over 30 vehicle manufacturers such as Jaguar Land Rover, Aston Martin, Lotus, Mini, Vauxhall, Ford, to mention but a few. These manufacturers are supported by close to 2500 suppliers to facilitate the manufacture the vehicles. The graph below indicates the most sold car models in 2017. Based on previous SMMT reports, Ford Fiesta has been the highest selling car in the country for close to 5 years now thus indicating the significant impact it has o the economy and how values it is among customers.
Figure 2: The Top UK Sales 2017
2 Ford Motor Company
Ford Motor Company was founded by Henry Ford and incorporated in the United States of America (USA) in 1903, where its main headquarters are located. It is a Family owned corporation immersed in a number of global markets worldwide by expanding its business in all continents, in some more prominently than others. The company is widely known for designing and developing, manufacturing, marketing and servicing a wide range of Ford utility and heavy duty cars and sports and luxury cars. It also designs, develops, manufactures and supplies engines. In 2017, Ford Motor Company was listed as the world’s 5th largest automotive manufacturing company and it’s also ranked as the 4th European automotive manufacturer. This level of success is attributed to adhering to the following core values;
1. Vision Statement:
“People working together as a lean, global enterprise for automotive leadership”
The company’s level of success and automotive leadership is attributed to living out the above statement to ensure that it attains a high level of satisfaction for the investors, dealers, suppliers, customers and communities and its very own employees.
2. Mission Statement:
“One Team. One Plan. One Goal”
Ford has a strong emphasis on teamwork, continuous change and restructuring of the company to operate profitably and effectively to meet the desired goals and stand out above its competitors. Through the aggressive implementation of the above vision and mission statements’ core values, it has achieved great success among customers, employees, suppliers, investors, communities, and dealers. It has also been able to overcome the numerous challenges in various global markets and regions like the crippling financial crisis in 2006 from which it fiercely bounced back in 2007. Ford is also known to own a large range of prestigious brands like the Brazilian SUV ‘Troller’ and the Lincoln, a famous luxury brand. It also holds up to 8% shares in Aston Martin in the UK. Some of Ford’s key competitors are:
1. General Motors Company (also known as GM motors)
2. Toyota Motors
3. Tata Motors
4. Daimler
5. Hyundai Motors
6. Honda Motors
2.1 Business Description
Ford Motor Company is divided into two crucial sectors;
a) Automotive Sector; It is divided into American and International. America’s automotive sector focuses on the sale of Ford, Lincoln, and Mercury brand vehicles and necessary related service parts in North and South America, while the International Automotive sector primarily handles the sale of Ford brand vehicles and related service parts outside North and South America. This international sector also sales some premier automotive group brand vehicles and related services parts for these brands namely like Aston Martin, Jaguar, Volvo, and Land Rover. ((Insert reference https://csimarket.com/stocks/F-Business-Description.html). In both the international and American automotive sectors, costs of design, development, manufacture, and service of the vehicles and necessary parts are taken into consideration.
b) Financial Services Sector; It comprised of the Ford Motor Credit Company and the Herts Corporation. The former focuses on vehicle-related financing, leasing, and insurance, while the latter focuses on renting cars, trucks, and industrial and construction equipment
2.2 Company & Product Strategies
In Spring 2018 Ford Motor Co. announced a new product strategy which included new vehicle architectures, double the number of truck and SUV models offered as well as increase hybrid offerings, and make automated safety systems as standard, and introduced a new electric crossover (Automotive News, 2018). They have addressed the automaker’s cost structure and in order to increase manufacturing efficiency will reduce vehicle architectures to as few as five. As an example, previously Ford has had seven moonroof architectures alone and the plan is to cut it down to two or three. This will allow the company to reduce manufacturing expenses and shorten order-to-delivery process resulting in profit increase (Trucks.com, 2018).
2.3 Ford of Britain
Henry Ford has built his first experimental car in 1896, following the great demands he developed new mass production methods and in 1911 opened industry’s first production plants in Kansas City, Missouri, US and Manchester, England.
