Ford Motor Company’s global visioning continues to rank it in the top three of the automotive industry worldwide. This research explores Ford’s long term strategic planning in terms of global operations, the North American hemisphere and the NAFTA.
DESCRIPTION OF FORD MOTOR COMPANY
Ford Motor Company started as a 10-man operation, with Henry Ford, in 1903. In 1905 Ford Motor Company of Canada, Ltd. started operations, positioning Ford for the future globalization in the automotive markets. Since then, Ford has held 13% of the world market and is "the second largest producer of cars and trucks, with active manufacturing, assembly or sales operations in the thirty countries on six continents" (http://www.ford.com/archive/fordhistory2000.html
). With respect to sales, Ford ranks second on Fortune’s list of the largest U.S. industrial corporations.
Anticipating that trade barriers would fall and a future for regional trade blocks, Ford established Ford of Europe (1967) 20 years before the ECīs arrival and the North American Automotive Operations (1971), and finally twenty-three years before the NAFTA. These strategic moves have facilitated Ford’s global positioning in the automotive industry (http://www.ford.com/historyglobal.html
Relative importance of Canada, United States and Mexico
Ninety five percent (95%) of the total automobile production market share in the North American hemisphere is concentrated within four countries: United States, Brazil, Canada and Mexico. In 1996 the total Canadian, Mexican and American automotive unit sales accounted for a total of 16,857,000 trucks and cars, of which 92% were American, 7% were Canadian and 1% were Mexican. This did not include Brazil, which produced 44%, more units than Canada in the same year. (http://www.ford.com/corp.../govt_policy/trade2.html
In the Mexican automotive sector, 1995 and 1996 were depressed sales years as a consequence of the Mexican crisis. Despite an improvement from the previous year, sales remain inconsistent because of tight customer credit and an increase in retail prices for automobiles in the beginning of 1997. A total of 94,000 motor vehicles were sold in the domestic market during January-March of 1997, an increase of 33% from the first quarter of 1996. It is also worth noting that more than 85% of the total Mexican exports were heading to the U.S. and Canadian markets. As well, Mexican Motor exports increased during the first quarter of 1997 to such markets as Brazil, Chile and Panama (Mexico Economic News & Analysis on Mexico. April 23,1997).
Unlike the American and Canadian markets, the Mexican market is highly influenced by companies other than the "Big Three" (Ford, GM and Chrysler). Directly related to Mexican economical position and market prices, VW and Nissan have introduced their products and are able to achieve shares of around 20% of the total market share each. However, Ford de Mexico is the biggest producer of automobiles in the country registering 24.3% of the entire production share until 1995. According to the same data, Ford in Mexico until 1995 had the fourth place with 17.6% of the total market share, behind Nissan (22.3%), GM (21.8%), and VW (17.9%) and only a bit above Chrysler who registered 17.4% (Auto Case 2000).
The Canadian automotive market does present a "normal" American trend according to market share and relative importance of the companies. According to registered data until 1995, Ford held second place in market share with 22.4% of the total market. GM held first place with 33% and the third place by Chrysler with 18.8%.
The American automotive market presents a better view of Ford Motor Company.
Even though it holds second place of the market share, the distance between Ford and the first place is less than in the Canadian market. The first place, which is held by GM, shows a 32.2% of share, while Ford registers a 25.6%, 11.3% above the third place, Chrysler (14.3%).
Looking at the NAFTA countries as an entire region, Ford Motor Company has reduced its market share in accordance to its net exports from North America, struggling between 8% to the lowest registered at 2.5% in 1995. Ford’s closest competitors show a similar trend. GM dropped their share from a top 12.5% in 1982 to a 4.5% in 1995. Chrysler hasn’t been affected by this trend showing a continuous share around 2.5% and 4.5% (Auto Case 2000).
After the NAFTA, Ford product exports from Canada and the United States to Mexico has risen in a much bigger proportion than Mexico’s exports to their trade partners. As well, sales have shrunk in Mexico’s local market while Canada and the U.S. sales have grown in their local markets from 1993 to 1996. Prior to NAFTA, in 1993 Canada and U.S. Ford exports to Mexico accounted for only 3% of the Mexican market. It’s worth noting though that the Mexican market shrank its sales 42% from 1993 to 1996. On the other hand, Mexican Ford exports to the U.S. and Canada remained around 1% of their markets even though the Canadian and U.S. market sales grew 8% in the same period (http://www.ford.com/corp.../govt_policy/trade2.html
In 1996 Ford employed 226,000 people world wide, of which 84% were American employees, nearly 8% were Canadian and almost 8% were Mexican. Since the implementation of the NAFTA, employment has grown at around 10% in the three countries (http://www.ford.com/corp.../govt_policy/trade2.html
Most Important Products
In 1995 profits were very low in Ford’s auto business, but the truck business was booming, especially in Canada and in the U.S. "the trend to trucks is good for Ford.
