Ford of Britain: A diminishing role in ford of Europe

Eurqm bCn~agement Journal Vol 11, No 4, pp 455-465, 1993 0263.2373193 $6 00 + 0.00 I’rmts,d m Great Britain Pergamon Press Ltd.

Ford of Britain: A Diminishing Ro of Europe w MICHAEL MCDERMOTT, Assistant Director, Umiwsity of Struthclyde

In this paper, Michael McDermott highlights Ford of Britain and its changing role in Ford of Europe’s operations. A review of the literature on foreign direct investment provides a framework for evaluating Ford Motor Company’s current position and future strategy in Europe. This suggests that the company is in decline and in particular, that Ford of Britain has reached a stage where foreign divestment is likely: the Iberian peninsula is emerging as an attractive strategic alternative.

The author concludes that, while the UK is losing its strategic importance as a market and a production base for Ford of Europe, any key decision to divest by the parent company is likely to involve lengthy analysis and therefore give time for public policy-makers to consider possible safeguards.

Introduction Ford Motor Company has plants in 28 countries and a world,-wide workforce of 325,333. In 1992 its turnover just exceeded a record $lOObn, but it also suffered a record loss of $7.4bn (due mainly to an accounting change). Automotive sales amounted to $84.4bn, exceeding the previous record of $82.9bn set in 1989. Nevertheless, a loss of $1.8bn was incurred, an improvement on the previous year’s loss of $3.77bn (see Table 1).

Ford consists of four regional groups: North America, Europe; Latin America; and, Asia-Pacific. During much of the 1980s the North American division incurred heavy losses,. but these were compensated for by the impressive profits achieved by its European operations. Profits of the parent company and Ford of Europe both peaked in 1988 at $5.3bn and $1.45bn, respectively (see Table 2). A major contributor to this success was Ford of Britain. For example, that year Ford of Britain reported profits of f673m (see Table 3). The UK subsidiary’s impressive performance reflected the fact that the UK played a vital role in terms of sales and production.

le in Ford

Strathclyde International Business Unit,

The late 1980s was a boom period for new car sales in Europe, but since then sales have slumped and Europe’s ‘big six’ (i.e. Volkswagen, Fiat, Peugeot, Ford, General Motors and Renault) have seen profits slump, necessitating job losses. The decline in new car sales has been particularly acute in the UK, falling by 21 per cent in 1991 alone (see Figure 1). To compound Ford’s woes, Ford of Britain has suffered disproportionately, especially in fleet sales, where it faces new competition from UK-built Japanese cars (see Figure 2). Until recently, Ford held more than a quarter of the UK car market, but its share for July 1993 was down to just over a fifth. Total new car sales in Europe are expected to shrink again in 1993, by a further 16 per cent to only 11.3m vehicles.

The purpose of this paper is to focus on Ford of Britain and its changing role in Ford of Europe’s operations. Ford of Europe has seen profits slump and in 1991 and 1992 its total losses amounted to $2.4bn. Ford of Britain has been largely responsible for these losses, suffering a loss for the third successive year in 1992.

The paper begins by considering briefly the evolution of Ford’s assembly operations in Europe. It then provides a review of the literature on foreign-owned plant closures, or foreign direct divestment. Since the early 1980s this has been a neglected topic, as the expansionist late 1980s resulted in a plethora of publications examining foreign direct investment from various perspectives (e.g. home country, host country, mode of entry, impact and combinations of these). The review of the foreign direct divestment literature provides the framework for evaluating Ford’s current position and future strategy vis li vis the EC. The paper concludes that the UK is losing its strategic importance as a market and a production base for Ford of Europe. In contrast, the Iberian peninsula especially is emerging as a much more important strategic location on both fronts. In such circumstances, serious doubts must surround Ford’s ability or desire to maintain in the UK two of its six main European assembly facilities, when a seventh is due to open in late 1994 at Setubal, near Lisbon.

EUROPEAN MANAGEMENT JOURNAL Vol 11 No 4 December 1993 455

FORD OF BRITAIN: A DIMINISHING ROLE IN FORD OF EUROPE

Table 1 Ford Motor Company ($ms)

1992

Total Sales 100,132.3 Net (loss)/income (7,385.0) Av. number of employees 325,333

Automotive Sales 84,407.2 Operating (loss)/income (1,775.O) Net (loss)/income (7,385.0)

Source: Ford Annual Reports

7997 1990 1989 1988

88,288.3 97,850.O 96,145.g 92,445.6 (2,258.0) 860.1 3,835.0 5,300.2

331,977 368,547 366,641 358,939

72,050.g 81,844.O 82,879.4 82,193.0 (3,769.l) 315.6 4,251.6 6,611.9 (2,258.0) 860.1 3,174.7 4,608.8

Table 2 Selected Financial Data on Ford of Europe ($ms)

7992 7991

Sales 24,739 24,080 Operating (loss)/income (1,283) (711) Net (loss)/income (1,288) (1,079) Capital Expenditure 1,941 2,055 Average number of employees 109,156 117,689

Source: Ford’s Annual Reports

1990 1989 l,os8

25,735 21,232 21,430 460 1,755 2,185 145 1,190 1,459

2,713 1,915 1,362 126,261 115,500 110,900

Ford of Britain’s Role in Ford of Europe When Ford established its first overseas plant in 1911, it chose the UK for its European production base. In 1925 it again selected the UK when seeking a large, greenfield site with the potential for serving the European market. Thus in 1931 Dagenham was opened. However it had by then already established car assembly operations in other European countries: Belgium (1922), France (1913), Germany (1926), and Spain (1920). Ford thus has a long history of extensive operations throughout Europe, but these operations were essentially country-centred until re-organisation in 1967.