1906 Henry Ford had acquired 58.5 percent of the company’s stock as the other stockholders balked at the idea of building expanding the company. His son Edsel Ford became president. On Edsel’s death in 1943, Henry Ford returned to the presidency and turned it over to his grandson Henry Ford II in 1945. This is when the company’s system of financial management was reorganised and its corporate culture reinvigorated by hiring younger managers. Henry Ford II continued to guide the company as a chief executive officer and chairman of the board until the 70s. In the 1950s and ’60s the Ford Motor Company began limited diversification, but by the 1990s it had refocused attention on its automotive concerns and financial services (Encyclopaedia Britannica, 2018).
Ford has been the largest UK’s commercial brand for up to 45 consecutive years, holding the position of the bestselling car for close to 34 consecutive years. The company has a research and development site in Dunton located in Essex and three other major manufacturing sites in the United Kingdom namely;
i. Dagenham: majoring in diesel engine production. It is Europe’s largest car plant and the 9th key manufacturing site in the UK.
ii. Bridgend: majoring in petrol engine production and the 9th key manufacturing site in the UK.
iii. Halewood: majoring in the manufacturing of transmissions
2.4 Management and Governance
Ford’s Board Committees are;
a) Audit – One of the main operating committees that are in charge of overseeing financial reporting and disclosure.
b) Compensation – Committee of independent directors appointed by the board of directors responsible for determining and approving the executive package.
c) Finance – Standing committee responsible for assisting the board of directors in fulfilling responsibilities over the financial affairs and ensure sound financial policies and practices which lead to long-term financial sustainability.
d) Nominations and Governance – the committee responsible for ensuring that of the board of directors is properly constituted to meet its’ obligations and follows appropriate corporate governance standards (Careers.accaglobal.com, 2018).
e) Sustainability and Innovation Committee – responsible for reviewing strategic sustainability issues and evaluation of innovations that improve our environmental and social sustainability (Corporate.ford.com, 2018).
Key governance processes allow managing issues that cut across functional areas.
To improve performance and deliver plans, Ford uses Creating Value Roadmap (CVRP) for guidance. CVRP is the model of how the company is run. It follows management processes to continually improve performance and deliver on our plans. They employ a variety of governance systems and processes across the business in order to manage the different aspects of sustainability.
The CVRP enables the continuous monitoring of the global business environment, assesses risks and opportunities, and uses the resulting analysis to inform the company’s strategies. It allows creating stronger accountability for setting, tracking and reporting progress. Assess it against the company’s objectives, revenue targets, and other financial indicators as well as stakeholder satisfaction measures.
The following processes allow to effectively respond to new developments using the evaluations to adjust management approaches:
• Business Plan Review (BPR)
• Special Attention Review (SAR)
• Business Plan Development and Compensation
Part of an annual business planning process is to track the performance using scorecards. This contributes to performance assessment for managers at various levels of the company and affects their compensation (Corporate.ford.com, 2018).
3 Financial Analysis
3.1 Financial Performance of Ford Motors Company
The financial performance of Ford Motors Company is comprehensively analysed. The data for the last 10 years were retrieved from De Montfort University (DMU) database via Fame repository. There are three areas that the data analysis of the financial performance of the company will be covered: the financial position and standing in terms of the revenue generation and increasing the value of the company, the profitability of the business and liquidity, solvency or the degree of the leverage the company employed in its financing structure and capitalization.
We will also compare the financial performance of the company to at least five other companies in the same industry to highlight the competence and effectiveness of the business model the Ford company enacts to outperform its rivals or increase its market share.
3.2 Revenue Generation and Profitability
The size of the revenues and the profitability of the business are depicted in Error! Reference source not found.. The solid black curve represents the turnover of the Ford Company from 2007 till 2017. As shown in Error! Reference source not found., the financial performance of the Company was the worst and the least productive in the year 2009. This could be due to the effects of the recession in the year 2008 that hit all business including the automobile industry. Nonetheless, the Company quickly recovered in terms of sales and revenue generation and there was a steady growth since the year 2012.