By the year 2000 half the vehicles sold in the U.S will be trucks, up from 43% today, and in Ford’s case trucks will account for 60% of sales" (Flint: 44).
Truck sales for the Big Three show a very encouraging trend. Ford, Chrysler and GM registered from 1982 until 1995 a continuously increasing trend on the proportion of cars-trucks sold in their markets. Clearly, this trend can be seen as more encouraging for Ford’s growing truck market, while in 1990 the firm registered for this product a proportion of around 50% of the total car sales and has gone up in 1995 to around 75% of the total car sales. Ford’s principal competitor on this specific product is Chrysler who registered since 1991 a greater proportion of their total vehicle sales due to truck sales (Auto Case 2000).
Ford’s U.S. market share registered at 26.3%. Today Ford has a wide range of products, although the most popular and profitable products are the Explorer and the big F series pick-up trucks. Other products include Taurus, which is priced in the middle segment; Expedition, which is one of Ford’s big utility vehicles; Escort, which is just a "break even" product and the Windstar, as a minivan truck (Flint: 44). Ford is also planning to put on the market some new models, which are going to meet different customer needs, for example, a smaller utility vehicle to compete with the Japanese models, which, may be produced in Europe. Also, a smaller Jaguar and a related but probably lower –priced Lincoln version is coming too (Flint: 44).
In December 1997, Ford Canada’s total unit sales were mostly a compound of trucks. Trucks accounted for 81% of the total units sold, and cars accounted for just 19%. Also a very important increase in sales took place from 1996 to 1997 when these products grew up 71.2% and 5.9% respectively. Canada’s strong truck performance takes place with three truck types: Explorer, Windstar, F-Series pickups and Lincoln Navigator (http://www.ford.com/corporate-infor/news/
Ford Motor Company has its Mexican headquarters in Mexico City, which was established as a national company in 1925. To this day there are three assembly plants around the country. The first plant to be established is the Cuautitlan industrial complex plant, constructed in 1964, which operates as an assembly and stamping plant. Its actual production concentrates on Ford Contour, Mercury Mystique, F-150, F-250 and F-350.
The second plant to be constructed in Mexican territory is the Chihuahua engine plant, which initiated its operations in 1983 and actually concentrates its production on the modern 1-4 Zetec motor. The last plant to be established in Mexican territory is the Hermosillo stamping and assembly plant in 1986 and is actually considered one of the most modern plants around the globe. This plant concentrates its production on the Mercury Tracer and Ford Escort, which are built to be exported to the United States and Canada (http://www.ford.com/corporate-info/international/FATWMexi.html
The total production capacity of these three plants accounts for approximately 350,000 vehicles and motors per year. Ford de Mexico exports most of the vehicles and motors it produces in its Mexican plants. In order to satisfy national demand though, it imports other vehicles and motors produced in Ford’s Canadian and U.S. plants (Escort, Mustang, Sable, Grand Marquis, Lincoln Town Car, Lincoln Continental, Explorer, Windstar, Expedition, Ranger and the new F-150 LOBO). In 1996, Ford de Mexico produced 213,000 vehicles and 215,000 motors, of which 84% were produced for exporting and 16% for domestic market. As well, it sold 66,000 vehicles in Mexico obtaining with it 20% market share. Nowadays, Ford de Mexico has 130 dealers in the country and employs more than 17,000 people throughout the country.
Ford Motor Company of Canada, Limited was established in Walkerville, Ontario (now Windsor), on August 17, 1904 with 17 employees. Canada’s headquarters is in Oakville, Ontario, near Toronto, as is the Oakville Assembly plant, which produces the Ford Windstar Minivan, and the Ontario Truck plant producing the F-Series pickups. Another plant is the St. Thomas Assembly plant situated near London, Ontario that concentrates its production on Ford Crown Victoria and Mercury Grand Marquis. In addition to these assembly plants, there are other plants such as the 3.8-liter motor and v-6 engine producer Essex Engine Plant situated in Windsor, Ontario.
