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Corporate Valuation: Ford Motor Company & General Motors Company Nicholas Kline

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Table of Contents 1 ABSTRACT ........................................................... 5

2 INDUSTRY ANALYSIS ........................................... 6 2.1 INDUSTRY SCOPE ................................................................... 6 2.2 INDUSTRY SIZE ........................................................................ 7 2.3 INDUSTRY ENVIRONMENT ......................................................... 9

2.3.1 Global Environment ................................................................ 9 2.3.2 Five Forces (see Exhibit 2) ..................................................... 11

2.4 PRODUCT DIFFERENTIATION ................................................... 12 2.5 INDUSTRY RETURN ON ASSETS MATRIX ..................................... 14 2.6 INDUSTRY TRENDS (SEE EXHIBIT 3 FOR PERCENTAGES) ................ 15

3 COMPANY OVERVIEW ..................................... 18 3.1 FORD MOTOR COMPANY .................................................... 18

3.1.1 History ...................................................................................... 18 3.1.2 Description ............................................................................. 18 3.1.3 Composition of Sales ............................................................. 19 3.1.4 Return on Assets Matrix ......................................................... 20 3.1.5 SWOT Matrix (see Exhibit 6) .................................................. 21 3.1.6 Opportunity Matrix ................................................................ 22 3.1.7 Threat Matrix ........................................................................... 23 3.1.8 SWOT Strategy Matrix ............................................................ 24

3.2 GENERAL MOTOR COMPANY ............................................... 25 3.2.1 History ...................................................................................... 25 3.2.2 Description ............................................................................. 26 3.2.3 Composition of Sales ............................................................. 26 3.2.4 Return on Assets Matrix ......................................................... 28 3.2.5 SWOT Matrix (see Exhibit 8) .................................................. 28 3.2.6 Opportunity Matrix ................................................................ 30 3.2.7 Threat Matrix ........................................................................... 31 3.2.8 SWOT Strategy Matrix ............................................................ 32

4 DRIVERS ............................................................ 33 4.1 EARNING DRIVERS ............................................................... 33

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4.1.1 Regional Sales ........................................................................ 33 4.1.2 Operating Profit ..................................................................... 35 4.1.3 Operating Profit Margin ........................................................ 43

4.2 COST DRIVERS ..................................................................... 45

5 KEY FINANCIAL RATIOS ................................... 47 5.1 FREE CASH FLOW ................................................................ 47

5.1.1 Ford Motor Company ........................................................... 47 5.1.2 General Motors Company ................................................... 48

5.2 INVENTORY TURNOVER ......................................................... 49 5.2.1 Ford Motor Company ........................................................... 49 5.2.2 General Motors Company ................................................... 50

5.3 RETURN ON EQUITY MATRICES ............................................... 50 5.3.1 Industry ROE Matrix ................................................................ 50 5.3.2 Ford Motor Company ROE Matrix ....................................... 51 5.3.3 General Motors Company ROE Matrix ............................... 52

6 BASIS FOR FORECAST ....................................... 53 6.1 INDUSTRY (SEE EXHIBIT 9) ...................................................... 53 6.2 FORD MOTOR COMPANY (SEE EXHIBIT 10) ............................ 55 6.3 GENERAL MOTORS COMPANY (SEE EXHIBIT 10) ..................... 57 6.4 KEY FIGURES FOR FORD AND GM (SEE EXHIBIT 10) ................. 60

7 FORECASTED FIGURES ...................................... 61 7.1 SALES GROWTH ................................................................... 61

7.1.1 Ford Motor Company ........................................................... 61 7.1.2 General Motors Company ................................................... 62

7.2 COST OF GOODS SOLD (COGS) ......................................... 63 7.2.1 Ford Motor Company ........................................................... 63 7.2.2 General Motors Company ................................................... 64

7.3 OPERATING PROFIT MARGIN ................................................. 65 7.3.1 Ford Motor Company ........................................................... 65 7.3.2 General Motors Company ................................................... 66

8 RESIDUAL INCOME MODEL & UPSIDE POTENTIALS & DOWNSIDE RISKS .......................... 67

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8.1 FORD MOTOR COMPANY .................................................... 67 8.2 GENERAL MOTORS COMPANY ............................................. 68

9 INVESTMENT RECOMMENDATION ................... 69

10 APPENDIX ......................................................... 70 10.1 EXHIBIT 1: LIST OF AUTOMOTIVE BRANDS IN UNITED STATES ........ 70 10.2 EXHIBIT 2: FIVE FORCES DIAGRAM ......................................... 71 10.3 EXHIBIT 3: KPMG SURVEY RESULTS FOR INDUSTRY TRENDS ........ 71 10.4 EXHIBIT 4: KPMG EXECUTIVE POSITION DISTRIBUTION ............... 72 10.5 EXHIBIT 5: KPMG SURVEY COMPANY TYPE DISTRIBUTION ......... 72 10.6 EXHIBIT 6: FORD SWOT MATRIX ............................................ 73 10.7 EXHIBIT 7: GM R&D FOCUSES AND PURPOSES ....................... 73 10.8 EXHIBIT 8: GM SWOT MATRIX .............................................. 73 10.9 EXHIBIT 9: REGIONAL INDUSTRY BASIS FOR FORECAST CHART .... 74 10.10 EXHIBIT 10: COMPANIES’ BASIS FOR FORECAST CHART ...... 74 10.11 EXHIBIT 11: FORD EUROPEAN TRANFORMATION STRATEGY .. 75 10.12 EXHIBIT 12: FORD RESIDUAL INCOME VALUATION .............. 76 10.13 EXHIBIT 13: FORD FORECASTED RESIDUAL INCOME EARNINGS 76 10.14 EXHIBIT 14: GM RESIDUAL INCOME VALUATION ................ 76 10.15 EXHIBIT 15: GM FORECASTED RESIDUAL INCOME EARNINGS 77

11 SOURCES .......................................................... 78

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1 Abstract Selling over 66 million vehicles in 2015, the automotive industry is one of the

largest industries in the global economy. With over 30 brands in the United States alone, this industry is extremely competitive, however, extremely consolidated with 5 companies make up 71% of the market in the United States. Even though extremely competitive, as companies continue to invest in autonomous vehicle technology, technology companies like Apple and Google can enter the market if they can offer these manufacturers competitive software for this technology. As companies begin to look at cities as separate markets with their own unique characteristics, other methods of transportation begin to rival the automotive industry within large urban areas. Trends such as connectivity and digitalization, platform strategies and modular production systems, mobility as a service and many others flood the industry bringing about changes within companies on how they are delivering their value proposition to customers. Some companies like Toyota showcase their reliability whereas companies like Fiat Chrysler Automobiles offers lower cost vehicles. North America is beginning to slowdown in growth except for Mexico while emerging markets like Brazil and the Middle East and Africa are underperforming and regions like Europe and Asia-Pacific are seeing a premiumization in their markets.

Ford Motor Company is an original American automobile manufacturer with

their brands Ford and Lincoln. They offer both luxury and economy cars, but have huge success in their light-duty F-series trucks. They have the third largest market share in the United States with North America being their largest market. Their main strength is their F-series trucks and their main weakness is their Lincoln brand, which they are trying to reshape. Since North America is their largest market, it is their main earning driver with cost of goods sold being their main cost driver. Key financial ratios like free cash flow and inventory turnover tend to influence their stock price. Ford has high financial leverage due to their fluctuations in their shareholder’s equity. Ford’s largest sales growth and operating profit will be in North America. However, Europe and Asia-Pacific will begin to see higher sales and higher profits. Using a residual income model of discounted residual income earnings and current book equity value, Ford’s stock price should be $18.64, but the market prices Ford’s stock at $12.04 making Ford undervalued in the market. Therefore, I recommend stockholders to hold their stocks and for investors to buy Ford stock. Even though Ford is undervalued in the market, there are downside risks to consider such as uncertainty in Brazil, instability in the Middle East and Africa, and fluctuations in the Chinese renminbi and British pound possibly affecting their bottom line.

General Motors Company is a world renown automobile manufacturer

offering many brands across the world including Chevrolet, Cadillac, GMC, and Buick. Their main luxury brands are Cadillac (luxury brand for Chevrolet) and

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Buick (luxury brand for GMC). They have the largest market share in the United States with North America being their largest market. Their main strength is their OnStar function in all their vehicles allowing for emergency support and information with the press of a button. Since North America is their largest market, it is their main earning driver with cost of goods sold being their main cost driver. Key financial ratios like free cash flow and inventory turnover tend to influence their stock price. GM has high financial leverage due to their fluctuations in their shareholder’s equity. GM’s largest sales growth and operating profit will be in North America. Europe will begin to see higher sales due to the refreshed local brands they offer. However, they will still be unprofitable because these brands have lower margins. Their international operations (GMIO) will see a decrease in sales, however, increases in profitability due to increased sales of Cadillac and Buick. Using a residual income model of discounted residual income earnings and current book equity value, GM’s stock price should be $66.55, but the market prices Ford’s stock at $34.25 making GM undervalued in the market. Therefore, I recommend stockholders to hold their stocks and for investors to buy GM stock. However, I suggest investing for a shorter period than Ford because GM tends to have periods of high growth and then stagnation. Right now, they are in a period of growth, which will fade in the future. This inflates their stock price in the residual income valuation. Even though GM is undervalued in the market, there are downside risks to consider such as uncertainty in Brazil, instability in the Middle East and Africa, and fluctuations in the major currencies around the world, and the expected downturn of their period of growth possibly affecting their bottom line.

2 Industry Analysis 2.1 Industry Scope

The automotive industry is a global industry whose primary product is passenger vehicles. This includes models from compact cars to light trucks. The supply chain of the industry includes the suppliers, manufacturers, and the dealerships. However, this industry does not include suppliers of tires, batteries, and fuel along with used car dealers and specialty shops. There are two main buyer and supplier groups in this industry. The first buyer group is wholesales. This includes governments, dealerships, companies, rental car companies, taxi companies, chauffer companies, etc. The second buyer group is consumers typically making single-car purchases. This first supplier group are the companies who supply raw materials to the manufacturers. The second supplier group are the companies supplying parts to the manufacturers. Industries who compete with the sales of the automotive industry are the motorcycle industry, public transportation (in urban areas), used car dealerships, and vehicle sharing companies. With autonomous vehicle technology

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becoming a focus to technology companies, potential entrants include Apple, Google, and other technology companies who are developing this technology.

2.2 Industry Size Figure 1

With global automobile sales exceeding 66 million units in 2015, this

industry has high sales volume. With this volume, there is also stable growth. Since 2006, global car sales have been increasing at a steady rate of growth. However, during the financial crisis, the industry experienced drastic changes in sales trends. However, since 2012 the industry has been experience a decline in growth of sales globally.

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10,000,000.00

20,000,000.00

30,000,000.00

40,000,000.00

50,000,000.00

60,000,000.00

70,000,000.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

UNITS

SO

LD

Global Automotive Sales since 2005

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Figure 2

This industry is very consolidated from a corporate perspective with

many brands being a subsidiary of a parent company. Although, there are many different brands with many different types of vehicles with many different markets who have unique tastes and preferences. One of the largest and most developed markets, the United States, has 33 brands from which to choose (see Exhibit 1). However, many of these brands only make up a very small percentage of the market. Over 70% of the total automotive sales in 2015 in the United States were from only 6 companies. Therefore, from the corporate perspective the industry is consolidated, but very fragmented from the consumer perspective.

