Ford intends to break even by 2011 through focusing on increasing sales volume through offering new vehicle designs, refreshing the designs of those models that currently exist, and relying on brand loyalty. The significant increase in sales volume for the third quarter of 2009 was attributable to the Consumer Assistance to Recycle and Save Act of 2009 (also known as cash for clunkers program). The cash for clunkers program was implemented in the summer of 2009 which allowed vehicle owners to receive a credit for trading in their vehicle for a more fuel efficient vehicle. The credits ranged from $3,500 to $4,500 depending upon the fuel efficiency gained. This program contributed to Ford’s total sales volume by approximately 90,135 which was 13.30% of new vehicles purchased through the cash for clunkers program. Ford had the second most sales originating from the cash for clunkers program per the National Highway Traffic Safety Administration.
Ford reported a 34% increase in the United States sales for December 2009 compared to the December 2008. However, Ford’s total sales volume decreased by approximately 15% for 2009 in comparison to 2008. Ford’s sales volume declined in 2008 by approximately 20%. Ford’s competitors General Motors and Chrysler reported sales decreases for 2009 of greater than 30%. Therefore, it appears that Ford is decreasing its rate of loss during the current economic state. As of September 30, 2009 the unemployment is at 9.6% for the United States as a whole, which is an increase of 3.5% in comparison to the third quarter of 2008. In addition, mortgage delinquencies are on the rise from approximately 7% at September 30, 2008 for the United States to 10% at September 30, 2009. Considering the current economic conditions it is difficult to believe that sales volume will increase in 2010 and 2011. The cash for clunkers program may have enticed car purchasers to buy in the current year when the purchaser may have delayed a few more years due to the state of the economy. Therefore, current year sales may be inflated due to purchases for future periods being shifted into the current year. Ford projected increased sales volume based upon their electric car production, which has since been placed on hold at this point in time. Also, Ford anticipates increased sales volume due to customers being more willing to purchase Ford as opposed to their domestic competition due to Ford not receiving bail out monies from the government. However, customers that are brand loyal chances are will not switch from Chrysler to Ford merely because Chrysler accepted bail out money and Ford did not. When accumulating the economic factors previously noted, Ford’s I would anticipate Ford’s sales activity in 2010 and 2011 to continue to decrease at a decreasing rate.
For the third quarter ended 2009, Ford’s North American division was profitable. However, the entity as a whole operated at a net operating loss of approximately $1.3 million pre-tax. Ford’s stock price at September 30, 2008 was $5.23 in comparison to $7.31 at September 31, 2009. Ford is focused on decreasing personnel costs and fixed expenses. Even though Ford did not participate in receiving government bailout monies they are focusing on the same cost cutting strategies as General Motors and Chrysler. Ford’s high operating leverage is primarily attributable to compensation costs. Since the majority of laborers are unionized employees, whether or not Ford has high or low sales volume plays a small role in related personnel expenditures. Unionized employees are paid whether or not there is work to be done. Currently Ford is offering buyout programs and early retirement options in order to decrease fixed costs. Ford along with GM and Chrysler are trying to increase sales volume while decreasing fixed costs thus decreasing their operating leverage. Ford also cancelled bonuses for 2009, reduced the number of dealerships and supply base, and is in continuous negotiations with the United Auto Workers Union as part of its cost cutting strategy. For the nine months ended September 30, 2009, Ford had operating expenses of $956 million in comparison to $1,161 million for the nine months ended September 30, 2008. Ford includes compensation expense in the operating expense line item on the income statement.
Even though increased sales activity is aggressive, the break even point for Ford as an entity seems to be obtainable in 2011. If Ford is able to stick to their guns and eliminate unprofitable plants/ dealerships and continue to decrease personnel expenses then they are on their way to break even in 2011.