Ford acquired the Dagenham greenfield site in 1925 and the plant opened in 1931. The plant was never intended to serve only the UK market: a key factor in choosing the site was its location on the River Thames, providing access to a deep water port and ease of serving other ports in Europe. However, during the 1930s the German and Italian markets became aggressively nationalistic, supported by local content regulations. Exchange controls and penal tariffs also served to produce an extremely fragmented European car market.

After the war, the European car industry continued to benefit from minimal levels of American and Japanese imports, but within Europe the presence of the General Agreement on Tariffs and Trade saw the progressive removal of protectionism and local content rules. Demand exploded, from 2m cars in 1955 to 9.3m in 1973, just before the first oil shock.

This growth had led Ford to establish other large assembly plants in Europe, including one at Halewood, on Merseyside, which opened in 1963 (see Table 4). The

key advantages of this site were its:

. good port facilities;

. adequate supply of labour;

. scope for expansion; and

. good communications with Dagenham, vital for inter-plant transport.

During the 1960s both UK plants had been assigned key roles as Ford extended its product range. Dagenham was given responsibility for Ford’s first compact car (i.e. the Cortina). Production of the Anglia was transferred from Dagenham to Halewood which also was assigned the Corsair, later replaced by the Capri.

The European market had grown, but so too had competition as a consequence of free trade. Between 1958 and 1974, 27 mergers occurred in the European industry as companies recognised that economies of scale were crucial for survival. For a firm like Ford with plants in several European countries, this led to a switch in strategy from a national responsiveness to a multinational integration policy, the hallmark of which is plant specialisation for a regional rather than a domestic market (Doz, 1976).

Hence in 1967 Ford of Europe was established at Warley, Essex in order to coordinate all the activities of Ford’s 15 national companies. Prior to this Ford’s and the German subsidiaries competed with one another in

456 EUROPEAN MANAGEMENT JOURNAL Vol 11 No 4 December 1993


Table 3 Selected Data on Ford of Britain (fms) -..-

1992 7997 1990 1989 1988 1987 1988 1985 1984 1983

Profit and loss account Turnover UK market Overseas markets

Operating profit/(loss)

Profitl(loss) on ordinary activities before taxation Tax (charge)/credit Profit/(loss) on ordinary actrvities after taxation

Profit/(loss) for the financial year

Dividend

Balance sheet Goodwill Other fixed assets

Current assets Stocks Not receivable from parent company Debtors Cash at bank and in hand Creditors and provisions

Capital and reserves Minority interests

Expenditure on Manufacturing and commercial Contract hire assets Expenditure on assets leased to customers

Vehicle unit sales (000s) UK market Overseas markets

Average employment

3157 3351 4454 4850 4388 3854 3187 2912 2888 2879 2228 2840 3055 1882 1570 1357 1187 1133 1084 908 5383 8191 7509 8732 5938 5211 4374 4045 3752 3585

(201) (523) 136 499 608 295 45 88 (14) 98

(353) (935) (274) 483 673 317 109 160 (1) 16 32 (76) (236) (100) (30) (45) (Z)

178

(36)

(354) (919) (242) 407 437 217 79 115 50 142

(354) (570) (235) 411 436 217 79 115 37 (103)

- - - 451 546 209 306 100 - 39

58 70 1383 1271 _ _ _ _ _ _

2062 2198 2605 2072 1207 1061 964 907 839 836

942 1130 1831 1593 1204 976 1002 818 778 809

- - - - - - 373 816 726 645 2330 2369 2807 2636 2093 1426 1023 853 712 644 310 495 285 288

(5497) (6032) (8213) (6892) (35:) (3~~~) (2:;;) (2:::) (1~~~) (1:::)

205 230 698 968 989 1096 1094 1320 1301 1267

204 228 698 939 979 1090 1094 1320 1301 1267 1 2 29 10 6- -

205 230 698 698 939 1096 1094 1320 1301 1267 _-

241 437 777 559 271 259 244 243 173 199 97 129 110 106 97 39 17 6 l-

152 184 224 173 114 94 105 117 107 111

436 463 614 734 692 673 597 581 579 600 162 214 166 99 87 72 59 79 74 77

598 677 780 833 779 745 656 660 653 677

38 52 60 48 48 47 49 53 59 64

Other fixed assets and creditors and provisions for years prior to 1989 have not been restated to reflect the change in accounting policy for government grants.

third markets, but from 1967 they have worked in partnership in developing new products (e.g. the Fiesta which was launched in 1976), and in terms of the external market they no longer were in competition. However, thev do compete for corporate resources.