5.65% 5.98%

-1.67% -0.66%

12.37%

3.62%

5.27% 4.01% 3.67%

1.37%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GRO

WTH

RA

TE

Gloabl Automotive Annual Growth Rate since 2006

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Figure 3

2.3 Industry Environment 2.3.1 Global Environment

The automotive industry varies from region to region. In North America, the United States hit record sales in 2015 exceeding 17.5 million units sold. However, the market is predicted to have flat sales growth over the next two years. This is due to the increasing of interest rates and tightening fuel economy restrictions. In Mexico, they are exceeding expectations by reaching 1.3 million units sold in 2015. They are expected to pass 1.5 million units in sales by 2021. Factory investments are also spiking in the country with an expected 50% investment growth in the next five years. This is causing companies to cautiously manage their United States’ supply chain and factory usage when expanding into Mexico. In the European Union, sales have slightly recovered since the recession. In 2015, sales amounted to 12.6 million units. However, this is well below their record from 2007 of 18 million units. Local economies like France, Greece, Spain, Italy, and Portugal are holding the industry hostage by coming closer to recession themselves. For this industry to recover, companies need to figure out how to match production capacity to market demand along with investing in new product areas to grow sales.

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Emerging nations, in general, are underperforming. India had flat sales in 2015 whereas China’s growth slowed form 10% in 2014 to 7.3% in 2015. China’s growth decline was mainly due to the new restrictions on new vehicle ownership. In 2015, Brazil had a decline in sales and Russia had their second year of sales decline. Even though emerging nations are underperforming, there are still investments being made into them. Companies who are investing in Brazil and Russia need to be flexible in managing costs and factory capacity for the next few years to adapt to the changes in demand. Contrary to the decline of sales growth, China still maintains their expectation of reaching 30 million units of annual sales by 2020. To capture this growth, companies are creating joint ventures with Chinese companies because they give the most consistent returns. These joint ventures also give companies the opportunity to have increased and highly managed production of more profitable, pricier vehicles to take advantage of the growth. The Middle East and Africa are expected to have consistent and strong sales growth for the next five years. The biggest improvement to sales are said to take place in South Africa, Egypt, Iran, and Nigeria. There is also predicted to be an increase in factory activity. By 2021, there is expected to be almost 3 million cars produced in this region. The countries with likely factory improvements include Egypt, Algeria, Nigeria, and Iran. The challenge with this region is managing the greater than 50 markets all with different and unique characteristics. To fully realize the potential in these markets, companies need to have a strong factory and distribution presence in the region. Today, we are entering a new era of personal transportation. This is the era of autonomous and connected vehicles. These vehicles are causing the merge of two large and unique industries: the automotive and technology industries. This merge is met with certain difficulties due to the differences in these industries cultures, product development models, and business operations. Companies like Apple and Google are looking to own parts of the technology of autonomous vehicles to eventually be the sole supplier of the technology to manufacturers.

Technology is redefining the value proposition of the automobile. Consumers are becoming much more concerned with the technology in their vehicles. A recent study showed 56% of new car buyers were willing to switch to a brand if the brand they were first considering did not offer the technology they wanted. This study

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also showed 48% of new car buyers would walk away from a vehicle if the technology was difficult to use. With this, manufacturers are starting to focus their Research and Development (R&D) on the technology they put in their vehicles. Even though technology is starting to take over this automotive industry by modifying powertrains with hybrid and electric technology, the Internal Combustion Engine (ICE) is said to be the dominant powertrain for decades to come. This is due to people not wanting to be dependent on electricity due to its short range. The huge shift that would be necessary in the production process to have any other powertrain be dominant would increase costs drastically for manufacturers. Stricter regulations on fuel economy are plaguing the industry. In the United States and European Union, fuel economy restrictions are said to reach 60 Miles Per Gallon (MPG) by 2025. Manufacturers say they may be able to meet this with the ICE powertrain. They say the ICE’s fuel economy can be maximized as much as 75% through maximizing energy efficiency, minimizing emissions within the cylinders, exhaust after-treatment technologies, and recovering wasted heat energy within the engine. To do this, however, is forcing companies to take massive risks in R&D. Examples include Ford and Honda. The 2015 F-150 model had its entire body changed from steel to aluminum to increase fuel economy. This is a massive risk because trucks are meant to be durable and consumers may see aluminum as a cheap and weak alternative. However, the model was a success. Honda introduced a technology called Continuously Variable Transmissions (CVTs). This technology removes the transmission with fixed gears and implements a transmission with pulleys that are consistently changing the gear ratios to optimize the power being put down to the ground by the wheels. Other companies like BMW, Mazda, and FCA are increasing MPG through aerodynamics, turbochargers, lighter materials, and other methods. 2.3.2 Five Forces (see Exhibit 2)

This industry has extremely high bargaining power of buyers. With over 33 brands globally, various vehicle classes within each brand, and various models within each class consumers have an enormous amount of choices to choose from.

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The bargaining power of suppliers is medium. Even though there are numerous suppliers for each manufacturer and numerous companies who can be a supplier of the same product, many products are single-sourced from manufacturers. If you are a single-sourced supplier who makes a unique product that a manufacturer uses, you have high bargaining power. If you are not, your bargaining power is diminished.

The barriers to entry is medium. Most would say the barriers to

entry would be high due to the high cost of capital, high development costs, saturation of the industry, slowing growth, and ever increasing regulations. However, due to the industry’s merge with the technology industry, start-ups or established technology companies can enter the industry by providing technology to manufacturers to put into their vehicles. You may not enter the industry as a manufacturer, but you can become a vital part of a large manufacturer’s supply chain if you have technology demanded from these manufacturers.

The threat of substitutes is medium. The industry used to

consider specific markets as either whole countries or regions. However, nowadays companies are starting to look at specific cities as unique markets. This is due to alternative fuel vehicles being more desired in urban areas and cities are becoming large enough to begin to have their preferences. With more markets emerging within markets, the threat of substitutes varies with each market depending on its urban populations.

Due to these factors, the intensity of rivalry is high. Companies

are in a race to have the most fuel efficient, technologically advanced, and affordable vehicle in the market. Another battle is also taking place in the luxury car market. For the last couple years, there has been a decline in the luxury car market. Sales in June 2015 compared to June 2016 dropped over 12%. This has forced companies like BMW and Mercedes-Benz to enter promotion/price wars during peak season to increase sales. At the end of 2014, BMW increased its incentives, which resulted to beating Mercedes-Benz in annual sales.

2.4 Product Differentiation Vehicles can be differentiated in four different ways: price,

fuel economy/performance, technology, and design.

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The first is by price. Vehicles prices can be as low as $12,800 and as expensive as $4.5 million dollars for a single vehicle. The price of the vehicle depends on the materials used, technology, engine size, brand, any many other characteristics.

The second is by fuel economy/performance. Fuel economy

can be measured by MPG or Kilometers Per Liter (KPL). With global warming being a major concern to people all around the world, consumers look for vehicles with low emissions and high fuel economy to “do their part” for society. Performance includes fuel economy, but is broader including horsepower, torque, acceleration, stopping power, handling, and other qualities. Usually this differentiation characteristic applies to consumers looking for high-powered sport vehicles or light trucks.

The third is technology. With the connectivity trend taking

over the industry, consumers are becoming ever-more concerned with how much technology there is and how easy that technology is to use is in their vehicles. Systems like Ford SYNC, Chevy MyLink, GM OnStar, and others are huge selling points for vehicles. The more technology a manufacturer has and the easier it is to use, the more attractive it is to the consumer.

The fourth and final differentiation quality is design. Whether a

vehicle looks modern or outdated, sporty or luxurious can vary on a consumer to consumer basis. Design also includes the vehicle class or its size. Depending on the consumer and the market, they may prefer a compact car over a light truck and so on.

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2.5 Industry Return on Assets Matrix Figure 4

This matrix gives a general idea of each company’s strategy

within the market. Fiat Chrysler Automobiles (FCA), a European manufacturer seems to practice a cost strategy with a low profit margin and high asset turnover rate. Ford, an American manufacturer, uses both a relatively high asset turnover rate and profit margin in their business strategy. Rather than focus on volume or price to achieve a profit, Ford combines both equally for an excellent overall strategy. General Motors (GM), another American manufacturer, seems to have the same strategy, but with even higher figures. This could explain why they have a bigger market share in the United States than Ford (see Figure 3). Hyundai, a Korean manufacturer, has a very high profit margin with a relatively low asset turnover rate. This could be a differentiation strategy because even though they do not sell many vehicles, each vehicle they sell is unique. Unique in the sense that the consumer owns a vehicle not many other consumers own. This uniqueness differentiates their vehicles in the industry. Toyota, a Japanese manufacturer, has about the same asset turnover rate as Hyundai, but with a higher profit margin. In Toyota’s case, their profit margin is due to their ability to minimize costs in production. This differentiates them in the industry from a company perspective. Add in the dependability of their vehicles and Toyota differentiates themselves from a business perspective and from a product perspective.

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2.6 Industry Trends (see Exhibit 3 for percentages) KPMG released results of a survey asking executives in the

automotive industry about various topics about the industry. These executive positions ranged from Business Unit/Functional Manager all the way to CEO/President/Chairman (see Exhibit 4). They also differed in what part of the industry they worked in (see Exhibit 5). One of these topics was industry trends. Respondents were required to list 11 trends in order of importance to manufacturers. The eleven trends were connectivity and digitalization, hybrid electric vehicles, battery electric mobility, market growth in emerging nations, fuel cell electric vehicles, mobility as a service, customer data/big data, platform strategies and modular production systems, autonomous and self-driving cars, downsizing and optimization of the ICE, and rationalization of production in Western Europe.

The trend of connectivity and digitalization refers to the

technology being implemented in vehicles. As stated before, consumers are becoming more and more concerned with the amount of technology in their vehicles. This includes infotainment, safety, interaction, interior, and much more. Infotainment systems like Ford SYNC allow consumers to download their phone’s contacts and music to the vehicle’s hard drive. Safety features like blind sport detectors and lane sensors make driving safely much easier. Interactive features like BMW’s gesture control gives the driver a whole new way to interact and control their vehicle’s infotainment system. Massive GPS screens, digital gauges, and pressure buttons instead of knobs give the interior of a vehicle an almost futuristic look and enhance their experience while inside the vehicle. This trend is starting to take flight and will continue to grow if the technology industry continues to grow.

The trend of hybrid electric vehicles refers to manufacturers

improving their hybrid electric vehicle powertrains. Hybrids are beginning to have huge success, especially in urban areas. They are also beginning to diversify. There are now plug-in hybrid vehicles which you can charge. With ICEs improving their fuel economy, hybrid vehicles are beginning to see more competition form ICEs. This requires manufacturers to focus on improving their hybrid systems to have an edge against the fuel economy of ICEs.

The battery electric vehicles trend refers to manufacturers

improving their battery-powered vehicles. These include vehicles like the Nissan Leaf, the Chevy Volt, the Chevy bolt, Tesla Model X

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and S, and many others. Since Tesla released the Model S, battery powered vehicles have become much more popular. However, Tesla has captured most of the market share in the battery-powered vehicles market due to their high range. This is forcing companies to improve the range of their battery-powered vehicles to capture more sales.