Aluminum engine parts are produced in the Essex Aluminum Plant and the iron castings at the Windsor Casting Plant (http://www.ford.com/corporate
info/international/FATWCana.html). Its full production capacity is almost half a million vehicles, accounting cars and trucks. The Oakville plant builds the Windstar Minivan and exports its product to 40 countries. In addition, the Windsor and Oakville plants export their products worldwide (http://www.ford.com/global/ca.html
Canada has accounted for the highest total of vehicles made outside of the United States. Since 1996, a wholly owned subsidiary of Ford Motor Company, the company will increase gains in the Canadian market. (http://www.ford.com/global/ca.html
) It took Canada 72 years to make their first ten million cars. However, they were able to make the second ten million cars during the next twenty years, and it has introduced 10 new vehicles within the last 2 years. The company has also invested more than $5 billion in the last sever years in its Canadian operations.
Now a wholly owned subsidiary of Ford Motor Company, the company is gaining more market share in the Canadian market. For the first time they have become leaders in truck sales with a 22.9% market share. The sales for cars and trucks combined have been of 275,432 (5.2% increase). Taurus, Mustang, F-Series, Ranger, Club Wagon and Econoline Van were segment leaders. The Escort, Contour and Sable cars and the Windstar Minivan set calendar-year sales record (http://www.ford.com/global/ca.html
As mentioned earlier in the history of the company, Ford Motor Company was born in the United States and actually is considered between the "Big Three" automotive companies in the world, sharing that title with Chrysler and General Motors. Ford U.S. is the center of the corporation and has the largest concentration of assembly, stamping, and other different types of plants that the company has. The concentration of plants throughout the American territory consists of 37 manufacturing plants, including 15 assembly and 13 powertrain operations, 25 research and engineering facilities, more than 20 automotive parts distribution centers and hundreds of offices. The states of Michigan, Ohio, Kentucky, Indiana, Illinois and Missouri hold the majority of Ford’s manufacturing and assembly operations in the United States.
In addition, Dearborn, Michigan is the central concentration for all of the research and engineering activities. Ford U.S. with all of these listed activities provides job opportunities to more than 166,000 employees and more than 5,300 Ford and Lincoln-Mercury dealers in the United States. (http://www.ford.com/corporate-info/international/FATWUsa.html
III. FORD AND THE NAFTA
1965 Canada-US Auto Pact
The 1965 Auto Pact, by establishing a conditional duty-free manufacturing environment, led to a full-integrated Canada-US automotive sector, with efficient world-scale plants. The Auto Pact combined duty-free access to the US market based on origin with conditional access to the Canadian market based upon Canadian assemblers meeting performance requirements (Johnson 89). Ford has been integrating its auto production within Canada and the US since implementation of this agreement.
The Auto Pact’s conditionally allowed the US to address alternative industry conditions in the mid-1980s. In 1965 the Big Three dominated the Canadian assembly industry. By the mid-1980s Asian transplants were increasingly becoming a major factor in the North American automotive market. In addition, while in the mid-1960s disparities between Canadian and US industries were such that the US could accept safeguards, by the 1980s Canada’s need for safeguards had all but vanished. The US thus wanted revisions to this pact that would lead to them having free, and not provisional, access to the Canadian market (91).
1988 Canada-US FTA
By signing on to the FTA, Canada relinquished its future capacity to use duty remission as a means of assuring performance in Canada in return for the guarantee that duty-free entry to the US market would continue.
The FTA offers duty free entry for Canadian automotive goods to the US market based solely on established rules of origin of 50%. The FTA clearly reinforced Canadian and American integration of the auto sector that had begun in 1965.
Mexico Automotive Industry Pre-NAFTA
The Mexican automotive industry was only partially integrated within the North American automotive industry. Many Maquiladoras were owned by US assemblers and parts producers. Most of their production was already exported to the US and Canada. It should also be noted that Mexico’s assemblers produced engines in world-scale plants for both the US and Canadian markets (Johnson 93). As an example, the Ford plant at Hermosillo achieved high levels of productivity (93).
Mexico’s automotive policy was guided by a series of decrees, beginning in 1962 and climaxing in 1990 with the Automotive Decree. This Decree covered all vehicles except for tractors, buses and large trucks (94). The Decree significantly liberalized Mexican regulations governing the auto industry. Nevertheless, among other loosened restrictions, it stipulated that assemblers maintain positive trade balances and during a transition period which expired for all vehicles by 1993, there was a 40% national value-added requirement (97).