This co-ordination of an integrated production network,

comprising six major assembly plants (see Table 4), proved highly successful until recently. This change has resulted, over the years, in a changing role for Ford of Britain. In 1963 Ford of Britain exported more than a quarter of a million cars (i.e. 251,057); by 1986 the figure had fallen to 7,122. The market scope of Ford of Britain was essentially its domestic market. On the one hand,

EUW >PBAN MANAGEMENT JOURNAL Vol 11 No 4 December 1993 457


2,500

2,000

1,500

1,000

500

igure 1 New Car Registrations In the UK, 1980-92

40.00%

35.00%

30.00%

25.00%

20 .OO%

15.00%

10.00%

5.00%

0.00% +

Rover Ford

Group

iQ 1987 El III 1992

Others Peugeot ml

Talbot Vauxhall

Citrden Opel

Source: Datastrean

this narrower focus is open to a negative interpretation, but on the other hand, it was indicative of Ford’s pre- eminent position in the large, and growing UK market.

Since then Dagenham has become increasingly export- oriented with half its vehicle (i.e. cars and commercial vehicles) production going abroad, and has been operating at close to full capacity. This export success also reflects growing demand from Eastern Europe where Ford is yet to establish an assembly plant. On the other hand, Halewood, which during the 1980s had become very much dependent upon the depressed UK market, exported 17 per cent of its total production, including 30,000 Escorts. Nevertheless, it still operated at around half capacity.

In the long run, Ford can be expected to locate assembly close to the source of demand and also achieve higher capacity utilisation in the UK. This has serious implications for one of the two UK assembly facilities.

In 1972, Ford of Britain produced 538,000 cars, but in 1991 it produced just 339,182. A slight recovery was reported in 1992, when 391,412 vehicles were produced, with a growing proportion destined for export markets. An analysis of Table 4 confirms the reduced strategic role of Ford of Britain in terms of product range and capacity.

Whilst Ford was the clear UK market leader in the 198Os, and had a market share of 28.81 per cent in 1987 (see

‘lgure 2 Distribution of UK Market Share by Manufacturer 1



Table 4 Model and Capacity of Ford of Europe’s Assembly Plants

Plant (Country) Date of Model opening

Straight time Capacity’ (1992 Production)

Dagenham (UK) 1931

Halewood (UK) 1963

Cologne (Germany) 1931

Saalouis (Germany) 1970

Genk (Belgium) 1964

Valencia (Spain) 1976

Fiesta 256,860 (213,192)

Escort 279,181 (178,220)

Fiesta; 307,074 Granada (286,072) Fiesta; 304,640 Escort (318,811) Mondeo 450,025

(298,927) Fiesta; 345,408 Escort (310,753)

’ Normal working time (i.e. does not include any over-time) Source: Ford of Europe

Figure 2), its market share has shrunk, and looks set to weaken even further at around 20-22 per cent. To make matters worse, there has been a sharp decline in new UK car sales. Indeed the slump in the UK market has been much more pronounced than that for Europe as a whole.

Moreover in the UK, Ford now has to compete for the first time with Japanese ‘transplants’, not to mention competition from exporters in other Asian countries, namely South Korea and Malaysia which are targeting the IJK market as their beachhead to the EC. The response of European producers has been to retaliate with a stronger sales push in the UK market. Paradoxically, the UK market leader appears ill-prepared to meet such forecful competition. In short, Ford of Britain is losing ground in a declining market where competition is intensifying.

Arguably, recognition of this is implicit in Ford’s decision earlier in 1990 to consolidate Sierra production b> transferring all production of the model from D‘lgenham (introduced there in 1982 when the car was launched) to Genk in Belgium, where the Sierra’s successor, the newly launched Mondeo is currently assembled. For the first time, a new model seen as crucial to Ford’s future is not being assembled at either pl,mt in the UK. On the brighter side, Ford of Britain continues to play a vital role as a component supplier to Genk and other Ford of Europe assembly plants.

Although Ford of Britain has attracted high levels of investment (i.e. f3.4bn during the period 1988-92), Ford’s newest vehicle assembly plants have been established in the Iberian countries - not surprising since Ford’s sales in Southern Europe rise while those in Northern Europe decline. Traditionally, Ford has

relied on Northern Europe, especially the UK and Germany, as its main markets and centres for production. Its recent sales performance and choice of location for new sites suggest that it is focusing increasingly upon Southern Europe. The choice of Setubal, near Lisbon, for its seventh major assembly plant in Europe, confirms that Portugal is now a major competitor for mobile investment in the EC. Ironically, the President of the country’s inward investment attraction agency, Dr Miguel Marques, who secured the Setubal investment, obtained his Doctorate from the University of Glasgow, Scotland, his thesis examining performance evaluation of foreign subsidiaries.