The market growth in emerging nations trends refers to

investing in the growth in emerging nations. Countries like India, Brazil, Russia, Thailand, etc. are beginning to grow economically which gives the automotive industry an opportunity to realize the high sales as the GDP per capita rises. The problem is these nations are still developing, have large income gaps, and are constantly changing. These pose issues to manufacturers when they want to make factory investments or establish joint ventures in these countries. Analyzing the risk versus return of these markets is crucial to determining the value of any investment to be made in them.

The mobility as a service trend refers to vehicle sharing in

developed nations. There is a trend arising where consumers would rather have a car for a specific purpose rather than owning a car. Start-up companies around the globe are beginning to be created for short-term rentals to fill this need. Consumers use an application on their smart phone to reserve a car for a short period, pick it up at a vehicle lot or on the street, then return the car to a vehicle lot or on the street. This service allows consumers to rent cars quickly and for short periods of time. It also allows consumers to rent various types of vehicles frequently for many different purposes. Manufacturers are beginning to release these services. GM released Maven in January of 2016 in Detroit, Michigan and Ford released GoDrive in London in 2015. If this service continues to grow, it will change the business strategy of manufacturers.

The customer data/big data trend refers to companies using

integrated enterprise systems to gather data on their customers to help with marketing, sales, and research strategies. As vehicles become more connected, businesses can gather more data on the behavior of their customers. Using various data can help companies to develop better products and target their customers better.

The platform strategies and modular production systems trend

refers to improving production by making an almost universal platform to manufacture vehicles. Using modular platforms has been around since the 1960s. However, the biggest change

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occurred at the turn of the century when technology was developed to make a platform that could be used for various models within the same segment. Today, the trend is further expanding platforms to be able to produce different models from different segments on the same platform. This will greatly reduce costs and improve productivity.

The autonomous and self-driving cars trend refers to

companies investing in autonomous vehicle technology. Semi-autonomous technology has been around for a few years now. The first was Ford to implement their park-assist technology in 2009. This technology will parallel park your car for you. Automotive manufacturers, nowadays, are not the only ones looking to develop this technology. Apple and Google are both investing in this technology in the hopes of being an owner of a part of the technology to sell to automotive manufacturers. This technology is still young because the regulation infrastructure is not in place. The recent Tesla crash was when the driving was using their autonomous vehicle technology. The question was raised whether it was the driver’s fault or the car’s fault. Until these types of regulations are in place, this technology will not see monetary returns.

The downsizing and optimization of the ICE trend refers to

making ICEs compliant with tightening fuel economy restrictions. As fuel economy restrictions rise and alternative fuel vehicles are being developed and improved, manufacturers must improve the ICE to make them competitive and legal. As mentioned previously, this is requiring companies to spend large amounts of money and effort in R&D.

The last trend, the rationalization of production in Western

Europe, refers to how to deal with the financial situation that is plaguing Western Europe. As mentioned before, the automotive industry is being held back from local economies nearing recession. Companies need to begin to consider their investment strategy in Western Europe as the industry begins to slow down in the region.

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3 Company Overview 3.1 Ford Motor Company

3.1.1 History Ford Motor Company is among one of the original American

automotive companies. It was established in 1903 by Henry Ford after he left Detroit Motor Company. In 1908 the Model T was invented and became an instant success for its reliability and low cost. In 1913, the assembly line was invented and helped Ford to supply the military with vehicles for World War I. In 1936, the Lincoln brand was created with the introduction of the Lincoln Zephyr as the luxury car for Ford. Then in 1938, the Mercury brand was established to be the medium-priced brand of Ford. Finally, in 1956 Ford released their Initial Public Offering (IPO).

3.1.2 Description

Ford Motor Company is an American automotive Original Equipment Manufacturer (OEM). Its brands include Ford and Lincoln. Lincoln is the luxury brand of Ford. They are organized into only two departments: Automotive and Ford Credit. Ford Credit is the financial services division of Ford Motor Company. In 2015, they reported revenues of $149.558 billion, a net income of $7.371 billion, and Research and Development (R&D) expenditures of $6.7 billion. Currently, their R&D is focused primarily on autonomous and semi-autonomous technology, smart mobility, and big data and analytics.

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3.1.3 Composition of Sales Figure 4

Between its two divisions, Ford gains most of its revenue from

its automotive division. Regionally, about two-thirds of their sales originate in North America. However, about one-fifth of their sales originate from Europe alone. The other sales originate from South America, Middle East and Africa, and Asia-Pacific.

Automotive94%

Ford Credit6%

Ford Composition of Sales

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Figure 5

3.1.4 Return on Assets Matrix

Figure 6

Over the last three years, Ford has had different strategies

based on their profit margin and asset turnover rate. In 2013, they had an extremely effective competitive strategy with a high profit margin and asset turnover rate. In 2014, however, their strategy

North America

65%

South America

4%

Europe20%

Middle East & Africa

3%

Asia Pacific8%

FORD AUTOMOTIVE REGIONAL SALES BREAKDOWN

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seemed to fail with a very low profit margin and asset turnover rate. Then, in 2015 they improved and began differentiate themselves again in the market with a decent profit margin and high asset turnover rate.

3.1.5 SWOT Matrix (see Exhibit 6)

Ford’s major strengths lie within their F-series trucks, EcoBoost technology, and Information Technology (IT). The F-series trucks include the F-150, F-250, and F-350 models. These are light trucks who are always among the best in their class. The F-150, especially, is one of the most highly awarded vehicles in its class and is almost always the most sold truck in its class in the United States. Their second strength is their EcoBoost technology. It uses turbochargers and direct injection to reduce the size of the engine, improve fuel economy, and increase power. They deliver 30% more horsepower and 15% better fuel economy than their naturally aspirated and larger displacement (cylinder volume) counterparts. Their final strength is their information technology. During the financial crisis of 2008, Ford focused on IT to cut costs and raise efficiency in production. Thus, Ford was not a part of the government automotive industry bailout. Today, their IT has helped them to develop industry leading technology in mobility and connectivity.

Ford’s weaknesses are in their Lincoln brand and their Asia-

Pacific sales. Even though the luxury car market is declining in the United States, Lincoln is declining faster. Therefore, even though the luxury car market has not been doing as well, Ford can still improve their luxury brand. Ford’s other weakness is their Asia-Pacific presence. With Asia, especially Southeast Asia, growing economically, Ford has not been as competitive as they should be with only 8% of their sales originating from Asia-Pacific.

Ford’s opportunities lie in fuel cell technology and emerging

markets. Fuel cell technology is becoming a popular trend in the automotive industry. However, Ford has not yet developed this technology. Even if they do not use it in their vehicles, it can be used in other industries such as aerospace. Another opportunity for Ford is in emerging nations. With developing nations rising in Gross Domestic Product (GDP) and GDP per capita, people are beginning to have and spend more money. Due to this, Ford has a chance to capture more sales in these nations with growing economies.

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Ford’s threats are possible recession in European markets and other diesel engines taking over Ford’s Power Stroke engine. Even though the European Union has mostly recovered from the recession, local economies like Spain and Greece are nearing recession. This is causing automobile sales to not grow. Given that 20% of Ford’s sales originate from Europe, this could be a huge threat to revenues and net income. Another threat is other diesel engines outperforming Ford’s Power Stroke engine. Since the implementation of Ford’s EcoBoost technology, they have focused primarily on developing its ICE technology and turned away from diesel. However, companies like FCA and their Ram brand have invested in diesel. Ram recently released their EcoDiesel powertrain light truck model. This 6-cylinder diesel powertrain gives the vehicle the fuel economy of a small 6-cylinder vehicle, but the power of an 8-cylinder vehicle. The EcoDiesel outperforms the F-150’s EcoBoost 6-cylinder engine by 4 MPG. Even though the EcoDiesel in the same class as the F-150, diesel enthusiasts could switch to the EcoDiesel for its fuel economy.

3.1.6 Opportunity Matrix

Figure 7

Ford’s opportunities can be divided into opportunities of high

or low attractiveness of the business to Ford or high or low fitting of the business to Ford.

Opportunities with high attractiveness and fitting to Ford are the Power Stroke engine and their Lincoln brand. Ford has the technology to improve their Power Stroke engine. Also, they have the knowledge of the industry to improve their Lincoln brand.

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An opportunity with low attractiveness and high fitting to Ford is in emerging markets. This opportunity fits Ford because it is just a matter of marketing and/or tailoring their products to certain markets. However, these emerging nations, even though growing, are a bit unstable. This makes them riskier than other opportunities.

An opportunity with high attractiveness, but low fitting to Ford

is vehicle sharing and fuel cell technology. Vehicle sharing has been around since the early 2010s and has been growing ever since. Ford has launched a pilot program called GoDrive in London. However, they have not done so in the United States. Other companies like GM have released pilot programs in Detroit and other major cities in the United States. This opportunity is of low fitting to Ford’s business because they would not lease or sell these vehicles. Essentially, they would be renting these vehicles. This is outside their current business model. Fuel cell technology has not become very popular for consumers and does not have the infrastructure to support it (i.e. hydrogen gas pumps to refuel vehicles). On the other hand, this technology has been developed by companies like Toyota. Therefore, it fits Ford’s business because it can be developed to be a workable powertrain for a vehicle.

3.1.7 Threat Matrix

Figure 8

The threats of Ford can be categorized into threats soon to

affect Ford or could later affect Ford with either high or low impact. Threats of most concern to Ford with high impact and could

affect Ford soon are their Power Stroke engine, their Lincoln brand,

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and the European economies. There is already a diesel engine competitor to Ford’s Power Stroke diesel engine making the threat immediate. Its impact may not be fully realized now, but if not dealt with can cause a significant impact to Ford’s sales. Lincoln is already having an impact on Ford with low sales and only two vehicles selling out of their entire lineup of models. This is an already present threat and having a high impact on Ford’s business. The European economies like Greece and Spain are nearing recession. They have been on this path for years now. It is only a matter of time before they enter recession and begin to affect Ford’s sales.

A threat to soon impact Ford, but with a low degree of

impact is the increasing of fuel economy restrictions. In the United States and Europe, the average MPG for vehicles will increase to 60 MPG in less than 10 years. However, Ford and most automotive OEM’s have the technology to increase their fuel economy to reach these restrictions.

3.1.8 SWOT Strategy Matrix

Figure 9

Ford’s current and potential strategies can be broken down

into either strength/opportunity (SO), strength/threat (ST), and weakness/opportunity (WO) strategies.

Ford’s SO strategies are their ICEs and the Ford Smart Mobility

Plan. Ford’s ICEs have been improved with the introduction of the hybrid feature, the reduction in size of the ICE itself, and their EcoBoost technology. The Ford Smart Mobility Plan entails focusing on five areas: connectivity, mobility, autonomous vehicles, customer experience, and data analytics. To oversee these efforts

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Ford has created a subsidiary company called Ford Smart Mobility, LLC with the purpose of partnering with start-up and established technology companies to pursue these interests. Connectivity is focused on connecting consumers with their world (i.e. infotainment). Mobility is focused on developing more efficient and sustainable ways to move. Autonomous vehicles are focused on helping people to drive when they want to or when they cannot. Customer experience is focused on solving mobility problems and delivering great experiences. Data analytics is focused on unlocking the potential of data to anticipate and customize customer needs.