This subjection to a "trade balancing" system obligated Ford to export significantly more than it imported (Ford NAFTA: 1). Moreover, Ford was required to purchase a large percentage of vehicle’s content from Mexican owned suppliers which in many instances, did not meet globally competitive sourcing standards in terms of quality or price (1). Consequently, Ford plants in Mexico operated at less than maximum efficiency and exports of cars from the US to Mexico were constrained. The Automotive Decree will be eliminated on a gradual basis by 2004 under the terms of NAFTA (Ramirez 73).
Ford’s Response to NAFTA
Ford, along with Chrysler and GM, were key players involved in the negation of free trade in autos between Canada, the US and Mexico. A pivotal Big Three objective achieved in the negotiations was the opening up of Mexico’s highly protected automotive market. Mexico was becoming one of the fastest growing auto markets in the world (Hufbauer 37). As a result, achieving enhanced access to this market was a pre-condition for the Big Three’s approval of a NAFTA. The automotive provision in the annex to chapter 3 dealing with autos, as they relate to Mexico, outlines in four interrelated parts how increased access was achieved: decrease in import barriers; liberalization of investment laws and regulations; seizing of performance requirements by Mexico; and rules of origin (Weintraub 13).
The Big Three wanted to enhance an already prominent presence in Mexico. After Pemex, they were Mexico’s three largest exporters (Hufbauer 37). Ford supported NAFTA because of its allowance for increased regional market access for its automotive products (Ford, Ford Perspectives: 3). This would permit Ford to establish plants in Mexico more efficiently.
Ford would be able to consolidate all production regionally rather than country by country; thus permitting Ford to enhance its competitiveness by gearing production to meet the needs of North America and not specific country markets. Ford would be able to select production sites and scale based on business factors rather than the need to locate behind tariff or other trade barriers. Finally, Ford believed that their firm’s competitiveness and viability would be impacted in such a way that there would not be a large migration of production or jobs to Mexico
(Ford, NAFTA: 1).
The most pugnacious matter in the automotive negotiations was establishing the rules of origin. For automotive goods, Chapter 4 lays out how the regional value content that makes a vehicle qualified for free trade under the NAFTA will increase in two steps, to 62.5% after 2002 for passenger autos and light trucks and engines and transmissions for such vehicles, and to 60% for other vehicles and parts.
Ford’s support of high regional value content rules was attributable to their desire to discourage non-US manufacturers from developing autos with low North American content in Mexico for export to the US. NAFTA would thus effectively defuse any potential for Mexico to become an "export platform" to the US for Japanese, particularly, and other foreign-based producers. Ford would now be able to protect its position within North America while forcing Japan and other foreign-based producers to do more sourcing in North America.
Finally, Ford expected that the slow phase out of the domestic content requirement would ensure that any new auto assembly firms establishing operations in Mexico would have to encounter the same obstacles as existing firms already established in North America must confront.
Ford’s Strategic Plans
Prior to the NAFTA, Ford Motor Company’s United States and Canada sales in Mexico were less than 1%. However, as a result of the NAFTA, sales have continued to climb with 1996 sales reaching 11 percent of the Mexican market. NAFTA then continues to help shape Ford’s vision for its global operations and will act as a springboard for deeper market penetration into Latin America.
In addition, pre NAFTA Ford had to assemble its vehicles in Mexico if it hoped to meet the "trade balancing system" that required Ford’s Mexican operations to export more than it imported. Ford was also required to use a high percentage of Mexican parts suppliers in its vehicle assembly. Often the Mexican suppliers did not meet global standards, which further compromised Mexican vehicle productions (Ford Perspective, Trade Policies).
The NAFTA has changed these production inefficiencies and helped to open the door for global economies of scale in terms of consolidating Ford’s manufacturing operations to help lower costs while maintaining quality of products. In that sense the NAFTA is integral to Ford’s strategy. Without the NAFTA Ford would not be able to reduce its vehicle platforms and establish cross-functional flexible matrices for its global operations. Ford’s strategy has included consolidation of operations in specific Mexican plants. Prior to the NAFTA, "Ford of Mexico produced four separate car and truck lines at its Cuautitlan plant…"(Ramirez). Since the trade agreement, Ford now manufactures Contour/Mystique and F-Series Trucks at this facility.
Ford has also made major plant upgrades investing up to $60 million at the Cuautitlan plant alone in order to improve its production capabilities. Furthermore, Ford slated $450 million in 1995 to "retool plants and boost production of components" in a variety of other Ford de Mexico operations (Reed & Malkin).
