Ford Motor Company Business Case and Financial Plan

Company Overview

Ford Motor Company is one of the most reputable brands in the global automobile industry. The company is headquartered in Dearborn, Michigan, in the United States of America but has operations in more than 120 countries employing over 183,000 employees. Ford Motor is primarily engaged in designing, making, promoting, and selling full-range utility vehicles, Ford trucks, pickups, and cars (Christensen, 2021). Ford operates in three market segments to optimally serve the customers: Ford Credit, Automotive, and Mobility. The automotive segment is the largest segment and the most significant revenue driver of the company earning close to 95% of the total revenues reported by the company in 2021. The automotive part is primarily concerned with developing, manufacturing, promoting, and selling Lincoln luxury vehicles, Ford cars, and related accessories.

On the other hand, Ford Credit offers financial and leasing services to the company’s dealers and customers to access the company’s products. Additionally, Ford’s mobility segment is engaged in developing the company’s autonomous vehicles and the associated business. The automobile industry is highly dynamic, and firms are aggressively competing to catch up with technological trends. The trends in the industry show that the customers are leaning toward and demanding eco-friendly products. This trend has increased competitiveness as firms fight to gain market clout by manufacturing cutting-edge technology products. The increased sustainability campaigns drive the industry towards EVs and safe driving.

Business Case

Ford Motor Company is expanding and spreading its activities in the manufacturing and rolling out EVs to gain a competitive advantage in the highly dynamic automobile industry. However, moving out of Electric Vehicles demand a considerable capital outlay in Research and Development, implying that the company is expected to invest massively in high-end technology to actualize the plans. According to the company’s development reports, Ford plans to manufacture close to 2million EVs by 2026 and convert more than 50% of its global sales into EVs by 2030 (Tu et al.,2019). According to the company’s cost projections, these programs will require over $ 50billion in funding. They will involve setting up Electric Vehicle units to deal with the development and manufacturing of the vehicles exclusively. Due to the novelty of the EVs technology, the company also needs to invest in its human resources and equip them with the prerequisite skills and knowledge to handle the new development. More resources will be required to fund, sustain and blend the latest technology in the Ford Motor operations.

Potential Sources of Funding

Retained Earnings: Big companies like Ford Motor, with colossal profit potentials, have some of their profits for growth and expansion. Retained earnings are the most important source of capital for long-term projects since it does not impose obligations to the company. When a company makes profits, it can decide not to pay dividends to the shareholders but instead plow back the profit into the business. The company can use the accumulated profits to finance the growth projects (Pakhnenko,2019). There is less risk associated with retained earnings since the funds are obtained from internal sources; thus, no claims from the outsider. Since retained earnings are generated internally, it does not come with attached requirements; however, only profitable companies such as Ford Motor can accumulate some of their earnings for expansion programs. For instance, Ford had $ 35.7billion retained earnings in 2021. The cost of the retained earnings is the opportunity cost, and its equivalent to the shareholders’ return since it represents the sacrifice that shareholders make by reinvesting the profits. The estimated cost of capital on retained earnings equivalent to the return on equity is 18.55%.

Debt Capital: This is an external source of finance that involves selling debt instruments to the investors to obtain funds to finance the expansion programs of the company. Debt financing comes with conditions that the borrowing company must fulfill. The borrower is expected to pay periodic interest on the borrowed amount and principal sum at the debt instrument’s maturity. Debt financing, therefore, imposes an obligation to the company, which must be settled out of the company’s earnings. Before the issuance of the debt capital, the investors assess the financial status of the borrowing company to ascertain its ability to service the debt. More often than not, investors will demand security before committing their funds to the company. Due to the claims from outsiders, debt capital may increase the risk of the business; it should therefore be used to finance more viable projects that will generate enough revenue to enable payment of the interest and principal amount (Pakhnenko, 2019). The more common debt instruments issued by prominent and established companies such as Ford include debentures, bonds, and long-term loans from financial institutions. The estimated pre-tax cost of debt capital is 10.3%.

Equity Capital: Equity capital represents the funds provided by the business owners in the form of shares of stock. Equity capital is the primary and most permanent source of funds for the business, which can finance long-term investment without imposing a burden on the company’s revenue. Since the business owners provide the funds, it is less risk due to the absence of claims from outsiders. With equity finance, the company can grow its revenue and provide enough working capital, which is the most vital funds for supporting the overall running of the business. A company with an excellent working capital position is likely to expand because it will have enough cash to pay for the recurrent expenses of the business. With a stable cash position, the company can easily fund its operation, earn more revenue, and support long-term investments, which are the precursor for establishing a footprint in the market and gaining a competitive advantage. The cost of capital for equity financing, which is equivalent to the return on equity, varies depending on the profits earned by the business. During periods of high earnings, the cost increases, and owners of the company enjoy high returns, but at low incomes, the cost is likely to be below. The estimated cost of equity capital is 18.3%.