Ford’s ST strategy is improving their Power Stroke engine. This is

a possible strategy for Ford to improve sales of their F-250 and F-350 models. The Power Stroke engine is a strength because of its long-standing history in the company.

Ford’s WO strategy would be to improve their Lincoln brand.

Efforts have been made with the introduction of the MKC model in 2015. However, this model is the only model who is having significant sales for Ford. Their other models can either be improved or divested to improve the brand and increase sales.

3.2 General Motor Company 3.2.1 History

General Motors (GM) has one of the richest histories in the automotive industry. GM originally began with David Dunbar Buick when he established the Buick brand in 1903. However, in 1904 William Durant took over Buick and then created GM in 1908. Durant’s vision was to compete with Ford by offering a car to fit every type of person. To do this, he began to acquire various manufacturers and suppliers. He acquired Old Mobile Works and half of Oakland Motor Company in 1908. In 1909, he acquired Cadillac and Rapid Motor Vehicle Company (Pontiac). Within the first two years, Durant acquired 30 companies with 11 of these companies being manufacturers. In 1911, Durant was forced out of GM for his high amounts of spending in acquisitions. In the same year, he created Chevrolet. He then built up enough power to retake GM in 1916. He then began acquiring more companies. Then, again in 1920 he was forced out of GM for the same reason. Today, GM remains to have the same purpose. This is to have a diverse brand portfolio to give consumers choices over Ford’s narrow portfolio.

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3.2.2 Description

GM is one of the original American automotive OEMs with various brands spread across the globe. Contrary to Ford, GM has many brands including Cadillac, Chevrolet, Buick, and GMC. GM also has brands tailored for specific markets including Opel for the German market, Holden for the Australian market, Vauxhall for the British market, and 3 Chinese companies for Chinese market. Unlike Ford, GM has different departments for each region including GMNA for North America, GMSA for South America, GME for Europe, and GMIO for International Operations (other regions). They also have a financial services department called GM Financial. GM had revenues of $152.356 billion, net income of $9.615 billion, and R&D spending of $7.5 billion in 2015. Their R&D is focused on clean energy; vehicle connectivity; advanced materials; sensors, processors, and memory; and manufacturing technology (see Exhibit 7).

3.2.3 Composition of Sales

Figure 10

Automotive96%

GM Financial

4%

GM Composition of Sales

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Figure 11

Between GM Automotive and GM Financial, automotive

makes up almost 100% of the sales. Contrary to Ford, GM divides its global regions into only 4 segments whereas Ford has 5 different segments. GM North America (GMNA) has the biggest part of sales with almost three-fourth of sales originating from them. This is a large dependency on North American sales. GM Europe (GME) has a smaller portion of sales than Ford’s European sales. This is the same for GM’s South American (GMSA) sales as well. Compared to Ford’s Asia-Pacific and Middle East and Africa sales portion, GM ‘s International Operations (GMIO) has 2% less of total sales. This shows a low capture of the emerging nations’ markets.

GMNA73%

GME13%

GMIO9%

GMSA5%

GM AUTOMOTIVE REGIONAL SALES BREAKDOWN

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3.2.4 Return on Assets Matrix Figure 12

Compared to Ford, GM has a relatively stable market

strategy per their profit margin and asset turnover rate. For 2013 and 2014, GM maintained a relatively low profit margin with a high asset turnover rate. This represents a cost-focused strategy. However, in 2015 GM almost doubled their profit margin while maintaining a high asset turnover rate.

From 2013 to 2015 GM maintained a substantially higher asset

turnover rate than Ford. Also, contrary to Ford, GM maintained a relatively consistent profit margin with its highest being in 2015 whereas Ford’s was in 2014.

3.2.5 SWOT Matrix (see Exhibit 8)

GM’s strengths lie in their Chevy Volt model and on their OnStar system. The Chevy Volt is a unique vehicle. Its uniqueness is derived from its powertrain. It combines electric fuel with gasoline fuel. However, instead of an ICE, it has an electric generator to power the battery when it reaches 30% capacity. No other vehicle on the market uses this combination. Hybrids are similar, but use an ICE in tandem with the battery. Electric cars have a battery, but only a battery. They have no alternate power source. This makes the Volt extremely desirable for consumers who want an electric vehicle, but do want to be dependent on electricity completely.

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OnStar is also something unique to GM. GM uses OnStar as an integrated system. Using a button on your rear-view mirror, you can call OnStar for road support, traffic information, and other information. Also, if you are in an accident, OnStar will call you to see if you are injured and require emergency services. This service gives every GM vehicle a feature not offered by any other competitor.

GM’s weakness lies in their global presence. Rather than

Ford’s 60%-40% spread between North America and international sales, GM has a 70%-30% spread. This makes GM more reliant on North American sales than Ford. With most of those sales originating in the United States and this market in declining growth, GM needs to reconsider how much they depend on North America.

GM’s opportunities lie in their ICE’s and emerging nations.

GM’s ICEs have not been updated to increase efficiency for a while now. For example, a 2012 Dodge Avenger with a large 6-cylinder ICE has the same fuel economy of any 2016 Chevy model with a 4-cylinder ICE. Due to this, consumers who do not want to spend the money on more fuel-efficient technology (i.e. hybrids, electric vehicles, etc.), but want a fuel-efficient vehicle will go to other brands for better fuel economy. With global presence being a weakness of GM, emerging markets give them an opportunity to make it a strength. They already are a step in the right direction by tailoring brands to specific markets (Opel, Vauxhall, etc.). They now need to utilize those brands to capture the growth in those and other markets.

GM’s threats are other ICEs taking GM’s market share and

GM’s ICEs not being updated fast enough to meet the tightening fuel economy restrictions. Since their ICEs are among the lowest when it comes to fuel economy, other ICEs could take their market share as competitor ICEs begin to improve even more. Also, if GM cannot update their engines fast enough to meet with the rapidly increasing restrictions on fuel economy they will not be able to compete in the market at all.

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3.2.6 Opportunity Matrix

Figure 13

GM’s opportunities can be grouped into categories of

high/low attractiveness of the business with high/low fitting to the business of GM.

An opportunity with high attractiveness and high fitting to

GM’s business is their ICEs. As discussed prior, their ICEs need to be updated to be competitive and to guarantee they meet future restrictions. If they are improved, this could boost their sales and increase their market share even further.

Opportunities with high attractiveness, but low fitting to GM’s

business are vehicle sharing and autonomous vehicle technology. Vehicle sharing is different from GM’s business because they would not be selling or leasing their vehicles. They would essentially be renting them out to consumers at an hourly rate. As of now, they have released 3 vehicle sharing pilot programs: CarUnity in Germany, Let’s Drive NYC in New York City, and Maven in Detroit. With the vehicle sharing market growing, they have a huge advantage already starting these programs. Autonomous vehicle technology is a bit outside the scope of an automotive manufacturer. To compensate for that, GM and other OEMs who are investing in this technology are working with established and start-up technology companies to develop the technology.

An opportunity with low attractiveness, but high fitting for

GM’s business is investing in emerging nations. The brand portfolio of GM is already established to handle multiple brands. This makes it easier for GM to enter emerging nations’ markets with a tailored

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brand for any market. However, because emerging nation are a bit unstable, it poses a risk for GM since they would have to make large and long-standing investments to enter the markets.

3.2.7 Threat Matrix

Figure 14

GM’s threats can be grouped into categories of high/low

impact and whether they will impact GM sooner or later. A threat for GM with high impact and could impact them

soon are more fuel efficient ICEs taking their market share. As mentioned above, there are already more fuel-efficient ICEs on the market. If consumers begin to demand the more fuel-efficient ICEs, then GM would be at a competitive disadvantage.

A threat with high impact, but would affect GM later is their

ICEs not meeting fuel economy standards. As of now, they meet the standard because there are still being sold. However, as restrictions begin to rise it will be more difficult for manufacturers to keep up. Since GM is already behind on the ICE fuel economy, it poses a future threat.

A threat with low impact, but could impact GM soon is Ford’s

C-Max SolarEnergi concept model. This vehicle is supposed to be a 2017 model. However, as the end of 2016 nears there has not been a lot of press about its release. This is a sign it may not enter the market as planned. Even if it does enter the market, this vehicle will be like fuel cell technology. It will not have a huge impact on the market because consumers do not trust the technology.

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A threat with low impact and would impact GM later is the

growth of the vehicle sharing industry. This industry is relatively new and is experiencing some growth. However, since gasoline is cheap and it is relatively cheap to own a car in most of the North America (the United States), this industry may not hit the auto industry very hard. Even if vehicle sharing develops to be strong, companies still need vehicles to offer to their customers. Therefore, manufacturers will still have sales. Possibly more leases than full ownership, but sales nonetheless.

3.2.8 SWOT Strategy Matrix

Figure 15

GM’s current and potential strategies can be grouped into 2

categories: strength/opportunity (SO) and weakness/opportunity (WO) strategies.

GM’s SO strategy is their vehicle sharing pilots. With members

of vehicle sharing companies reaching almost 5 million people and a membership growth rate of 64% in October of 2014 worldwide, vehicle sharing is becoming a popular trend. Since GM already has pilots in Europe and North America (the two biggest regions for vehicle sharing), they already have a position in the market. If they fully utilize their pilot programs, they could capture a large portion of this growing industry.

GM’s WO strategies are their global presence, autonomous

technology, and production technology. As discussed before, GM has a low presence outside North America. With emerging nations growing, there is an opportunity to improve their global presence.

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Currently, one of the focuses of GM’s R&D is autonomous technology. Since they have not released any autonomous technology yet as opposed to other manufacturers, they are behind in the market. With the technology already released, they know it will be accepted by consumers. They only must make sure they perfect the technology before they release it. In production, they are investing in mixed materials to reduce the weight of their vehicles to improve fuel economy and performance. To do this, they have patented an industry-first, spot-welding process to be able to weld aluminum and steel.

4 Drivers 4.1 Earning Drivers

4.1.1 Regional Sales Figure 16

Figure 17

$0.00$10,000.00$20,000.00$30,000.00$40,000.00$50,000.00$60,000.00$70,000.00$80,000.00$90,000.00

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South America

Europe Middle East & Africa

Asia-Pacific

Ford Credit

2013 86,500 10,800 27,300 4,500 10,300 7,548 2014 82,400 8,800 29,500 4,400 10,700 8,295 2015 91,900 5,800 28,200 4,000 10,700 8,922

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FORD REGIONAL SALES

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Regional sales for both Ford and GM follow the same trend

for North America, South America, and Europe. As we can see in Figures 16 and 17, both companies North American sales are the highest compared to every other region. Ford has had more trouble maintaining sales growth whereas GM has achieved positive sales growth since 2013 with 6.4% growth from 2013 to 2014 and 5.4% from 2014 to 2015. This growth could be attributed to gaining more sales in the growing Mexican market. South American sales have been decreasing for both companies. Ford had a decrease of about 23% from 2013 to 2014 while GMSA sales decreased by about 20%. From 2014 to 2015 Ford South American sales decreased by 34% and GMSA sales decreased by 40%. Europe had an increase in sales for both companies from 2013 to 2014. However, it decreased to the lowest sales over the last three years in 2015. Where both countries differ is in other regions. Ford separates their sales for the Middle-East and Africa (MEA) and Asia-Pacific (APAC) while GM combines both regions into their International Operations (GMIO). Ford’s MEA sales have been steadily declining since 2013 by an average of about 6% per year. Their APAC sales increased in 2014 by about 4% and then remained stable into 2015. On the other hand, GMIO’s sales have been declining since 2013 by an average of about 17% per year.