Thus, the competitive environment in the UK has changed dramatically since the mid-1980s. At the moment the political environment favours Ford and the other western producers because the EC has imposed a ceiling on the market share of Japanese producers. Such protectionism is unlikely to last indefinitely.

Within Ford of Europe only Genk and the two UK assembly plants assemble only one car model. Genk is the sole source for the Mondeo, Halewood is the oldest of three plants assembling the Escort, and Dagenham is with Cologne, which also produces the Granada, only one of four sources for the Fiesta. By limiting the two UK assembly operations to relatively low volumes of such models, neither plant can be expected to contribute much to Ford of Europe’s profits. Indeed by exposing these plants to the higher competitive, lower end of the market, where consumers are so price sensitive, then the prospect of losses grows.

In a period of prolonged excess capacity and losses, at least one plant in Europe is vulnerable to closure, and at the moment the UK facilities look particularly precarious. On a broader level, Ford no doubt recogrtises that the most modern plants of its rivals in Europe each have an annual capacity of 500,000 cars, giving them major economies of scale advantages.

Foreign Divestment Revisited Not since the early 1980s (Hood and Young, 1982; Van den Bulcke et al, 1979) have foreign owned plant closures or plant restructurings in the EC provoked such controversy. McDermott (1989) warned then that the main trends in international business during the second half of the 198Os, would lead in the 1990s to a period of major plant closures in Europe resulting in massive job losses. These trends were:

. the huge increase in Japanese foreign direct investment;

. the boom in international acquisitions and mergers; and,

. the emergence of new competition from Asia’s newly industrialising economies.

Already, in 1993 a number of multinationals have transferred production from one EC member country

EUI:OI’EAN MANAGEMENT JOURNAL Vol 11 No 4 December 1993 459


to another. Digital Equipment Corporation transferred ‘hardware’ production from Galway, Ireland to Ayr, Scotland; Hoover (owned by the US MNE Maytag) announced that it was closing its Dijon facility to consolidate production of vacuum cleaners at Cambuslang, Glasgow. At the same time MNEs in the food sector are having to achieve greater economies of scale through further plant specialisation. CPC, best known for its Knorr and Hellman’s brands, transferred production of the former product-line from its Paisley, Scotland operation to the Continent. Nestle also reduced the strategic importance of its Glasgow plant by indirectly transferring production of a leading brand to the Continent. These defensive divestments are likely to be repeated by other multinationals.

The UK and Inward Investment: A Potential Victim of its Own Success? These examples serve to highlight a major challenge facing host country governments in the 199Os, and that is retaining existing inward investors. The UK has been and is very successful in attracting foreign direct investment (fdi) from newly founded firms from the US (e.g. Compaq), the traditional source country, but also investments from new home countries (i.e. Hong Kong, Japan, Singapore, South Korea, Taiwan). However, this very success in securing new sources of investment may now threaten the survival of competitors with long- established UK plants. From a policy-makers’ perspective the cost/benefit analysis of attracting new fdi perhaps needs to consider the possible negative impact of new entrants upon existing investors. On the other hand, from the perspective of a host nation lacking an independent, large, strong indigenous producer, it may be better to secure a presence from firms whose competitive position is rising, rather than seek to support established investors whose position is weakening.

This dilemma confronted the UK during the 198Os, and the policy chosen was to pursue investments by competitors of existing investors. This resulted in first, Nissan and then Toyota, Japan’s top two car producers, selecting the UK for their large greenfield investments, where the top two US car producers also have major assembly plants.

Foreign Divestment Theory and Ford of Europe In comparison to foreign direct investment, foreign divestment has attracted scant attention. Boddewyn (1976) provided the first attempt to identify the causes of foreign divestment. It was based on a random sample of 32 MNEs (21 from the USA, nine European, and two from elsewhere). It noted that ‘poor performance and prospects’ and ‘adverse environmental conditions’ were the main causes of foreign divestment. On the other hand, internal factors (e.g. unsuccessful acquisitions, lack of resources, problems elsewhere in the company,

Table 5 Key Factors Triggering Foreign Divestment

Divestment Factors Percentage of companies mentioning

Poor performance and prospects 94% Adverse environmental conditions 72% Bad acquisitions 34% Lack of strategic fit (peripheral) 34% Lack of managerial fit (too small) 31% Lack of resources 22% Problems elsewhere in the company 19% Bad management 13%

Source: Boddewyn, 1976, p. 12.

and poor management) also cause foreign divestment (see Table 5).

Boddewyn (1983) provides an eclectic theory of foreign divestment which highlights:

. the conditions or pre-requisites for divestment;

. the motivations for divestment; and,

. the precipitating circumstances for divestment.

These are discussed below.