Estimated annual percentage returns

The Selected Source of Finance

Equity capital: The designing, manufacturing, and promotion of the EVs project by Ford Motor Company is a long-term investment that requires adequate funding that will not impose a burden on the firm’s revenues. Against this backdrop, equity financing will be ideal for the company. The project involves a lot of Research, development, and innovation, and the company must have enough funding to support the program. Since the project will take considerable time before the company gets the return from the investment using non-equity funds may impose risks to the company by straining its revenue. The company’s cost projections, the project requires funding to a tune of $ 50billion to enable rolling out of close to 2million EVs by 2026. Therefore with equity finance, the company will be able to finance the project without being overburdened by claims from outsiders. Another important reason for selecting equity finance is that the capital raised will be permanent in the company. The management will be able to invest the funds without being required to pay them back after maturity.

Analytical Summary of the Project

The designing, manufacturing, and promotion of Electric vehicles by Ford Motor Company will benefit the company in terms of brand reputation, increased revenue, customer satisfaction, and long-term sustainability. The increased advocacy and calls for environmental sustainability have imposed pressure on the firms in the industry to reduce carbon emission, and the development of EVs is the panacea of the problem (Bhatti & Singh, 2021). Companies such as Tesla that have already embraced and implemented the EVs project increase their market penetration and global appeal. The company’s revenue in February 2022 stood at over $ 53billion, representing over a 70% increase from the previous year. The EVs project supports the overall growth strategy of Ford Motor, which is geared towards attaining carbon neutrality by 2050. The company is already electrifying its iconic brand – Mustang, F- 150. Ford Motor capitalizes on EVs to deliver the highest services that meet the customers’ dynamic demands and increase market command. The critical goal of Ford’s EVs project is to target the market for fully commercial vehicles and vans.

The project advances the company’s sustainability plans and purposes which underpins its vision of building a better world where everyone is free to move and pursue their dreams. The company’s financial and sustainability report points to how the environmental concerns are significant drivers of the current and future revenues of the company. According to the reports, the company has received more than 20,000 news since the launching of its F-150 electric pickup. The orders are projected to increase in 2023 and boost the company’s earnings by close to 8%. Through EVs connectivity and breakthrough in battery technology, the company is expected to provide more revenue to the company in the foreseeable future than its current reviews. Expanding the company’s commercial vehicle business has been an effective strategy that Ford’s managers have been pursuing; the fully rolling out of the EVs technology will accelerate and propel the realization of this growth strategy. The project is also likely to supplement the company’s autonomous driving technology between Ford and Argo Al. The investment will bring lower cost and strong loyalty across the company’s private and commercial customers’ thus increasing the competitiveness and global appeal.

However, despite the promising opportunities presented by the project, some challenges still abound. The project requires high-end technology grounded on heavy investment in Research and development. Ford has been spending a colossal amount of money in Research and development to speed up to full range implementation of the project. But due to the effects of the Covid 19 pandemic, which drastically affected the company’s operations, leading to the temporary closure of its three plants in Brazil and halting operations in Southern America, the investment in R& D reduced to $ 7.1billion 2020 from $ 7.4billion in 2019. The high cost of developing the battery technology is another concern for the company in implementing the project. Batteries in electric cars require holding a massive charge to enable them to be practical to the drivers; the development of these battery features increases the project’s cost. Shortages in automotive chips have also raised significant concerns for the full implementation of the project. Chips are an essential ingredient in making the electric vehicle; thus, its deficit will slow down this project.

References

Bhatti, G., Mohan, H., & Singh, R. R. (2021). Towards the future of intelligent electric vehicles: Digital twin technology. Renewable and Sustainable Energy Reviews, 141, 110801.

https://www.sciencedirect.com/science/article/pii/S1364032121000964

Christensen, L. K. (2021). Between Denmark and Detroit: Ford Motor Company A/S and the Transformation of Fordism 1919-1966. Aarhus Universitetsforlag.

https://pure.kb.dk/en/publications/between-denmark-and-detroit-ford-motor-company-as-and-the-transfo

Pakhnenko, O. M. (2019). Alternative sources of funding for innovative activities of business entities. Przeworsk: WSSG.

https://essuir.sumdu.edu.ua/handle/123456789/80054

Tu, H., Feng, H., Srdic, S., & Lukic, S. (2019). Extreme fast charging of electric vehicles: A technology overview. IEEE Transactions on Transportation Electrification, 5(4), 861-878.

https://ieeexplore.ieee.org/abstract/document/8930619/?casa_token=8iNGmqvVl5gAAAAA:KESkbcogwhD_RzrD6-8LfWjW4q883Hbsh8mXw6LHYd1z1tXU4rj6-bR__JRi7ae4sDsI1HmpXF05B9k