TOO BIG TO FAIL!!

Was I the only one who thought that Ford was pronounced as Fird or we have some geniuses reading this blog who made the same mistake? Anyways, in the last blog we talked about Mr. Darwin and his "survival of the fittest" philosophy. Well, you guys are going to get the perfect example of that philosophy in this blog. Mr. Henry Ford commenced business on 16 June 1903. After the LPG policy, Ford Motor company got access to enter one of the biggest consumer markets in the world and entered the Indian markets with a joint venture between the Ford Motor company and Mahindra. 

Under this JV, they launched the Ford escort. Over the years, Ford set up 2 full-scale manufacturing plants which had a capacity to produce 444000 units per annum, a state-of-the-art engine factory, and also developed a deep supplier base that would give them the reach they wanted. And to make its investment pay off ($2 billion over 25 years), ford focused on the mass, sub-4-meter segment for economies of scale. We have already covered the different lengths of cars and how they are taxed in the Kia blog.

https://economicsunbiased.blogspot.com/2022/10/kia-rising-giant.html

 Unlike many multinationals which gave up on diesel, Ford in fact invested in BS6 diesel tech in the belief that India was still a substantially large diesel car market. So, why did Ford fail?  Even after applying similar strategies used by rivals like Hyundai, Ford gave up on the 27 years of unprofitable journey. During 2021-2022, none other than Tata Motors has come forward and bought their plants and factories. Even after focusing on 1 segment, building a deep supplier base, having the brand name and applying strategies like economies of scale, why did Ford India come to an end? 

1. UNDERSTANDING INDIAN CUSTOMERS & HIS WALLET:
          Ford was one of the earliest MNCs to enter Indian markets and still failed to read its customers. Before the LPG policy, there were a mere 2-3 car manufacturers in India which were partly or wholly controlled by the Government of India. What Ford thought was that Indians were starved of different brands for so many years and now that giant Ford has entered our markets, we would go crazy and buy whatever they offer. The failure of Ford escort was a wake-up call for them. Neither did the Escort had power steering nor was it well equipped with power windows for the rear passenger. It came with an old 1.3 LT engine. What Ford realized the hard way was that they just couldn't offer a global product. They will have to design a product that will be tailor-made for Indian customers. Later, when they applied this theory and then when they introduced the Ford IKON, it was an instant hit. The car was spacious and drove like an absolute dream. Later that year, the Ford IKON became the largest selling car in that segment. It's not just the selling part, companies also need to offer amazing after-sales services. The Ford IKON become an expensive toy to maintain. Simply changing AC started costing Rs 70000. This impacted the sales as it created a perception in the minds of customers that owning a Ford is very expensive. Hence, there was a drastic fall in sales. This damaged their reputation as well. After collecting all these hard lessons, Ford came to the conclusion that Indians not only wish for an affordable car, but a car that is easy to maintain as well. Hence, after considering these changes, they launched the Ford Figo. The car was an instant success and won the award for the car of the year in 2011. The company sold more than 78000 units. What Ford went on doing was exactly what Gillette does. Gillette sells their razors at dirt cheap prices and then marks up the blade cost. Razors and blades go hand in hand and hence we would go on buying those expensive blades. That's exactly what was happening with Ford. Their cars were cheap, but their spare parts were expensive. By the time they realized this, it was too late. 

2. OVERESTIMATION:   
         Ford was high on Figo's success. The market for this segment was estimated to reach 7 million units. We are talking about 2011-2012. 7 million units was a lot of sales and a lot of money as well. In order to grab that opportunity, Ford went to set up a 2nd state-of-an-art factory in Chennai with an investment of $1 billion which had a capacity to produce 240000 units. Their first factory was already sufficient to produce more than 444000 units per year. The success of Ford EcoSport's fueled the sentiments of the Indian automobile market. However, after the inauguration of the Gujarat factory, the automobile industry started tapering off. 2016 was the year when the automobile industry started feeling the jerks of the dry demand. Now the situation in which Ford was very critical. They had already anticipated the increase in demand and hence went on to expand their existing capacity. Now, there was no demand, and the supply was about to increase. This was a terrible situation for which Ford wasn't ready. 

3. CHASING MARUTI INSTEAD OF SUV MARKET:    
          When we are not able to develop ourselves, we try to drag the person to our level who is performing better. This happens everywhere. Maruti was becoming the favorite brand and hence their volumes were skyrocketing. Maruti was a direct competitor in the sub-4-meter segment, and they were taking Ford's share away. Hence, Ford went heads up against Maruti and launched compact sedans and hatchbacks, which was a big mistake. Just because you want to terminate your opponent, you don't leave your own turf and try to fight with the opponent on their turf. It's like Arjun wanted to kill Karna and instead of shooting bows from his vehicle, he jumps off the vehicle, starts walking towards Karna and then tries shooting bows when he is close to Karna's vehicle. For 35 years, all the major car makers have tried replicating Maruti and have failed. Everyone wants Maruti's formula, which is cheap cars, highly fuel efficient and utterly reliable sold through a well-oiled distribution network. Ford should have focused on making their SUV segment strong as they were the only cars which were in demand. Instead of satisfying the demand, Ford went on to create a new market and forgot the old one. 

4. IRRATIONAL SPENDING:      
         It's not just Ford but all other foreign auto companies screw up the cost structure and hence can never compete with Indian-origin brands. Knowing where to spend and where not to spend is a deft balancing act that only Maruti has mastered. Ford spent huge amounts of money on things that weren't needed and then had to cut corners, where they should have actually increased their spending. Ford spent billions on developing a world class factory in Sanand. Ford tried building their factories exactly like their factories in the US. I guess they forgot the fact that no tornadoes took place in Sanand. Their spending on forklifts was 6-7X that of Tata's and Mahindra's. Just because to meet global standards? Employee costs were also high, which affected the bottom line (profits). Since their operating costs were so high, Ford started cutting corners, like eliminating a few of its cars, just to save cost. Ford also failed to spend money on marketing their successful products. Ford Aspire was a great car but at the same time, Maruti launched the s-cross and Hyundai launched the Creta with a bulk load of marketing. Ford Aspire was left in the corner. 

Lastly, as Ford was losing money, they started decreasing their dealer's margin. You can once not market your products, but you can't take the risk of decreasing the margins of your dealers as they are the ones who sell your products. In short, Ford messed up in a big way and finally was forced to leave our markets in the current year, 2022. 

We have to consider the fact that the automobile is one of the worst businesses to be in. The business is highly dependent upon trends, choices, needs and affordability. These 4 factors change regularly as they can easily be influenced by greed and envy. The sector is highly capital intensive and is cyclical. You might think that SUVs are in demand, so you start manufacturing SUVs, but then when the launch date is near, the air might change to sedans, and you might go bankrupt. In fact, individually, we change our likings so fast. Today I might see a shining Mercedes and now I have fallen in love with sedans. The other day, I might see a shining Range Rover and now I am an SUV guy. It can't be predicted. 

Ford wanted Indians to adjust according to their servings. Well, the matter of the fact is that the company is the one that adjusts itself according to the customer or the market they are in. In order to gain the market share from Maruti, Ford lost its temper and started launching cars according to their competitors and neglected their customer's feedback. Henry Ford once said that it's not the employer who pays the wages. The employer only handles the money. It is the customer who pays the wages. I wish Ford would have worked on imparting these values among themselves instead of going out and launching cars, just to counter their competitors.