Condition-based Theory Dunning (1979) had developed an eclectic theory of foreign direct investment suggesting that three conditions must all exist for fdi to occur. The MNE must possess ownership-specific advantages (i.e. competitive advantage); it must be more profitable to internalise these advantages within the firm than sell them to external parties; and there needs to be certain benefits in exploiting these advantages outside the home country (i.e. host countries possess location-specific advantages).

By reversing these conditions, Boddewyn (1983) has employed Dunning’s ‘eclectic theory’ to develop a theory of foreign divestment. Modifying his ‘reverse theory’, it can be argued that foreign divestment takes place whenever a firm:

. ceases to possess net competitive advantages over firms of other nationalities; or,

. even if it retains net competitive advantages, it no longer finds it beneficial to ‘internalise’ these advantages,

. the firm no longer finds it profitable to utilise its internalised net competitive advantage in a particular host country.

Whereas Dunning’s eclectic theory of international production demands that all three conditions must exist simultaneously for fdi to occur, in Boddewyn’s ‘reverse theory’, foreign divestment occurs when any one of the above conditions prevails. Spanhel and Johnson (1982)



Table 6 External Environmental Factors Likely to Trigger Forelgn Divestment and their Relevance to Ford of Brltaln and Ford of Europe

Foreign Divestment Factor --

Ford of Britain Ford of Europe

Economic Recession in home or host country markets Rising fuel costs Declining demand Market saturation Increased government controls Growing nationalist sentiments Leftist advances Prcspect of working participation in decision-making process

Technology Advancement in process technology leading to obsolescence of plant and equipment Product development leading to obsolete products

Competitive Changes in industry structure, especially as result of mergers and acquisitions -..-

SocIrce: author using Spanhel and Johnson (1982) framework. J = applicable X :I non-applicable

identify a wide range of environmental factors which mav provoke foreign divestment. These and their relevance to Ford of Britain and Ford of Europe are indicated in Table 6.

This author would contend that Ford’s ownership- specific advantages have been seriously eroded. Moreover, whilst the UK remains an attractive location for recent investors (i.e. Nissan and Toyota), for longer established investors such as Ford, it no longer affords a particularly attractive location, either as a market or as ‘1 major assembly location. General Motors and Peugeot, the other two main foreign producers in the UK, may thus take action to reduce the importance of their IJK operation.

It shculd be borne in mind though that MNEs may tend to ctverstate the importance of external factors such as shareholders and other stakeholders (e.g. employees, got ernments) are more likely to accept meekly foreign divtstment due to factors beyond management control. An MNE is unlikely to publicly blame plant closure upon internal considerations (e.g. lack of investment, poor ma.lagement, ill-conceived acquisitions etc).

Reducing the Barriers to Exit Boddewyn’s theory suggests that while foreign divestment decisions are easier to reach on economic grounds than foreign direct investment decisions, management invariably found the foreign divestment decision very difficult to make (Boddewyn, 1983; Porter, 1976; Spanhel and Boddewyn, 1983; Torneden, 1975; and Wilson, 1980). However, even when changes have

occurred which suggest the need for foreign divestment, ‘barriers to exit’ serve to delay the necessary action being taken. Exit barriers originate from three sources:

. the industry environment (i.e. structural exit barriers);

. corporate strategy (i.e. strategic exit barriers); and

. the decision-making process (i.e. managerial exit barriers).

Thus, foreign divestment decisions are likely to be taken long after the firm recognises the seriousness of its problems. Since ‘barriers to exit’ may delay foreign divestment, it is worthwhile analysing the extent of these barriers in relation to Ford of Europe. As Table 7 demonstrates, Ford has already taken significant steps to overcome such hurdles. The UK assembly plants have had their product range reduced and weakened, and some major recent investments have been in Portugal and Spain, whilst certain proposed investments in the UK have been cancelled or reduced. Equally significant is the appointment of ‘new men’ with no previous connection with European operations, and who can be expected to be ruthlessly objective.

Thackray (1971), noting that some managers often looked upon divestment as almost a betrayal of their employees, discouraged this notion, arguing that the workforce ‘should not be treated as an insurmountable obstacle to the planning and effecting of divestment’. Already Ford of Europe has reduced its automotive workforce (excluding Jaguar) from 115,000 in 1990 to 97,400 by the end of October 1992. By the end of 1993 the workforce will have been reduced to 83,000, down almost a third from the 1990 level.



Table 7 Ford of Europe and ‘Barriers to Exit’

Barrier to exit Overcoming the barrier Ford

Strategic barriers’

plant integration market dependence on particular location production dependence on specific location

profit dependence on particular location

plants with wide product range

Managerial Barriers2

Information-related l decision-makers lack

access to all relevant information due to structural and organisational issues

Conflicting goals management at different levels of the corporate hierarchy have conflicting goals;

exit barriers strongest in plants which have been instrumental to the company’s development; also stronger for greenfield operations, as opposed to acquisitions

.

.

.

.

.

.

.

.

.

