Ford, GM Study Ford Reaction Paper

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Ford, GM Study

Ford and GM have seen many turbulent periods prior to 2008. The very nature of the auto industry is that of various cycles of optimism and pessimism on the part of the consumer. As economies move through their natural cycles of boom and bust, so too do the autos that are prominent within that particular region. Tata motors goes through the came cycles in India as Honda does in Japan. Such is the nature of a capitalistic society in which many of these businesses operate in. The latest financial crisis was no different in this regard. However, one key difference was the extent of the losses incurred by many of the American auto makers. Due in part to irrational exuberance of the part of American citizens two out of the three largest auto makers failed. What ensued was a massive restructuring in regards to cost structure, organizational structure, and product focus. As a result of this restructuring, it can be argued that Ford and GM are poised for extreme growth for the future (Automobile Industry Introduction, 2008).

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Reaction Paper on Ford, GM Study Ford and GM Have Assignment

General Motors was forced to except stimulus aid as a result of inefficient operations. Many of GM's foreign competitors were taking market share as they were creating high quality vehicles. These competitors included Toyota, Honda, and Nissan. In fact, during the height of the financial crisis (more detail on the crisis is given below). Toyota overtook GM as the number one auto manufacturer in the world. However, after coming from bankruptcy, GM has now regained its top position in the market. In addition, with the advent of just in time inventory, Japanese automakers were more efficient than GM. As a result of weak demand, and a high cost structure, GM was forced into bankruptcy. The bankruptcy helped GM compete on a more global scale as it reorganized its cost structure. For example, a major liability to GM was its labor union agreements. Under these agreements, GM was forced to pay a disproportionate amount of money to former employees. These benefits began to compound while the companies' earnings did not. As a result of these promises, GM could not afford to pay them, and eventually went bankrupt. Now, after the bankruptcy, labor union contracts were created that were more favorable to GM. For one, members are now involved in profit sharing programs. Furthermore, the overall employee base has diminished substantially as employees were laid off. This action reduced variable costs associated with production. Plants were also closed which reduced fixed costs associated with production. These incentives are paid when the company is profitable and are not paid during periods of stagnation of little growth. This in turn, helps the company survive during times of severe depression in the financial markets. However, during periods of prosperity, the employees along with the company benefit. This also helps the company in regards to free cash flow. With excess cash, GM invested heavily in new product development while also changing its cost structure. It also, sold or discontinued unprofitable car lines, brands and models. This concentrated vehicle portfolio allowed the company to focus on a core set of enhanced models. New cars such the Chevy Camaro, Chevy Volt and Chevy Suburban are all industry leading vehicles. GM invested in technology to make its manufacturing more efficient. For example, the company adopted "Just in time" delivery options to reduce the costs of excess inventory and receivables. GM reduces incentives used to entice consumers to purchase vehicles which were also very costly to the company.

Ford is a very interesting example of a turnaround company. Unlike GM, Ford did not accept bailout funds from the government. Instead, it elected to avoid bankruptcy and continue operations under a revised cost structure. By not accepting funds, Ford was not under the control of the government. This providing the automaker with a distinct competitive advantage over GM. Without government funds, Ford was free to develop new and innovative vehicle before GM could. By developing these vehicles first, Ford was able to bring these vehicles to market before GM could release its new models. This allowed Ford to take valuable market share within the auto industry. Much like GM, Ford too changed its cost structure. It did so be reducing the number of models it produced overall. Ford also sold off unprofitable franchises such as Volvo and discontinued operations on Lincoln models. Ford also instituted interchangeable parts that can be used on all models. These interchangeable parts created economies of scale for Ford. Being a global company, by using the exact same parts on similar models, the unit cost per part would be reduced. Ford also focused on its industry leading brands as its focus. The best selling truck in America is the F-150. The Taurus and mustang are also ranked very highly in their respective markets. Ford has elected to focus on a select few models and focus on quality of these vehicles.

Circumstances in which Ford and GM have operated under

Over the last few years the circumstances in which these companies have operated has changed dramatically. First, the auto industry is an oligopoly globally as very few competitors compete on a global scale. Many smaller companies are located in specific countries but Ford can achieve economies of scale through its global operations. These cost cutting measure are thus enhanced by the companies economies of scale. Being so large, both GM and Ford can bring the unit cost per item down. In addition, the threat of new entrants with the financial power of Ford is minimal. As such, the company can initiate strategic choices that can encompass purchasing smaller companies that may pose a future threat. Finally, as a global company with viable financial backing, Ford and GM have the brand recognition that many of its competitors do not have. As such, it has the ability to attract more customers and charge premium prices for its brand and what the values it represents (Eisenstein, 2011). International competitors are also weaker as the tsunami in Japan has created an opportunity for American manufacturers to gain market share. Many of the Japanese automakers vendors have been severely weakened as a result of the tsunami. As a result, Japanese vehicles can not be manufactured to the quality and efficiency specifications of before. In fact during the height of the tsunami crisis, production decreased nearly 46%. As such Ford and GM could take valuable market share from foreign competitors.

Finally, as a result of the financial crisis mentioned later in this document, the Japanese currency is becoming stronger. This has an adverse effort on Japanese automakers while benefiting Ford and GM. This is because, a stronger Yen makes exporting Japanese vehicles more expensive. As a result, Japanese automakers must now charge more for their vehicles. Likewise, Ford and GM can export their vehicles to Japan cheaper. Ford has had nearly 20% sales gains in Asian countries alone with many of its smaller models such as the Ford Fiesta. GM has experiences similar growth with many of its smaller, more fuel efficient vehicles as well. Because of these situations, the circumstances in which these two companies operate in are becoming more beneficial.

In regards to hydrogen cars, I believe the prospects are grim at best. Hydrogen cars do exist in a very infant form. However, many variables will be needed for Ford and GM to succeed. For one, consumers must adopt this new technology and embrace it. There is very little evidence that suggests society will purchase a hydrogen vehicle over its electric counterpart. Furthermore, there is little infrastructure to support hydrogen vehicles. Will gas stations now become hydrogen stations? If so, how long will this shift take to occur (Shepardson, 2011)? If the shift is taken place, how much will it cost the oil manufacturers? Many of the oil manufacturers have no incentive to innovate their filling stations to support hydrogen. In addition, consumers must be willing to pay more for hydrogen cars. The technology, at this point in the production cycle, is very expensive. As such, consumers must be willing to pay premium prices for it. During this economic crisis, (which I will elaborate on in the next section) consumers are not willing to pay premium prices for Ford and GM model hydrogen vehicles. It is not a question of the technology. The question is, "are consumers willing to pay more for it?" As of now the answer is an emphatic "no." I believe the prospects for Ford and GM electric cars are more evident. Consumers are beginning to purchase electric vehicles at a faster pace than 10 years ago (Romm, 2004). The technology is becoming cheaper while the quality and reliability is increasing. In terms of fuel efficient vehicles, Ford and GM should pursue the electric model. The issue for both Ford and GM is the consumer's willingness to purchase fuel efficient vehicles. Below is a chart depicting electric vehicle sales.

As the chart depicts, there is… [END OF PREVIEW] . . . READ MORE

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