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GMNA GMSA GME GMIO GM Financial & Corporate

& Eliminations

2013 95,099 16,478 21,962 18,411 3,477 2014 101,199 13,115 22,235 14,392 4,988 2015 106,622 7,820 18,704 12,626 6,584

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Both companies’ financial divisions have seen sales growth since 2013.

4.1.2 Operating Profit

Figure 18

Ford’s regional operating profits are dominated by North

America making up, on average, about 93% of all operating profits. South America has been losing money over the last three years due to the instability of the markets.

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2013 8,823 (32) (1,447) (7) 330 1,301 2014 7,416 (1,162) (590) (22.0) 589 1,417 2015 9,374 (835) 254 32.0 760 1,624

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FORD REGIONAL OPERATING PROFIT

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Figure 19

As shown above, Europe, even though sales have been

declining, has been becoming more profitable. From 2013 to 2014 sales increased by 8% while operating profit increased by 59%. On the other hand, from 2014 to 2015, sales decreased by 4% and operating profit still grew by 143%. This could be due to a premiumization in the market and/or low operating leverage. With sales declining, profits could be increasing because they are selling more cars with higher profit margins. Low operating leverage could also explain this trend because with low operating leverage, if this region sells less, they are more profitable due to the decreasing variable costs as production increases.

2013 2014 2015Sales 27,300 29,500 28,200 Operating Profit (1,447) (590) 254

-$1,600.00-$1,400.00-$1,200.00-$1,000.00-$800.00-$600.00-$400.00-$200.00$0.00$200.00$400.00

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OPERATING PROFIT

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Figure 20

Another factoring that could be contributing to lower sales

with higher profits is the decrease of the Ford’s other costs and expenses. From 2013 to 2014 other costs and expenses decreased by 2% and by about 4% from 2014 to 2015. With operating profit increasing at a much faster rate, this decrease in other costs and expenses is not the largest contributing factor to increasing profit. However, since sales for Europe have been relatively stable it still an effect on operating profit.

2013

2014

2015

Other Costs and Expenses 3,068 3,004 2,871

Operating Profit (1,447) (590) 254

-$1,600.00-$1,400.00-$1,200.00-$1,000.00-$800.00-$600.00-$400.00-$200.00$0.00$200.00$400.00$2,750.00

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FORD EUROPE OPERATING PROFIT VS OTHER COSTS & EXPENSES

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Figure 21

The same trend is slightly apparent in the MEA region. From

2013 to 2014 sales decreased by 0.2% and operating profit decreased by 214%. However, when sales decreased by 9% from 2014 to 2015, operating profit increased by 245%. This same trend could be due to premiumization of the industry in this region and/or by this region’s possible low operating leverage.

Figure 22

Also in the MEA, as their operating profit increased from 2014

to 2015, Ford’s other costs and expenses decreased. As mentioned

2013 2014 2015Sales 4,500 4,400 4,000 Operating Profit (7) (22.0) 32.0

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FORD MEA SALES VS OPERATING PROFIT

2013 2014 2015Other Costs and

Expenses 3,068 3,004 2,871

Operating Profit (7) (22.0) 32.0

-$30-$20-$10$0$10$20$30$40$2,750.00

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previously, the decrease in other costs and expenses may not be the major contributing factor to the increase in profitability, but still has an impact.

Figure 23

The APAC region for Ford is also experiencing a similar trend.

From 2013 to 2014, sales increased on by 4% while operating profit increased by 78%. When sales remained flat from 2014 to 2015, operating profit still managed to grow by 29%. Like Ford Europe and MEA regions, this region could also be experiencing a premiumization in their markets and low operating leverage.

2013 2014 2015Sales 10,300 10,700 10,700 Operating Profit 330 589 760

$0.00$100.00$200.00$300.00$400.00$500.00$600.00$700.00$800.00

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FORD APAC SALES VS OPERATING PROFIT

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Figure 24

Also, this increase in operating profit follows a trend of Ford’s

decreasing other costs and expenses just as the European and MEA regions. As said before, this decrease in Ford’s other costs and expenses may not be the only factor contributing to higher profits, but it has an impact on profitability.

2013 2014 2015Other Costs and

Expenses 3,068 3,004 2,871

Operating Profit 330 589 760

$0.00$100.00$200.00$300.00$400.00$500.00$600.00$700.00$800.00$2,750

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Figure 25

GM’s operating profits follow about the same trend as Ford’s.

North America makes up most the total operating profit comprising about 90%. South America is becoming less profitable with operating profit decreasing on average of about 200% per year. Europe has been losing money over the last three years.

Figure 26

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GMNA GMSA GME GMIO GM Financial & Corporate

& Eliminations

2013 7,461 327 (869) 1,255 898 2014 6,603 (180) (1,369) 1,222 803 2015 11,026 (622) (813) 1,397 837

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2013 2014 2015Sales 18,411 14,392 12,626 Operating Profit 1,255 1,222 1,397

$1,100.00$1,150.00$1,200.00$1,250.00$1,300.00$1,350.00$1,400.00$1,450.00

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GMIO SALES VS OPERATING PROFIT

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However, GMIO has remained profitable even though their sales have been declining over the last three years. From 2013 to 2014, sales decreased by about 22% and operating profit decreased by about 3%. On the other hand, when sales decreased from 2014 to 2015 by about 12%, operating profit increased by about 14%. As in the case for Ford in Europe, MEA, and APAC, GMIO could be experiencing a premiumization in their markets along with low operating leverage making them profitable even though sales are decreasing.

Figure 27

Contrary to Ford’s profitability and cost trend, GMIO’s

increase in profits seems to be correlating to the change in Cost of Goods Sold (COGS). As COGS increased by about 2% from 2013 to 2014, operating profit decreased by about 3%. Then when COGS decreased from 2014 to 2015 by about 7% operating profit increased by about 14%. In the case of GMIO, their increasing profitability seems to be correlated with GM’s overall COGS.

2013 2014 2015COGS 134,925 138,082 128,321 Operating Profit 1,255 1,222 1,397

$1,100.00$1,150.00$1,200.00$1,250.00$1,300.00$1,350.00$1,400.00$1,450.00$122,000.00

$124,000.00$126,000.00$128,000.00$130,000.00$132,000.00$134,000.00$136,000.00$138,000.00$140,000.00

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4.1.3 Operating Profit Margin Figure 28

As shown above, Ford’s most profitable region is North

America. Their least profitable area is South America who continues to have a declining operating profit margin. However, Europe, MEA, and APAC have increasing operating profit margins aligning with their increasing operating profits as mentioned previously. Their financial services division has also been experiencing an increase in their operating profit margin.

-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%

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South America

Europe

Middle East & Africa

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Ford Credit

North America

South America Europe

Middle East & Africa

Asia-Pacific Ford Credit

2015 Amount 10.2% -14.4% 0.9% 0.8% 7.1% 18.2% 2014 Amount 9.0% -13.2% -2.0% -0.5% 5.5% 17.1% 2013 Amount 10.2% -0.3% -5.3% -0.15% 3.2% 17.2%

FORD EARNING DRIVERS: OPM

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Figure 29

GM’s operating profit margins distribution is about the same

as Ford’s. GMNA is the most profitable region with an overall growing margin. GMSA has been losing profits since 2013 along with GME. On the other hand, GMIO has been growing in terms of profits along with GM’s financial services division.

-10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

GMNA

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GME

GMIO

GM Financial & Corporate & Eliminations

GMNA GMSA GME GMIO

GM Financial & Corporate

& Elimination

s2015 Amount 10.3% -8.0% -4.3% 11.1% 12.7% 2014 Amount 6.5% -1.4% -6.2% 8.5% 16.1% 2013 Amount 7.8% 2.0% -4.0% 6.8% 25.8%

GM EARNING DRIVERS: OPM

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4.2 Cost Drivers Figure 30

Ford’s cost drivers are those typical of a large manufacturing

company. COGS represents most costs by comprising about 87% of total costs with a peak in 2014. Other costs and expenses have been declining since 2013 at an average rate of about 3% year-over-year.

$0.00$20,000.00$40,000.00$60,000.00$80,000.00

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COGS SG&A Other Costs &

Expenses

Income Tax

2013 120,190 10,850 3,068 2,425 2014 125,025 15,716 3,004 4 2015 124,041 14,999 2,871 2,881

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Figure 31

GM’s cost structure is almost identical to Ford’s. COGS makes

up about 89% on average of total costs per year with a peak in 2014. Contrary to Ford, GM’s SG&A costs decreased from 2013 to 2014 whereas Ford’s increased over this same period. In 2014, both GM and Ford experienced the lowest level of income tax over the last three years. However, GM experienced income tax benefit in 2015.

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Income Tax

2013 134,925 12,382 2,989 2,127 2014 138,082 12,158 4,159 228 2015 128,321 13,405 5,733 (1,897)

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5 Key Financial Ratios 5.1 Free Cash Flow

5.1.1 Ford Motor Company Figure 32

When comparing free cash flow to stock price there is a typical

relationship that should be present. As free cash flow rises, so does stock price and vice versa. From 2013 to 2014 free cash flow increased by about 29% while stock price increased by about 4%. When free cash flow declined from 2014 to 2015 by about 51%, the stock price declined by about 7%. Due to this strong correlation between free cash flow and stock price, we can see that stock price is heavily affected by changes in free cash flow.

2013 2014 2015Free Cash Flow (9,287.00) (6,617.00) (9,992.00) Stock Price 15.14 15.75 14.62

$14.00$14.20$14.40$14.60$14.80$15.00$15.20$15.40$15.60$15.80$16.00

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5.1.2 General Motors Company Figure 33

When we compare GM’s free cash flow to its stock price we see the

same pattern as Ford. One difference, however, is their free cash flow trend. Ford decreased from 2013 to 2014 then increased from 2014 to 2015. On the other hand, GM has had declining free cash flow for the last three years. Compare that to their stock price over the last three years and we see the same, but more intense, correlation as Ford. When free cash flow decreased by about 226% from 2013 to 2014, the stock price increased by about 5%. Then, when free cash flow declined by about 185% from 2014 to 2015, their stock price also declined by about 5%. Comparing free cash flow and stock price we should see that as free cash flow decreases so does the stock price. This is true from 2014 to 2015, but not from 2013 to 2014. Due to this, free cash flow has a weaker effect on stock price for GM than it does for Ford.

2013 2014 2015Free Cash Flow (1,732.00) (5,640.00) (16,057.00)Stock price 33.33 34.95 33.37

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GM: Stock Price vs Free Cash Flow

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5.2 Inventory Turnover 5.2.1 Ford Motor Company

Figure 34

When comparing inventory turnover and stock price for an OEM we

would expect to see as inventor turnover increases, stock price follows. We see this trend over the last three years for Ford. When inventory turnover increased by about 2% from 2013 to 2014, stock price rose by about 4%. When inventory turnover decreased by about 6% from 2014 to 2015 stock price decreased by about 7%. Therefore, inventory turnover does have a huge impact on Ford’s stock price.