.

isolate divestment candidate(s) diversify markets

reduce by transferring production to other location(s); divert new investments to other location(s) cancel or reduce proposed investments in high-dependence location re-distribute production of models to achieve new balance in favour of other location(s) reduce product range

change personnel or organisational structure

appoint new executive(s) to head troubled unit, who has no emotional ties to any plant, subsidiary or host country withhold information from executives with suspected divided loyalties

.

.

.

.

.

.

.

.

.

.

.

Limited progress Progress

Achieved (Sierra to Genk)

Achieved

Achieved

Achieved

Achieved

Achieved

Achieved

Unknown

Exit barrier strong for Dagenham and Halewood, especially strong for Dagenham

1. Boddewyn, 1981; McDermott, 1986, 1989; Wilson, 1980 2. Boddewyn, 1979; Gilmour, 1973; Hilman and Soden, 1971; McDermott, 1986, 1989; Porter, 1976; Vignola, 1974;

Wallender, 1973 Source: Derived by author

Porter (1976) contended that not only do ‘barriers to exit’ discourage divestment, but that firms squander resources in their efforts to turnaround loss-making subsidiaries. With the present industry conditions, auto companies cannot afford to subsidise loss-making operations and quick solutions are required - witness Volkswagen’s recruitment from GM of Mr Lopez, the renowned procurement cost cutter.

In short, condition-based foreign divestment theory suggests that unless there is significant change in the externaI environment, then Ford of Britain is a candidate for divestment.

Motivation-Based Theory Poor Subsidiary Performance

Subsidiary performance is the most frequently cited reason for foreign divestment (Boddewyn, 1976; Boddewyn, 1979a, b; Chopra et al., 1978; Sachdev, 1976; Torneden, 1975). In the first half of 1993, losses totalled $257m compared with a profit of $107m for the same period in the previous year. Thus, in 1993 Ford of Europe will report a loss for the third successive year, and perhaps even exceed 1992’s poor results.

However, for multinationals, like Ford, with a global or



regional strategy in which plants/subsidiaries are foreign divestment. Expatriate managers were not integrated, a subsidiary should not be evaluated as an always able to adjust to conditions abroad, and often individual component, but rather as a contributor to the this problem was exacerbated by poor communications whole entity (McDermott, 1989). Management must between head office and subsidiary concerning therefore recognise that the value of a particular foreign corporate goals and policies. As a long-established US investment cannot always be precisely determined if it MNE in Europe, and a regional structure in place since is linked to other parts of the multinational entity. 1967, Ford of Europe’s recent poor performance is

hardly due to organisational issues, though a number Integration usually renders a portfolio view of foreign of errors/weaknesses have contributed to Ford’s investments inappropriate as MNEs do not simply rank declining fortunes (e.g. unsuccessful product launches; their subsidiaries and get rid of those at the bottom of weak new product development; labour relations the league. Indeed, the benefits derived from retaining difficulties in the UK as the firm sought to introduce what is ostensibly a loss-making operation, may far Japanese-style practices). outweigh the costs. This argument favours retention of a Ford manufacturing presence in the UK. Problems in the Parent

Parent company difficulties often lead to foreign Poor Pre-Investment Analysis divestment. Indeed, MNEs are much more inclined to A number of divested plants/subsidiaries never matched tolerate poor performing subsidiaries when the parent management’s expectations, and in retrospect they is healthy. It is a decline in parent company fortunes should never have been established in the first instance. which often leads to a plant with a history of poor This is particularly true of foreign subsidiaries acquired performance attracting parent company scrutiny during the 1960s. Poor pre-investment analysis is, (McDermott, 1989). without doubt, a key divestment factor. Boddewyn (1979a) contends that in comparison to European MNEs, Motivation-based theory also indicates the likelihood of US MNEs ‘plunge’ into new ventures, many of them foreign divestment at Ford of Britain (see Table 8). poorly analysed. The net result is that US firms end up getting involved in more initiatives but also in more Precipitating-Circumstances Based failures and divestments (Boddewyn, 1979a, p. 24). However, there is no evidence to suggest flaws in Ford’s Theory plant location decision-making in Europe, and indeed A number of researchers (Bower, 1970; Gilmour, 1973; the long life-span of its assembly plants indicates Torneden, 1975; Wilson, 1980) have stressed the prudence in selecting suitable sites. importance of the appointment of the ‘new man’,

Structural and Organisational Factors psychologically detached from any particular operation, who overcomes the ‘barriers to exit’, and is ready to

Poor managerial performance by both local and consider divestment. It is easier for new senior expatriate managers have been identified as a reason for executives to identify and remedy a discrepancy through

Table 8 Motivation-based Foreign Divestment Theory and Ford of Europe

_~-

Factor Authors Degree of Degree of relevance to relevance to

Ford of Britain Ford of Europe -..-

Poor subsidiary Boddewyn, 1976, 1979a, 1979b; Chopra Strong Strong

performance et a/., 1978; McDermott, 1986, 1989; Sachdev, 1976; Torneden, 1975

Poor Pre-investment Boddewyn, 1979a; Kitching, 1973; Weak Weak

analysis Torneden, 1975

Structural and Boddewyn, 1976 Weak Weak

Organisational factors

Parent company Boddewyn, 1979; Brooke & Remmers, Strong Strong

difficulties 1978; Grunberg, 1982; McDermott, 1986, 1989; Torneden, 1975; Van den Bulcke, 1982

