Research Proposal on "Ford Motor Company With the Current Economic"

Research Proposal 6 pages (1673 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Ford Motor Company

With the current economic crisis, companies all over the U.S., from all segments of the economy, find themselves in challenging situations regarding their capacity to generate revenues and, in the end, to survive on the market. With the automobile producers, it is an even more complicated situation, mainly because some of them have failed to reorganize their activities in time to make them more adaptable and better fit for the current situation. At the same time, many of these companies face tough foreign and international competition from companies that manage to produce at lower costs and penetrate other markets.

Ford Motors resembles, in many ways, the situation with the other U.S. producers and its results and latest operational actions in 2008 show this. The company has had the worst year in history, with $14.6 billion losses in 2008

. At the same time, Ford was forced to divest and sell many of its businesses, including Rover or Jaguar to competitors, which will limit its chances in the long run in terms of making profits and being able to penetrate more segments of the automobile market.

Despite all these, the Ford management had announced and it reiterated that it would not use the funding promised by the U.S. government, despite all recent developments and the severity of the financial crisis. In fact, it will be drawing on its own lines of credit to finance the effects of this loss, with the next loan being estimated at around $10.1 billion

The decision here mentioned is worth several microeconomics considerations. First of all, in 2006, the company made an important decision which many credit for the potential survival of Ford Motor Company. At that point, management decided that the best solution in anticipating the crisis would be to mortgage the company's assets in order to both be able to raise a significant amount of cash at that point and to be able to access credit lines at a later time, when the crisis would be at its peak.

First, when compared to many of the other companies on the market and certainly with the other automobile producers, Ford has no cash problem. It still has cash reserves in the range of billions, which allows the company both to pursue its own research and development policies and to potentially develop new models with which it can remain reasonably active on the market.

Second, access to financial markets in such a tight market is probably the key to success. It means not only that the company will be able to still finance its main operations and activities, but also that it still has credibility on a market where the other main U.S. companies have had to appeal to the government for rescue.

Third, going for the government's money means that the government is going to be controlling some of the company's policies. While remaining financially independent, Ford can afford to be making its own decisions in this competitive market and work with the government from an equal footing. This means investing in the research and development which it sees as fit to rescuing the company, as well as taking the necessary cost reduction measures, despite the potential social costs.

Following this current situation, with Ford not tapped yet into the money channel from the U.S. government, from a microeconomics perspective, Ford is basically creating demand through supply. What this means is that by offering the customer different alternatives and commercial perspective, the company is able to provide the customer with more environmentally friendly, perhaps even cheaper offers that may increase the incentive to purchase of the regular consumer, despite the current economic environment. After all, the car remains a necessity on the U.S. market, where many of the citizens live far away from their work or from the important cities.

The basic conclusion on Ford's survival is that, compared to some of the other automobile producers, it had much needed cash at a time when this was very scarce. The absence of cash can eventually lead to bankruptcy because the company could have no or little access to a market that is so strained today by the impact of the financial crisis. At the same time, accessing this credit lines before the beginning of the crisis as well meant that the company would be able to count on more cash to finance its operational activities.

Nevertheless, Ford will probably need to use some of the government's bailout money, if the crisis will be more lasting than the current optimistic estimates. Money from the government will first of all allow the company to support some of its financial credit and, with this new collateral, potentially receive future loans, if and when the financial market begins to perform better.

The problem at this point on the market is that demand needs to be stimulated to remain at reasonable levels, otherwise its fall will mean a necessary decrease of the price per unit, as basic economics teaches. The price is formed at the intersection between supply and demand. As seen on the chart below, price p2 is formed at the intersection of quantity supplied on the market (S) and the demand curve for the market, considered to be the total aggregate demand on the market, a sum of the individual demands.

A decrease of the demand on the market to the curve D1 means that the new price formation will be at p1, with the same supply from Ford on the market. There are several worthwhile considerations in this regard, as well as negative implications for the company.

First, the lower price means that the company will need to somehow act on the cost side so as to be able to retain similar or reasonable profit levels. Second, in theory, the company would need to lower its supply on the market. However, this would imply additional negative consequences, as the company would have a difficult time supporting its additional inventory which would remain if the company does not sell all its stock. A significant downward spiral would include downsizing and letting people go, because Ford would need to downsize at this new level of supply.

In a perfectly competitive market, the equilibrium point would mean that supply and demand, as well as cost and value would be perfectly balancing one another

. This not being the case, costs need to be adjusted to fit the supply on the market.

The price is important in this analysis, because it is also explained through the value or marginal utility that a customer attributes to a Ford car

. With the current economic crisis, the marginal utility will most likely tend to decrease.

The obvious question that can be asked at this point is how can the governmental bailout help? The money can go towards supporting either the demand or the supply. In Ford's case, accessing the bailout money would mean that the company would want to support its supply. Seeing all the things mentioned in the previous paragraph, accessing more cash and funds would offer Ford the necessary money to support or avoid its downsizing and focus on using this money to be able to pass through the crisis at the same level of supply, but at the lower demand and lower prices that would be needed to still provide an incentive for the population to buy Ford products.

It is probably better for Ford to use the money from the government in this direction, while retaining its own cash funds for internal development and research activities. Money to cover the potential effects of the decrease in demand will also be in line with governmental social policies, such as those of retaining jobs. Indeed, if the government covers part of the costs that companies like Ford incur… READ MORE

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