2013 2014 2015Inventory Turnover 15.59 15.89 14.91 Stock Price 15.14 15.75 14.62

$14.00$14.20$14.40$14.60$14.80$15.00$15.20$15.40$15.60$15.80$16.00

14.40 14.60 14.80 15.00 15.20 15.40 15.60 15.80 16.00

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5.2.2 General Motors Company Figure 35

GM’s inventory turnover also has an impact on its stock price.

From 2013 to 2014 GM’s inventory turnover increased by about 5% and stock price rose by about 5%. When inventory turnover fell by about 8% from 2014 to 2015, the stock price fell by about 5%. Therefore, inventory turnover has a significant impact on GM’s stock price.

5.3 Return on Equity Matrices 5.3.1 Industry ROE Matrix

Figure 36

2013 2014 2015Inventory Turnover 9.61 10.12 9.32 Stock price 33.33 34.95 33.37

$32.50$33.00$33.50$34.00$34.50$35.00$35.50

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Toyota and Hyundai tend to have lower financial leverage than the other companies, FCA is between GM & Ford in terms of financial leverage and between Toyota and Hyundai and GM and Ford in terms of return on assets, and the GM and Ford have the highest return on assets. In the case of Toyota, their financial leverage is low because of their high equity compared to their total assets. Hyundai has low financial leverage because they have high total assets compared to their equity. FCA has high financial leverage because they have extremely high assets compared to their equity. GM has lower financial leverage than Ford because Ford has higher amounts of assets compared to GM. However, GM has higher equity, which also contributes to their lower financial leverage when compared to Ford.

In terms of return on assets, the Ford and GM have higher

return on assets due to their net income in comparison to their assets. FCA, Toyota, and Hyundai have lower return on assets because its assets are much larger in comparison to their net income.

5.3.2 Ford Motor Company ROE Matrix

Figure 37

Ford’s return on assets decreased due to the changes in their

COGS. From 2013 to 2014 net income fell by about 90% primarily due to an increase of about 4% for COGS. When net income rose from 2014 to 2015, it was also primarily due to COGS fluctuating with

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a decrease of about 0.8%. Due to this, the fluctuations in Ford’s net income affect their return on assets from 2013 to 2015.

Ford’s financial leverage changed over the last three years

primarily due to fluctuations in their shareholder’s equity. From 2013 to 2014 total assets rose by about 3% whereas shareholder’s equity rose by about 53%. This caused the drastic decline in their financial leverage during this period. Also, from 2014 to 2015, Ford’s total assets grew by only about 8% while shareholder’s equity rose by about 17%. Therefore, the primary cause for the changes in financial leverage from 2013 to 2015 for Ford is their rapid increase in shareholder’s equity compared to their increase in total assets.

5.3.3 General Motors Company ROE Matrix

Figure 38

GM’s return on assets fluctuated due to their COGS

fluctuations. From 2013 to 2014, GM’s COGS increased by about 2% causing net income to fall by about 25%. Then from 2014 to 2015 COGS decreased by about 7%, which drove net income to increase by about 139%. Therefore, the fluctuations in GM’s COGS caused their return on assets to change over the last three years.

GM’s financial leverage fluctuated from 2013 to 2015

primarily due to the fluctuations in their shareholder’s equity. Over the past three years, GM’s total assets have increased by about 8%. However, shareholder’s equity decreased by about 39% from 2013

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to 2014 and increased by about 49% from 2014 to 2015. These large changes in shareholder’s equity compared to the small growth of total assets is what caused GM’s financial leverage to increase from 2013 to 2014 and decrease from 2014 to 2015.

6 Basis for Forecast 6.1 Industry (see Exhibit 9)

As we saw in Figure 2, global automotive sales growth has been declining since 2012. However, not every region is following this same trend. Some regions are improving sales growth whereas some regions are declining year after year.

North America will remain relatively stable in terms of sales and

operating profit. This is the most stable automotive market in the world. It is also the largest. Due to this, it has a huge impact on global sales data. If you look at sales data since 2006, the industry has an average sales decline rate of 1.4%. This is mainly due to the high losses during the financial crisis skewing the average. On the other hand, since 2012, the average sales growth rate is 2%. This shows the stability of the market. In fact, 2015 was a record year for the automotive industry in the United States reaching over 17.5 million vehicles sold. However, it is predicted by PwC that after 2015 there is going to be stables sales for the next two years. Mexico is expected to grow. They exceeded expectations in 2015 by selling over 1.3 million vehicles and are expected to reach 1.5 million vehicles by 2021. Due to industry cycles, many new vehicles are going to be released in the next three to four years. Some to consider are the 2017 Chevy Bolt, 2018 Ford F-150, 2019 Cadillac CT8, and more. These could have huge impacts on North American sales because of their anticipation in the market. Also, with the luxury market companies in price wars, operating profit for these vehicles will be heavily dependent on the number of vehicles sold. Overall, the North America market will remain relatively stable in terms of both sales and operating profit.

South America will continue to see declines in sales and operating

profit. Brazil is the largest market for automobiles in South America and it has been declining in sales and operating profit. This is mainly due to the slowing economic growth taking place in Brazil since 2010. If Brazil’s economy continues to shrink and the other surrounding nations remain unstable, sales and operating profit will continue to decline. However, investments are being made into these emerging nations in terms of production. For these investments to be successful, companies need to balance their costs and factory capacity with changing market

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conditions to avoid heavy losses for the next few years. Overall, South American sales will decline along with operating profit if Brazil’s economy is shrinking.

Europe will see a slight decrease in sales, but with an increase in

operating profit. The economies have mostly recovered since the recession. This has helped the European Union see increases in sales since the recession. Premium brands like BMW, Mercedes-Benz, Volkswagen, etc. have captured most of this growth whereas mass market companies like Ford, GM, and FCA are barely achieving profit. Ford achieved positive operating profits in 2015 whereas GM continues to lose money. Europe is having only slight growth because not all the countries have fully recovered since the recession. Countries like France, Spain, Italy, Greece, and Portugal are nearing recession and holding the industry hostage. Also, Brexit is going to make importing cars into Great Britain more expensive therefore increasing costs, which will increase prices. If companies can either increase production inside of Great Britain or target the lower import taxes for parts rather than an assembled vehicle, sales may not be hurt as much. Even if sales decrease, operating profit will still increase for companies with luxury brands. Since operating profits are being achieved in the face of decreasing sales and the premium brands are capturing most of the sales, we see a premiumization happening in Europe. Therefore, the European Union may see a decrease in overall sales, but operating profits will still be achieved for premium brands.

The Middle East and Africa will see a steady increase in overall sales

and an increase in operating profit. The biggest sales improvements are going to be seen in South Africa, Egypt, Iran, and Nigeria. With gas pricing becoming cheaper, mass market companies are beginning to lose sales in the market. However, luxury cars are still growing. The oil money in this region is still present and is keeping the luxury car market growing with its increasing sales. Also, companies are investing in these emerging markets in terms of production like South America. There is expected to be 3 million cars produced in this region by 2021. The biggest factory improvements are expected to be in Egypt, Algeria, Nigeria, and Iran. The only caveat with this is managing the instability of the economies and the many different and unique markets. To compensate, companies will need to have a strong production and distribution presence in the region. Overall, sales will steadily grow along with operating profits.

Finally, APAC will experience slowing sales growth, but with growing

operating profits. From 2001 to 2013, as North America and Europe

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remained stable, this region grew exponentially to having 47.6% of global sales in 2013. This growth is mostly due to companies setting up full-scale production plants in the region to avoid high Completely Built Unit (CBU) or Completely Knocked Down Unit (CKD) import taxes. The biggest market for vehicles in this region is China. China experienced slowing sales growth from 2014 to 2015 from 10% to 7.3%. This follows with China’s slowing economic growth. However, China still says it will achieve sales of 30 million vehicles by 2020. With sales reaching over 21 million in 2015 and slowing sales growth this target may be out of reach. It is even further out of reach if you consider the congestion problem in China. With the license lottery in affect, it is difficult for Chinese consumers to get license plates for their vehicles. As this lottery begins to prevent more and more people from getting license plates, sales growth will continue to decline. Other smaller and growing economies like Thailand will see sales growth, but their size will prevent them from affecting the region. On the other hand, the cars that consumers do purchase are more luxury cars than regular vehicles. With Chinese wealth and Japan’s rich elderly population being most of the licensed drivers in Japan, luxury vehicles are being purchased in the APAC region. Although sales growth may decline, operating profits can still be achieved by selling the more premium vehicles. Overall, this region will see a decrease in sales growth due to China, but an increase in operating profit.

6.2 Ford Motor Company (see Exhibit 10) Overall, Ford will see slight growth in sales due to the release of new

coming models and an increase in connectivity and technology in their vehicles. They will see an increase in operating profit due to premiumization in certain markets. Also, they will experience a decrease in COGS due to the implementation of modular platform strategies in production.

The North American market for Ford will experience a slight increase

in sales growth and operating profit due to the release of new vehicles in the next three years. Many new vehicles will be released, but there are only several that could a have huge impact on North American sales. The first is the 2017 Lincoln Continental, which was released in September 2016. This vehicle was the flagship vehicle for Lincoln while it was in production from 1940 until it was discontinued in 2002 and has returned to retake its position in 2016. Their September sales have reached 775 units in the U.S. With prices from about $45,000 to $70,000, it can compete against its competitors like the Hyundai Genesis G90, which starts at about $68,000. The next two vehicles are the 2018 Mustang GT500 and 2018 Ford Expedition/Lincoln Navigator. The high-powered, unique model

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sports cars like the Mustang GT500 go for a high-price premium and tend to have high sales rates among sports car enthusiasts. This could mostly affect operating profit due to their minimal production volume. The new Ford Expedition/Lincoln Navigator (luxury version of the Expedition) could affect sales and operating profit due to their crossover into two product segments and their refresh. With their size and powertrain, they crossover into the light-truck segment which is always high in the United States. Also, because they are fully enclosed (no truck bed) they crossover into the large SUV segment, which are popular vehicles for families. These vehicles have not been refreshed since 2014, which makes the new releases highly anticipated. Due to their higher price points, they could increase operating profit. Lastly, the 2018 F-150 and 2019 Ranger should increase sales and possibly operating profit from the higher-end models of the F-150 such as the Lariat and Platinum. The light-truck market in the U.S. has always been strong and a remake of the F-150 has never gone without high sales. Also, the Ranger has been discontinued since 2012, but with smaller truck beginning to increases in sales like the Chevrolet Colorado, its release could bring higher sales for Ford. With plenty of new and anticipated vehicle releases for Ford in the coming years, sales should increase and with it should increase operating profit.

The South American market for Ford will continue to see decreases

in sales and operating profit. In Ford’s 2016 second quarter report, they state their South American sales are heavily dependent on Brazil, the largest automotive market in South America. Since Brazil has been seeing an overall slowing of GDP growth since 2010, the automotive market has taken a hit. With GDP growth predicted to continue to decrease, sales of vehicles will follow. Along with GDP growth decreasing, their currency has also been weakening against the dollar. This causes translation losses when Ford converts their earning into their home currency. Also, the increase of investments being made in these emerging nations coupled with the decrease in sales will cause operating profit to continue to decrease.