With respect to the profitability of the Company business, the historical trend of the data reveals that the Company was struggling in the first few years. For example, the profit margins of the sales the Company made in the years 2007-2009 were 0%, 1% and -0.5%, respectively as can be seen in Error! Reference source not found.. However, the Company made relatively steady profit margins of ca. 2.5-5.5% from the year 2013 till 2017.
The worst-case scenario for the profit margin of the Company’s financial performance was witnessed in the year 2012. Though the turnover of the Company’s sales was over £8 billion in that year, the Company made a loss of ca. -2.5%. This loss may be elucidated in the light of the Company’s financial cost structure and how the capital for assets was raised as will be discussed in the analysis of the Company’s liquidity and financial standing.
Nevertheless, the more interesting analysis of the Company’s financial profitability and the strength of the business viability can better be demonstrated in the correlation between the changes in the overall sales turnover and the variation in the profitability margin instead of looking at them separately. This analysis highlights the degree of the Company’s productivity and the extent to which the magnitude of the sales add value to business growth.
Interestingly, by plotting the ratio of the percentage changes in the profit margin, [Symbol](PM), and the percentage changes in the turnover, [Symbol](TO) in a chronological pattern (year after year), it is very clear that the year 2008 – the recession year – was the worst time in the Company’s business performance. In Error! Reference source not found., the value of ratio [Symbol](PM)/[Symbol](TO) is < -200, i.e. the relative loss in this year was 200 times worst in terms of the percentage changes in sales turnover compared to the year before. However, the highest actual loss was observed in the year 2012 (ca. -2.5% loss in 2012 vs. ca. 1% profit) – see Fig.2, the red dashed curve representing the profit margin. Moreover, the trend of this ratio indicates that the relative percentage profitability of the Company business in relation to the fluctuations of the revenue turnover has reached a plateau and constant stability from the year 2014 till 2017.
The return on asset (ROA) and asset turnover (ATO) ratios are other powerful indicators of the business financial performance and profitability. ROA measures how much net income the company gains for every £1 of the total asset invested (no matter how the asset was financed, i.e. by equity or liability). ATO – on the other hand – captures how much revenue sales the Company generates for every £1 of the total asset. Error! Reference source not found. exhibits both ratios for the period 2007-2017. The profit margin is also plotted alongside these ratios as a benchmark.
Discernibly, ROA follows the same pattern as the profit margin and shows that there are very low returns on assets for the early years 2007-2009, a rise in ROA for 2010/2011 and the biggest fall in 2012. For the years 2013-2017, ROA indicates that the Company has relatively been doing well on a return of ca. £10 net income for every £1 total asset invested.
In contrast to ROA, ATO patterns show that the revenues with respect to the total asset were very stable for the first few years of 2007-2011 – an average asset turnover of ca. £10 for every £1 of the total asset. Quite exceptionally, the Company made the highest asset turnover in 2014 followed by a significant fall in asset turnover from 2015 till 2017. Though asset turnover is a very important indicator of the financial performance of the business, it is quite obvious that there is no direct correlation between the profitability and the size of turnover depending on the how the asset was initially financed and the outstanding company liabilities and interest expenses.
3.3 Financial Structure and Liquidity
The Company’s financial structure and how the current assets can cover for the payment of the debt and interest expenses owed by the Company can be known by carrying out a number of liquidity ratio analyses. This analysis will also explain the fall in the profit margin when the sales turnover was high.
Error! Reference source not found. shows debt-to-asset and equity-to-debt ratios highlighting how the Company’s assets were financed. The debt-to-asset ratio shows how much of the total asset was financed by borrowing. The trend of debt percentage kept growing until it peaked in 2012 from a value of 0.8 in 2007 to 1.4 in 2012. The 5% loss in this year as shown in Figures 3-5 can then be related to the high cost of the debt the Company was obliged to meet in that year. Besides, the equity-to-debt ratio shows how much shareholder’s equity is used in asset financing compared to the asset financing by borrowing; a metric for the financial health and how the Company is meeting its obligations.