Internal-External Market Grunberg,‘1982 Strong Weak

failure model

Plant life cycle model Boddewyn and Torneden, 1973; Strong Weak

McDermott, 1989 _-

Source: derived by author

EUR0PE:AN MANAGEMENT JOURNAL Vol 11 No 4 December 1993 463


divestment. They are not personally committed to prior decisions; nor are they emotionally tied to particular products or divisions, and they are confident that the divestment decision will not be interpreted as failure on their part.

Gilmour (1973), for example, examining three domestic divestments by as many US firms, found that in all three cases, the decision to divest ‘dogs’ (the Boston Consultancy Group’s description of poor performers) was only taken once new men were appointed to senior management positions. This author would suggest that the reverse sequence is the case. The first phase is when the Board recognises that divestments can no longer be postponed, and it appoints a new man to implement the tough decisions which it believes necessary.

Torneden (1975) too noted that foreign divestments originated in most instances with new men who were not committed to past investment decisions and who were quite prepared to consider divestiture when they perceived it as beneficial to the parent company. He found that the arrival of new men precipitated foreign divestment in six of his eight case studies. They were clearly invclved in making the divestment decision, as well as initially suggesting a divestment study, whereas subsidiary management rarely instigated the divestment process. He observed that: ‘the foreign divestment decision typically reflected a shift in power from an international expansion executive to a loss terminating executive’ (Torneden, 1975, p. 106).

Ford Motor Company has a new Chief Operating Officer (Alexander J. Trotman, himself a former President (1984-86) and Chairman (1987) of Ford of Europe), and a change in this position has been found to be an even more significant spur to divestment than the

appointment of a new number one (Wilson, 1980). New men have also been appointed to the most senior positions at Ford of Europe and Ford of Britain. Of particular interest is the appointment of Mr Nasser, who previously succeeded in turning around Ford’s operations in Australia, albeit accompanied by a sharp reduction in the number employed.

Precipitating-Circumstances based theory also supports the possibility of foreign divestment at Ford of Britain.

Conclusions Boddewyn and Torneden (1973) were the first to relate Vernon’s PLC model with foreign divestment. They observed that most ventures go through a normal ‘life cycle’ in which they grow, mature and decline. They pointed out that managers should not consider their enterprises as eternal. The PLC model of foreign divestment suggests that divestment is most likely a result of increased competition related to mature products. Ford Motor Company would appear to be in decline, with the associated implications for organisational resources and size.

From Helle’s (1976) study, it could be argued that divestment is most likely to occur, not when a company/ plant/product loses its competitive advantage, but at any point of transition in the life cycle: Any major change in demand for a product may precipitate a review of the product’s future. The recent launch of the Mondeo would therefore lead to an increase in the likelihood of foreign divestment.

McDermott (1989) suggests that manufacturing plants have a life-cycle and that this is shrinking. US Investors in the UK prior to 1914 (e.g. Singer) maintained the same facility for almost 100 years. Many plants opened in the inter-war years were closed in the last wave of foreign divestment (i.e. 1978-85). Many of the most recent investments in technologically intensive industry will, he argues, have a significantly shorter life-span. The age of plants per se may not be the main problem facing Ford in the UK, but rather it is locked into labour relations agreements of the 1960s and earlier. Nissan and Toyota, on the other hand, have newly built plants (subsidised by the UK government), and the flexibility associated with single union agreements, negotiated under legislation introduced by the Conservative government.

Each strand of foreign divestment theory suggests that Ford of Britain has reached a stage where foreign divestment is likely: the changes in the external environment provide the motivation, and the changes in senior personnel remove the ‘barriers to exit’. However, this does not imply the prospect of immediate plant closure(s).

The foreign divestment process, which can be defined as the amount of time between the President or Chief Executive Officer’s first consideration of a possible divestment to the moment when the divestment is substantially completed, can last for several years. Nees (1978) in an investigation of 14 specific divestment cases found that the divestment process ranged most frequently from 20 months to several years (see Table 9).

Time spent on deciding is commensurate with the potential and size of the subsidiary. Therefore the divestment process of a foreign subsidiary serving the entire European market would tend to be given prolonged consideration while management ascertain that there is no alternative. Ford of Britain is still of major

Table 9 Estimated Duration of Divestment Decision Process

Cases Studied

2 3 4 5

Source: Nees (1978, p. 90)

Estimated Duration

l-10 months 11-l 2 months 21-30 months

Over 30 months



mportance to Ford of Europe and hence any key decision regarding its future, is likely to involve lengthy analysis. This also affords policy-makers the opportunity to assess the value of Ford’s existing presence in the UK, and to consider possible measures to safeguard a :cmpany which has contributed much to the UK economy.