Prior to the NAFTA, the United States and Canada had already forged a bilateral trade agreement, and under that agreement both countries had experienced explosive trade growth. Clearly though, NAFTA reached Ford in Canada with more than $700 million being invested in their Oakville, Ontario facility to produce Windstar minivans…"and another $1.5 billion to upgrade its Ontario truck and engine plants" (Symonds). In addition, the NAFTA has been instrumental in moving other operations to more productive regions throughout North America. The Contour’s automatic transmission parts are produced in Ohio. Side benefits to the NAFTA include increased trilateral employment within the Ford Motor Company (See Appendix: Table 6).
Concerning the environment, NAFTA side benefits have included maintaining United States environmental emission control standards in all Ford vehicles throughout the trilateral countries. In addition, prior to the NAFTA, Ford invested millions in upgrading Mexican manufacturing facilities to improve their emission and water treatment facilities. All of which continues to demonstrate the positive spill over effects of the NAFTA in a variety of areas.
The North American Free Trade Agreement then has acted as a catalyst for change within the Ford corporate structure. It has contributed to this new Ford 2000 vision in global manufacturing; centralized leadership coupled with decentralized implementation. Clearly, the NAFTA has served Ford well in its restructuring initiative.
Rather than being a single cause of massive change throughout Ford’s infrastructure, NAFTA represented an additional indicator of the world’s shift towards freer trade. In order to remain competitive in this new environment, Ford realized that it would have to become a much leaner, flexible organization.
As a result, the Ford 2000 strategy was developed and adopted by the company. The phrase "Ford 2000" embodies the company’s vision of being a global firm and the world’s lowest-cost volume producer while creating the highest-quality vehicles ("Trotman Forces Ford 2000 into UAW Negotiations" 4).
The vision came from the thinking that "Ford needed to be much leaner, faster, and more competitive, eliminating duplication of effort and spreading best practices around the world". As a result, Ford has reorganized its structure and began pursuing a total cost management strategy ("Auto Operations Q&A" 2). If Ford is successful with this approach, the company will:
Offer more and better vehicles
Increase its global market share.
Become the world’s largest vehicle maker
Increase profits substantially (Connelly1).
Ford 2000’s Approach to Reorganization
Ford’s new approach to reorganization seeks a balance between centralized strategic leadership and decentralized implementation. Centralized leadership and creating a single global profit center (i.e., merging Ford’s European and North American Automotive Operations into a single entity named Ford Automotive Operations) allows top management the flexibility to manage the company strategically and steer its course into the 21st century. Through centralized decision making, Ford can consider the broadest range of market opportunities and subsequently gain the most efficient use of the product development dollar by creating products to satisfy the consumer needs in multiple markets ("Auto Operations Q&A" 2).
Decentralized implementation allows Ford to take advantage of the corporation’s centralized strengths as well as the flexibility and rapid responsiveness of much smaller companies. Several layers of management have been eliminated in order to improve communications and encourage empowerment. Empowerment represents a critical component to the new structure since there simply is no longer time for managers to micro-manage. The "span of control" has now become the "span of empowerment" ("Auto Operations Q&A" 2).
Ford 2000’s Total Cost Management
Ford 2000’s "heart" lies in Total Cost Management (TCM)—a system designed to eliminate excess costs in every aspect of the corporation. Engineering personnel has been reduced by 30%. Hundreds of dollars are being cut from vehicle material costs. The company now uses one process to develop cars rather having each engineering center operate under a different process. Such cost reductions help the company become leaner and more competitive (McElroy et al 100).
However, the biggest benefits have been seen within purchasing operations. In 1996, Ford reduced its overall costs by US$2 billion, primarily by lowering its total purchasing bill. In addition, cuts across the board in 1997 equaled US$2.5 billion (McElroy et al 101). Purchasing has become a global enterprise rather than a regional function. Ford has reduced its supplier base by cutting its number on non-production suppliers from 58,000 to 28,000 and plans to reduce that number to 5,000 by the year 2000 (McElroy et al 101). Ford plans to focus on a small group of suppliers that will earn "full-service" status.
More importantly, Ford will help these suppliers develop their R&D, design, and engineering abilities so that they can meet Ford’s specific criteria. Ford also consolidated its internal supplier operations into one organization called Automotive Parts Operations, which operates as a self-funding profit center (McElroy et al 101).
Ford Motor Company continues to reinvent itself in the face of our changing global economy. By consolidating its operations, streamlining its production platforms, and utilizing CAD systems worldwide, Ford is able to meet the needs of a globally diverse marketplace. Clearly, the North American Free Trade Agreement is but one element in Ford’s overall strategic plan to meet these global demands.
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