As can be seen in Error! Reference source not found., the pattern of the equity-to-debt ratio is a mirror-image of “debt-to-asset ratio and was lowest in 2012 (with a loss of 5%) where the company’s asset financing was based on borrowing three times more than the equity provided by shareholders which may have resulted from the profit margin that was very low compared to the cost of borrowing. From 2013 till 2017, the debt-to-asset ratio has fallen sharply while the equity-to-debt ratio has risen significantly ca. 4 times till 2017 showing the dramatic intervention the Company adopted by increasing the equity financing and reducing borrowing.
Another very useful analysis of the Company’s financial performance is looking into how the company’s current assets – cash and cash equivalents – can pay for the short-term debt owed by the company or covering the outstanding interest expenses of the debt.
Error! Reference source not found. shows both the current ratio and the interest cover for the past 10 years. The current ratio indicates how the current asset of the company can pay for the current liabilities, i.e. liabilities that are due within a year or less. The current ratio is found by dividing the current asset by the current liability. The data in Error! Reference source not found. reveals that the value of the current ratio starts with ~ 0.5 and reaches a maximum of ~ 0.85 in 2010 which shows that the Company could provide only 85p for every £1 of current liability. From 2011 until 2015 the value of current ratio plummeted before it slightly improved in 2016 and then quickly fell to ~ 0.5 in 2017 where only 50p of the current asset can be paid for every £1 of the current liabilities.
The interest cover is a financial metric that discovers how the earnings of the company before interest and tax (EBIT) can cover for the interest expenses the company should meet. It is very clear from the data presented in Error! Reference source not found. that the interest cover was just around 2 from 2007/2008, rose to 10 in 2011 and dramatically fell to -3 in 2012 where the Company earnings could not cover for the interest expenses owed (this may have been the primary cause why the Company made a 5% loss in this year). Afterward, the interest coverage of the company has significantly improved and has risen to a record 64 value in 2017, i.e. the Company’s earnings can cover 64 times the interest expenses.
3.4 Industrywide Benchmarking
The financial analysis and performance of the Company will not make much sense unless compared and benchmarked with the financial performances of other companies in the same industry.
In Error! Reference source not found., the Ford financial performance is compared to the other six strong competitors in the auto industry in the UK in 2017. In all aspects of turnover, total asset, and net income, Ford is positioned in the second place, next to Jaguar Land Rover Ltd. All other companies are doing less than Ford.
Figures 9 and 10 compare the profit margin and the number of employees of the major companies in the industry in 2017. Interestingly, the Ford Company earned the highest profit margin of 5% and employed the second highest number of employees.
4 Investment Risks
The uncertainty of the future when running a business brings an element of risk that investors have to take into consideration. A risk in finance is the possibility of failure, loss or bad consequences, and it’s related to the volatility of return. Therefore, by definition, investment risk is the probability that an actual return on investment will either be higher or lower than the investor’s expectations and there is always an immediate correlated effect between risk and return in any project an economic agent is undertaking.
Ford of Britain, like any autonomous subsidiary, is the result of Ford’s strategy to expand its automotive engineering competency and to conquer, by physical presence (factories and shops), the UK automotive domestic market. The looming uncertainty caused by the British exit from the European Union and the anticipated future changes in the market and legal regulations is a major shake for the manufacturer in Britain. As a result, the company’s analysts, the board of directors and shareholders have to contemplate the risk of changing the business model, operation and production strategies. These decision makers also have to deliberate the risk of re-investing into or exiting the UK market or expanding their domination into other countries and the subsequent impact of these decisions on the company’s financial stability, the brand and value, and local investors, while taking into consideration that its global and continental positioning, other competitors, and future developments.