The European market for Ford will see an increase in sales and in

operating profit. New vehicle releases could possibly help sales to increase along with operating profit. The 2017 Escape and 2018 Fiesta are the best candidates to help sales and operating profit. Per Ford’s 2016 second quarter report, their European sales are affected by SUV sales. With the Escape receiving an exterior redesign, it could help boost sales. The European market tends to favor hatchbacks. These are sedans that have no divide between the trunk and the cabin. If you are to look at the best-selling premium large, midsized, and compact vehicles for the first half of 2016, you will notice they are all hatchbacks. Therefore, with Ford

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releasing the new Fiesta, sales could see an increase. With sales increasing and the premiumization trend showing an increase in sales of higher-margin cars in the European market, operating profit will increase. New vehicles coming to the market and a premiumization of the market, European sales and operating profits will increase in the next three years.

The MEA market for Ford will see a decrease in sales and operating

profit. This is due to the instability of the region in terms of the political and economic environment. Also, with oil prices remaining low, consumers do not see the need to purchase the newer, more fuel-efficient vehicles. As this high instability in the region continues, Ford’s sales and profitability will decline.

The APAC market will see an increase in sales and an increase in

operating profit. As we saw from 2014 to 2015, sales did not change, but operating profit increased by 29%. This shows they are selling more, higher-margin vehicles. This trend, Ford’s sales dependency on China, and the recent pre-sales in China of the all-new Lincoln Continental show a trend towards an increase in sales and operating profit.

6.3 General Motors Company (see Exhibit 10)

The North American region for GM will see an increase in sales and operating profit. This will be mainly due to the release of new and anticipated vehicles. There are several new vehicles coming to the market, but the most influential ones will be the 2017 Chevrolet Bolt, the 2018 Chevrolet Equinox, the 2018 Chevrolet Silverado, and the 2018 Cadillac CT8. The Bolt is highly anticipated due to its powertrain capabilities and new technology. It is a Plug-in Electric Vehicle (PEV) that is supposed to rival the range of a Tesla with about 238 EPA-equivalent MPG. With a price point of about $38,000, it makes this vehicle highly competitive to the Tesla whose prices are mostly over $100,000. New technology is also being introduced to the market through this vehicle. The first is One-Pedal Driving. Basically, instead of losing power as you release the accelerator, it will slow the car down and help to recharge the battery. The brake pedal, however, will still be present if a quick stop is needed. The next technology is not completely new, rather updated from the 2016 Chevrolet Volt. It is called Regen on Demand. This is a paddle behind your steering wheel that you can use to further slow-down the vehicle while generating power for the battery. With other technology, such as available 4G LTE Wi-Fi, accident prevention technology, an enhanced rear-view mirror rear-view camera, an easy-to-use infotainment system, and 25 miles for every hour of charge this

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vehicle is highly anticipated in the market. The next vehicle is the 2018 Equinox. The remake of this vehicle has substantial redesign and feature upgrades for connectivity since the last model, which could help to increase its sales and therefore GM’s sales. The final third vehicle is the Chevrolet Silverado. This vehicle also follows the same argument as a new Ford vehicle, the 2018 F-150. Light-trucks sales are always strong in the United States and when a remake of a light truck is introduced, it usually correlates with higher sales for the company. The final vehicle is the 2019 Cadillac CT8. This will be Cadillac’s new flagship vehicle to show its competitiveness to other luxury-limo manufacturers like Jaguar, BMW, and Mercedes-Benz. This car will be a showcase of Cadillac’s premium styling and technology. If this vehicle lives up to the expectations of the market, we could see a huge increase in sales for GM and since it is a very high-margin vehicle, an increase in operating profit. Since North American sales correlate to its operating profit, with an increase in sales expected to occur with the release of these new vehicles, operating profit will follow.

The South American market will follow the same trend as Ford. South

American sales will continue to decrease along with operating profit. This is due to the dependency on Brazil and its decreasing GDP growth. This trend along with the increase in investments being made in emerging nations in this region will decrease sales along with operating profit.

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Figure 39

The European market for GM will see an increase sales, but an

increase in operating profit. GM’s Great Britain brand Vauxhall is about to release a few new models in late 2016. The noteworthy ones are the Insignia, Mokka, and Meriva. These vehicles could increase sales because they will be introducing new connectivity features not previously offered like OnStar, Apple Play, 4G LTE Wi-Fi, etc. These changes have resulted in an increase of 44,000 for their local brands Opel and Vauxhall in the first three quarters of 2016. If we look at Figure 39 above, we can see that as GM’s Europe division’s (GME) operating profit increases, the company’s overall COGS decreases. From 2013 to 2014 as COGS increased by about 2.3%, GME’s operating profit decreased by about 58%. To add, from 2014 to 2015 as COGS decreased by about 7%, GME’s operating profit increased by about 41%. This shows that the company’s overall COGS can have huge effects on GME’s operating profit. The platform modular systems trend and GM’s patented spot-welding technology will allow the company to reduce their COGS. This, in turn, will increase GME’s operating profit.

GM’s international division (GMIO) will see a decrease in sales, but

an increase in operating profit. This is mainly due to decreasing COGS. With platform modular systems being introduced and GM’s new spot-welding technology being introduced, producing vehicles is becoming cheaper for GM and therefore increasing their operating profit. Since their luxury brands (Cadillac and Buick) are not as preferred as others like BMW and Mercedes-Benz, their sales will continue to decrease. However, with the introduction of the 2019 Cadillac CT8, both their sales and operating

2013 2014 2015COGS 134,925 138,082 128,321 Operating Profit (869) (1,369) (813)

-$1,600.00-$1,400.00-$1,200.00-$1,000.00-$800.00-$600.00-$400.00-$200.00$0.00$122,000

$124,000$126,000$128,000$130,000$132,000$134,000$136,000$138,000$140,000

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profit could increase if this vehicle meets expectations. Overall, sales will continue to decrease and operating profit will increase, but with a possible spike in sales in 2018 when the 2019 Cadillac CT8 will be released.

6.4 Key Figures for Ford and GM (see Exhibit 10) Both Ford and GM will see decreases in COGS and free cash flow

while inventory turnover and return on equity increase. COGS sold will decrease due to the implementation of platform modular systems and, for GM, their patented spot-welding technology. Free cash flow will decrease due to more investments being made in R&D and in emerging nations. Inventory turnover and return on equity will increase because of an increase in North American sales. Since both companies are highly dependent on North America, this increase in sales due to the release of new vehicles will cause their inventory to decrease. This will cause their inventory turnover rate to increase. Also, with this increase in sales, their net income will increase causing their return on equity to increase as well.

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7 Forecasted Figures 7.1 Sales Growth

7.1.1 Ford Motor Company Figure 40

North American sales for Ford will continue to grow. This is due

to their new vehicle releases such as the 2017 Lincoln Continental (released late this year), the 2018 Mustang GT500, the 2018 Ford Expedition/Lincoln Navigator, the 2018 Ford F-150, and the 2019 Ford Ranger. One year of interest is 2017 when Ford will be introducing its new model of the F-150. As discussed before, when a new truck is introduced to the market, sales increase drastically for that brand. With the F-150 being one of the most sold light duty trucks in the market and gas prices remaining low, it will bring higher sales growth than 2016 and 2018. South America will continue to see a decrease in sales due to Brazil’s economy contracting, their currency weakening, and an overall industry slowdown in volume. Europe will see slight increases in sales over the next three years. This is due to Ford’s European Transformation Plan (see Exhibit 11) to

North America

South America Europe

Middle East & Africa

Asia-Pacific

Ford Credit

2016E 4.7% -27.0% -0.4% -3.7% 17.5% 1.0% 2017E 9.0% -28.0% 2.5% -5.0% -1.0% 8.0% 2018E 5.0% -29.0% 3.0% -7.0% 8.0% 8.6%

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Ford Forecasted Sales Growth by Region

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rebrand themselves in Europe and focusing on profitable segments within Europe to reduce the impact of unprofitable segments. However, 2016 will experience a minimal decrease in sales due to the impact of Brexit. Ford adjusted production during the third quarter of 2016 to try and match market demand following Brexit. This adjustment was underestimated, which left dealerships with not enough inventory to meet the market demand. Therefore, they lost potential sales due to a lack of stock. MEA will continue to see a decline in sales due to the political uncertainty, weakening of local currencies, and low oil prices. APAC will see an overall increase in sales over the next three years. For 2016, they have been experiencing a high level of success in the region from a high acceptance rate of their new vehicles. Also, their joint ventures in China have been successful. Over the first three quarters of 2016, their Chinese joint ventures contributed $1.1 billion to the company overall net income of $5.4 billion, which is about 19.5%. Ford Credit will also see an increase in sales.

7.1.2 General Motors Company

Figure 42

GMNA GMSA GME GMIO GM Financial

2016E 10.8% -10.0% 2.7% -7.5% 47.0% 2017E 11.2% -13.0% 3.0% -7.1% 48.0% 2018E 7.0% -15.0% 3.4% -6.7% 49.0%

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GM Forecasted Sales Growth by Region

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North American sales will continue to grow overall. Sales will grow the most in 2017 with the release of the 2018 Chevrolet Silverado. The release of the 2018 Chevrolet Equinox will also impact sales growth. However, sales growth will decline in 2018 due to the release of the 2019 Cadillac CT8 being the only new vehicle being released and it being released in low quantity because of its market segment, large luxury sedan. Increases in sales volume in other countries in the North American region (mainly Mexico) will also impact sales growth. South America will continue to decrease in sales due to Brazil’s contracting economy causing an industry slowdown. GM experienced positive sales growth in the third quarter of this year, which is why their sales growth for 2016 is substantially higher than Ford’s. However, they will still experience a decrease in sales growth thereafter. Europe will begin to see an increase in sales growth due to the new releases of vehicles for their local brands Opel and Vauxhall. GMIO will continue to see a decline in sales, however, this decline in sales will diminish over the next three years due to the popularity of their Buick brand and the release of the 2019 Cadillac CT8 in 2018. GM Financial will continue to see an increase in sales growth.

7.2 Cost of Goods Sold (COGS) 7.2.1 Ford Motor Company

Figure 43 2016E 2017E 2018E

Amount % Amount % Amount %

Sales 154,030 100.0 162,744 100.0 169,616 100.0

COGS 127,075 82.50 134,101 82.40 139,594 82.30

SG&A 15,403 10.00 16,274 10.00 16,962 10.00

Other Costs and Expenses

3,081 2.00 3,255 2.00 3,392 2.00

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Income Tax 3,081 2.00 3,255 2.00 3,392 2.00

COGS for Ford will see an overall decrease in the next three

years as a percentage of sales. From 2013 to 2015 the average COGS as a percentage of sales was 83.8%. As you can see above, COGS will reduce to about 82.5% in 2016 and continue to decrease. This is due to platform strategies and modular production systems reducing cost further as production increases due to sales increasing. Also, there is major cost cutting going on in South America because the region is slowing down in growth. For example, in the first quarter of 2016 Ford cut labor costs down by 20% and salaries and OH down by 10%.

