Ford Motor Company is an automotive company which sells its products across the six continents. Vehicles of all sorts are sold to the respective dealers and distributors, financed through credit by Ford Credit at a wholesale price. This credit results in Ford Credit paying cash to the respective manufacturer who sells the asset while recognizing a receivable from the dealer’s obligation to pay the purchase price. Once the vehicle is sold to a retail consumer the dealer pays off Ford Credit. This transaction represents an intra company transaction takes place either nationally (in USA) or across a different boundary. Intra-firm trade, also known as ‘transfer prices’ has unique characteristics in helping the organization. Such transactions have helped Ford to reduce costs related to distribution and acquiring of necessary input for companies abroad. (Source: Financial Statements 2007, Multinational Corporations)
There has been intense competition in automobile sector, example Toyota, which has affected the prices of Ford greatly. Japanese and Korean manufacturers have expanded greatly in USA, threatening heavily to reduce the market share of Ford, along with the ease of Korean Won and Japanese Yen against dollar and euro has made them have a major cost advantage on export against Ford Motor Company. Also due to the Block Exemption Regulation in Europe, the prices charged have been under severe pressure. (Source: Financial Statements 2007)
The following is an activity related to Europe which spreads to countries nineteen countries such as England, Italy, France and many more which will directly or indirectly effect the profit of the consolidated balance sheet of Ford Motors Company:- (Source: Financial Statements 2007)
All figures are in millions (W1)
2007
2006
Difference
Income/(Loss) before income taxes
Ford Europe
$744
$371
$373
Special Items but effect the profit
Variable Marketing – change in business practice
($120)
$0
($120)
Personal – reduction programs
($90)
($84)
($6)
Plant Idling/closure
($43)
$0
($43)
From the above working it is clear that the only places where currency will have an effect for the year 2007 are in income before income taxes and personal reduction programs. The following table will show the effect of currency for the year 2007:-
All figures are in millions except for the exchange rates which were calculated below this working (W2)
Income before income taxes
Personal Reduction programs
Figure for the year ended 2007
a = W1
$744
($90)
Average Exchange rate of 2007 (USD/Euro)
b = W3
1.3708
1.3708
Figure in Euros
c = a / b
€ 543
(€ 66)
Figure in Euros after applying 2006 average rate
d = W1/W3
€ 592
(€ 72)
Exchange (loss)/Gain
e = d – c
(€ 50)
€ 6
Total Difference as mentioned above
f = W1
€ 373
(€ 6)
Actual addition/reduction of activities
g = e – f
€ 423
(€ 12)
Even though it seemed as if Europe segment made a profit of only €373 million but in real affect Ford Motor Company made a profit of €423 million. This is due to the fact that Ford Motor Company suffered an exchange loss from last year as figure moved from an average of $1.2558/€ in the year 2006 to an average of $1.3708/€ as shown below.
Calculation of Average Currency for 2 years :- (W3)
2007
2006
USD / EURO
January
1.2999
1.21032
February
1.3083
1.19393
March
1.32459
1.20284
April
1.35129
1.22733
May
1.3515
1.27662
June
1.34206
1.26606
July
1.37214
1.26806
August
1.36259
1.28105
September
1.39099
1.27274
October
1.4233
1.26164
November
1.46817
1.28895
December
1.45517
1.32013
Average
1.3708
1.2558
(Source: Xrates)
References
Ford Motor Company, Financial Statements 2007
http://www.ford.com/doc/2007_ar.pdf,
Multinational Corporations
http://www-old.itcilo.org/actrav/actrav-english/telearn/global/ilo/multinat/multinat.htm
Xrates
http://www.x-rates.com/d/USD/EUR/hist2007.html