By investing in Europe, particularly in the UK, Ford has taken an investment risk of expansion and adaptation, in order to grow his international market share. Before and after the two world wars the reconstruction of Europe was fertile ground, and a new and open market for American manufacturers looking for gain on productivity, added value, and growth. Decades after in an already existing and dynamic European automotive industry, with more self-sufficient and well-established brands, Ford and its Europeans investors have taken the risk to enter the market with a specific business model that has worked and created a significant competitive advantage. When classic European car manufacturers were concentrating the whole chain of production from components manufacturing to assemblage, under the same roof with the heavy cost this method of production was generating; Ford came up with a different method of mass production of finished assembled cars with different vehicles’ parts from different factories around the globe, increasing the speed and volume of production of finished cars and significantly reducing production costs and promoting correlation of distribution. This was a major change and operational investment risk to take at that point in time for Ford inside the well experimented European automotive industry and environment. The statistics of the Financial Analysis above show in the specific example of Britain, the leading position of the brand in terms of sales for many decades.
4.1 Ford of Britain elements of investment risk assessment
To assess and measure risks in a business context, it is important to evaluate from the past, the present and the future, elements around the business environment where uncertainty exist and the impact or consequence that they can and they will have. The socio-political, socio-economical and financial environment is crucial when assessing risks. The managerial policy and internal organisation are key as well. The elements of the business environment associated with the risk of holding an investment or undertaking a project are classified into two types: systematic risk elements and unsystematic risk elements.
4.1.1 The systematic risk elements
The systematic risk elements or macroeconomic risk elements are the uncertainties that can affect the market or the industry as a whole. These risks are also called non-diversifiable risks. The purchasing power of the future potential market, the exchange rate of the local currency, the interest rate on the financial market, the custom regulations of inputs and outputs of production, the level of taxation et cetera, are an exhaustive list of elements around an industry environment that manufacturers and their Investors will analyse thoroughly in order to assess and reduce any investment risk.
Ford of Britain and his investors are particularly paying attention to the outcome of the Brexit (the British exit from the European Union), a socio-politic, macroeconomic and financial reality to deal with in the future. The previsions are showing a significant drop in the production of vehicles from Britain.
A hard Brexit leading to a “No deal” between London and Brussels can be catastrophic for Ford of Britain finances, costs, and market capitalisation. The rate of return from a share due to the uncertainty of the Brexit, can drop significantly and put investors away from injecting money into the business.
4.1.2 The unsystematic risk elements
The unsystematic risk element of an investment or microeconomic risk elements are the more controllable risk elements in business. They make reference to internal management and organisation technic. They are also called inherent risk elements or diversifiable risk elements.
With a portfolio of two factories producing mainly components such as engines and transmissions for some specific line of products of the brand in the UK and the import/export game of parts (for the assemblage of finished cars, vans, lorries) to/from Europe, are Ford of Britain and his European investors going to take the risk to maintain his hybrid and diversify chain of production, for a specific UK industry and market?
5 Conclusion
The conclusions are to be sorted based on certain terms taken from the figures based on the sections discussed above. It is to be discussed and shown how the future assessment of ford can be predicted based on the figures.
(Gurufocus.com, 2019)
The figure above shows a complete chart of Ford’s financial health over the past thirty years. The terms like revenue growth and operating income will give us a proper future assessment.
6 References
• Automotivecouncil.co.uk. (2018). UK automotive sector: overview. [online] Available at: https://www.automotivecouncil.co.uk/uk-automotive-sector-overview/ [Accessed 18 Dec. 2018].
• Automotive News. (2018). What’s behind Hackett’s new strategy at Ford. [online] Available at: https://www.autonews.com/article/20181001/OEM/181009955/what-s-behind-hackett-s-new-strategy-at-ford [Accessed 18 Dec. 2018].
• Publishing, V. (2018). Industry Overview: Automotive. [online] Valueline.com. Available at: http://www.valueline.com/tocks/Industries/Industry_Analysis__Automotive.aspx#.XB7NvBanyEc [Accessed 18 Dec. 2018].
• Trucks.com. (2018). Ford Product Strategy Pushes Trucks, Hybrids, Tesla fighter. [online] Available at: https://www.trucks.com/2018/03/16/ford-product-strategy-trucks-hybrids-tesla/ [Accessed 18 Dec. 2018].