7.2.2 General Motors Company

Figure 44 2016E 2017E 2018E

Amount % Amount % Amount %

Sales 165,742 100.0 182,451 100.0 197,693 100.0

COGS 134,251 81.00 147,603 80.90 159,736 80.80

SG&A 14,917 9.00 16,421 9.00 17,792 9.00

Other Costs & Expenses 6,630 4.00 7,298 4.00 7,908 4.00

Income Tax 2,486 1.50 2,737 1.50 2,965 1.50

COGS for GM will decrease as a percentage of sales over the

next three years due to the implementation of platform strategies and modular production systems along with their patented spot-welding technology discussed previously. From 2013 to 2015 GM’s COGS averaged at about 86.5% of sales. I forecast this to decrease

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to 81% for 2016 and continue to decrease thereafter. With COGS decreasing from 88.6% in 2014 to 84.2% in 2015 while sales only decreased by about 2.3% and their new cost cutting strategies, a decrease to 81% is not out of reach.

7.3 Operating Profit Margin 7.3.1 Ford Motor Company

Figure 45

In North America, Ford will see an increase in their operating

profit margin for the next three years. This is mainly due to the increase in sales. In 2017, I expect the operating profit margin to be higher than 2016 and 2018 due to the launch of the 2018 F-150 and the 2018 Ford Expedition/Lincoln Navigator. These three vehicles are large vehicles and therefore have higher margins. Also, the Ford Expedition and Lincoln Navigator have not been refreshed for about 3 years making these new versions highly anticipated in the market. The 2018 Ford Mustang GT500 will also help their operating profit due to its high margin and popularity in the market. In South

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South America Europe

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Ford Credit

2016E 9.8% -24.2% 4.6% -10.7% 5.3% 17.0% 2017E 12.0% -27.0% 5.6% -12.0% 6.0% 17.3% 2018E 7.0% -30.0% 6.8% -13.0% 6.4% 17.5%

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Ford Forecasted OPM by Region

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America, profitability will decrease due to the worsening economic conditions mentioned in forecasted sales growth. Europe will begin to see an increase in operating profit margin over the next three years. Ford’s European Transformation Strategy has begun to take hold with the market demanding their higher series vehicles. This has helped their operating profit margin to increase to an expected 4.6% for 2016 compared to 2015 when it was 0.9%. MEA will see a decrease in operating profit margin due to the worsening conditions mentioned previously. APAC will see an increase operating profit margin as their Chinese joint ventures continue to be profitable due to new vehicle releases and the government incentive program. Ford Credit will also increase in profitability.

7.3.2 General Motors Company

Figure 46

GM’s operating profit margin for North America will continue

to increase due to expected sales increase. The operating profit margin for 2016 will largely be impact by the increase in Buick sales (3,000 units for the first three quarters) and truck sales (16,000 units

GMNA GMSA GME GMIO GM Financial

2016E 11.1% -5.3% -2.1% 12.2% 12.0% 2017E 11.7% -6.2% -2.7% 12.5% 12.5% 2018E 12.6% -7.0% -3.2% 13.0% 12.7%

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GM Forecasted OPM by Region

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for the first three quarters) in North America. This margin will increase further in 2017 with the release of the 2018 Chevrolet Silverado. Operating profit margin will be the highest in 2018 over the next three years due to the release of the 2019 Cadillac CT8. South America will continue to decrease in profitability due to the industry slowdown in Brazil. Europe will decrease in profitability because even though they are selling more of their local brands, these brands have much lower margins than their other brands. Their international operations, even though decreasing in sales, will increase in profitability due to the premiumization occurring in the market demand with more Cadillacs and Buicks selling. GM Financial will also increase in profitability.

8 Residual Income Model & Upside Potentials & Downside Risks

8.1 Ford Motor Company Based on forecasted growth rates, capital retention rates,

discounted residual income earnings, and current book value equity a residual income model prices Ford’s intrinsic value per share to be at $18.64 (see Exhibits 12 & 13). Compared to the stock price of $12.04 quoted on the New York Stock Exchange on November 25th, it is 55% higher. Due to this, the Ford stock is undervalued in the market.

To further add to the undervalued stock of Ford are some

unquantifiable upside potentials. These include favorable government policies in South America, Ford’s European Transformation Strategy, their car sharing pilots, and Ford’s Smart Mobility Plan. In Ford’s first quarter report of 2016, they mentioned Argentina will be taking favorable steps to improve the economic conditions of the automotive industry. This may help the South American region for Ford, but since Brazil is the major market in the region its impact may only partially offset the struggling Brazilian market. Ford’s European Transformation Strategy, if carried out successfully, could bring higher sales profits than already forecasted. Ford’s car sharing pilots could become a service offered by Ford if the pilots become successful. This could bring Ford a stable revenue stream from membership fees. Finally, Ford’s Smart Mobility Plan could help to add value to their products with more connectivity between a consumer’s vehicle and their outside world (mobile devices) and attract new customers if other competitors do not match Ford’s features.

However, there are some unquantifiable downside risks to consider

when investing in Ford. These are the Brazilian economy, the political and

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economic environment of the MEA region, and the strengthening of the Chinese renminbi and the British pound. As discussed previously, Brazil’s economy is beginning to slow in growth and its currency is weakening causing the automotive industry in the country to slow down. If the government does not act to fix these issues it could bring devastating results for Ford. The MEA region’s instability in their political environment and currencies could worsen and bring devastating results for Ford. If the Chinese renminbi continues to strengthen, costs in China will rise and impact Ford’s margins. If the British pound continues to weaken, it will cause translational exposure as Ford incorporates their European figures into overall company figures.

8.2 General Motors Company Using a residual income model based on overall forecasted sales

growth, capital retention rates, current book equity value, and discounted residual income earnings, my valuation prices GM’s intrinsic value per share at $66.55 (see Exhibits 14 & 15). Compared to the market stock price of GM $34.25 quoted on the New York Stock Exchange on November 25th, it is 94% higher. Due to this, GM in undervalued in the market. However, GM is going through a period of growth, which is inflates their valuation. This growth period will subside and my valuation will decrease. Therefore, this valuation price compared to the stock price should be taken cautiously keeping in mind this period of growth inflates the intrinsic value per share.

To further add to the undervalued GM stock, other unquantifiable

upside potentials must be addressed. These include their R&D investments, their car sharing pilot Maven, and favorable South American policies that will be introduced in the future. GM has invested heavily in R&D to capture a larger competitive edge in the market (see Exhibit 7). These investments could pay off in the future and add value to the company through reduced costs, higher sales, and better margins. Their car sharing pilot program, Maven, could produce favorable results and be offered nationwide giving GM a steady revenue stream through membership fees. Finally, Argentina will be introducing favorable government policies for the automotive industry that could help GM’s position in the South American market.

On the other hand, there are also unquantifiable downside risks that

must be taken into consideration. These include Brazil’s economic situation, the MEA region, fluctuations in major currencies, and GM’s period of growth. As mentioned previously, Brazil is the largest market in the South American region and is experiencing economic contraction.

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This has caused a slowdown in the industry’s sales volume. This could continue and further impact GM’s bottom line. The instability in the political and economic environment in the MEA could worsen and oil prices could remain low. Major currencies for GM could fluctuate in unfavorable ways causing an increase in costs and/or translational exposure. Finally, GM’s period of growth could subside and cause GM to stagnate in the market.

9 Investment Recommendation Based on my corporate analysis and valuation of both Ford and General

Motors, I recommend if you have stock in either Ford or GM to hold your position and if you do not own stock, invest in either company. In the case of Ford, there are many prosperous aspects in Ford’s plans including their Smart Mobility Plan, their European Transformation Strategy, anticipated vehicle releases, and their car sharing pilots around the world. Ford may not be growing as fast as GM, but they will continue to go in the right direction. GM is a valuable company to invest in because this is a period of growth for them and it will continue at least for the next three years. This is shown through their large investments in R&D, their many coming refreshes of their car models, and anticipated vehicle releases such as the 2017 Chevrolet Bolt. However, GM tends to go through period of high growth and then periods of stagnation. Therefore, if you are going to invest or have already invested in GM, I recommend holding your position for a shorter period than Ford due to this fluctuation in growth.

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10 Appendix 10.1 Exhibit 1: List of Automotive Brands in United States

Ø Chevrolet Ø Cadillac Ø GMC Ø Buick Ø Ford Ø Chrysler Ø Toyota Ø Honda Ø Nissan Ø Hyundai Ø Mazda Ø Mitsubishi

Ø Kia Ø Subaru Ø Mercedes-

Benz Ø Volvo Ø Volkswagen Ø Audi Ø BMW Ø Porsche Ø Fiat Ø Tesla Ø Jaguar

Ø Land Rover Ø Alfa Romeo Ø Mini Ø Smart Ø Ferrari Ø Maserati Ø Bentley Ø Lamborghin

i Ø Rolls Royce Ø Maybach

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10.2 Exhibit 2: Five Forces Diagram

10.3 Exhibit 3: KPMG Survey Results for Industry Trends Ø Connectivityanddigitalization-50.1%Ø Hybridelectricvehicles-49.5%Ø Batteryelectricmobility-46.5%Ø Marketgrowthinemergingmarkets-46.3%Ø Fuelcellelectricvehicles-45%Ø Mobilityasaservice-41.8%Ø Customerdata/bigdata-41.1%Ø Platformstrategiesandmodularproductionsystems-38.5%Ø Autonomousandself-drivingcars-37.6%Ø DownsizingandoptimizationofInternalCombustionEngine(ICE)-

36.8%Ø RationalizationofproductioninWesternEurope-29.1%

Intensity of Rivalry

(H)

Bargaining Power of Buyers (H)

Bargaining Power of Suppliers

(M)

Threat of Substitutes

(M)

Barriers to Entry (M)

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10.4 Exhibit 4: KPMG Executive Position Distribution

10.5 Exhibit 5: KPMG Survey Company Type Distribution

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10.6 Exhibit 6: Ford SWOT Matrix

10.7 Exhibit 7: GM R&D Focuses and Purposes Ø Clean energy - advanced propulsion Ø Vehicle connectivity - infotainment Ø Advanced materials - improve fuel economy and

safety Ø Sensors, processors, and memory - autonomous cars Ø Manufacturing technology - improve productivity

and reduce costs

10.8 Exhibit 8: GM SWOT Matrix

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10.9 Exhibit 9: Regional Industry Basis for Forecast Chart

10.10 Exhibit 10: Companies’ Basis for Forecast Chart

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10.11 Exhibit 11: Ford European Tranformation Strategy

European Transformation

Strategy

Product Surge

Introduce new plug-in hybrid, hybrid, and

full-electric technology by 2020

Continue and invest in commercial vehicles and

refreshed Ford Ranger

7 refreshed & new vehicles in

2016

5 new vehicles in next three

years in SUV & crossover segment

Expand upscale Vignale line form 1

to 5 vehicles by 2017

Brand Strengthening

New revenue stream

opportunities in customer

loyalty, fleet and ride services

FordStores FordPass

FordHubs

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10.12 Exhibit 12: Ford Residual Income Valuation

10.13 Exhibit 13: Ford Forecasted Residual Income Earnings

10.14 Exhibit 14: GM Residual Income Valuation

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10.15 Exhibit 15: GM Forecasted Residual Income Earnings

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