References 3oddrwyn, J.J. (1976), Inte~ational Divestment: A Survey of

Corporate Experience, Business ~nte~utional, New York. ?oddewyn, J.J. (1979a), Divestment: Local vs Foreign and US

vs European Approaches, Management International Review, No. 1, pp. 21-27.

Soddewyn, J.J. (1979b), ‘Foreign Divestment: Magnitude Factors’, Joumat of lnte~atio~l Business Studies, Voi. 10, No. 1, Spring-Summer, pp. 21-27.

Boddewyn, J.J. (1981), ‘The Theory of Foreign Direct Divestment: a first pass’, Paper to Eastern Regional Annual Meeting of Academy of International Business, New York University, April.

Boddewyn, J.J. (1983) ‘Foreign Direct Divestment Theory: Is It the Reverse of FIX Theory‘, ~e~~~~sc~~~~je~es Archiu, 119, pp. 345-385.

5olidewyn, J.J. and Torneden, R. (1973), ‘The Divestment Decision process’, Academy of Management Review.

Bover, J.L. (1970), Managing the Resource Allocation Process, Harvard University Graduate School of Administration, Division of Research Publications, Boston, Mass.

Chopra, J., Boddewyn, J.J. and Torneden, R.L. (1978) ‘US Foreign Divestment: A 1972-75 updating’, Columbia y;_n~3! of World Business, Vol. 13, No. 1, Spring, pp.

Doz, Y. (1986), Strategic Management zn the Multinational Corporation, Pergamon Press.

Dunning, J. (1979), ‘Explaining Changing Patterns of International Production: In Defence of the Eclectic ‘Theory’, Oxford Bulletin of Economics and Statistics, Vol. 41, pp. 269-296.

Gilmour, S.C. (1973), The Divestment Deczsion Process, DBA Dissertation, Harvard University Graduate Schooi of Business Administration.

Helle, D. (1976), Une Gestion Collective Des Investissements, Paris. Hillman, R.H. and Soden, J.V. (1971), ‘Don’t Try To Sell a Pig

m a Poke’, Corporate Financing, November/December. Hood, N. and Young, S. (1982), Multinationals in Retreat,

Edinburgh University Press, Edinburgh. McDermott, M.C. (1986) Foreign Divestment and Employee

Disclosure in the UK, 1978-86, Doctoral Thesis, University of Glasgow.

McDermott, M.C. (1989), Multinationals: Foreign Divestment and Disclosure, McGraw-Hill, Maidenhead.

Netls, 0. (1978), ‘The Divestment Decision Process in Large and Medium-Sized Diversified Companies: a Descriptive Model Based on Clinical Studies’, ~nte~ational Studies of Management and Organization, 8, pp. 67-95.

Porter, M.E. (1976), ‘Please Note the Location of Nearest Exit Exit Barriers and Planning’, California Managemen Review, Winter, pp. 21-33.

Sachdev, J.C. (1976), A Framework for the Planning c Dis~n~s~~t Polici~ of Mulf~nat~o~l mornings, Doctora Thesis, UMIST, Manchester.

Spanhel, C.L. and Boddewyn, J.J. (1983) ‘The Crisi! Divestment Decision Process: a descriptive model’ Mimeo, February.

Spanhel, CL. and Johnson, D. (1982), ‘Issues in the Study of US Foreign Divestment: a review of major studies’ Paper presented at the Annual Meeting of the Midwes Academy of International Business, Chicago.

Thackray, J. (1971), ‘Disinvestment: How to Shrink and Profit’ European Business, Spring, pp. 50-57.

Torneden, R.L. (1975), Foreign Disinvestment by US Multinationa Corporations, Praeger Publishers, New York.

Van den Bulcke, D. et al. (1979), Investment and Divestmen Policies of Multinational Corporations in Europe, Gower AIdershot.

Vignola, L. (1974), Strategic Divestment, American Managemen Association, New York.

WaIIender, H. W. (1973), ‘A Planned Approach to Divestment’ Columbia Journal of World Busmess, Spring, pp. 33-37

Wilson, B. (1980), Disinvestment of Foreign Subsidiaries, Am Arbor.

MICHAEL MCDERMOTT, Strathclyde international Business Unit, University of Strathclyde, Stenhouse 3u~~ding, Glasgow G4 ORQ

Dr McDermott is Assistant Director of Strathclyde lnternational Business Unit and author of seven books including Multinationals:

Foreign Divestment and Disclosure ~~cGraw~ Hill, 1989), which examined foreign-owned plant closures in the UK during the period 1978-86. He is also author of two Economist intelligence Unit Reports examining the internationalisation of South Korean and Taiwanese industry, and regularly provides ~mi~rs in the Far East. He has undertake cons&fancy for multinationals and international agencies (such as the UN Centre for Transnational Corporations). National agencies in Portugal and China have commissioned him to provide advice and seminars on the inte~ationa~isat~on of their small- and medium- sized enterprises.


Ford of Britain: A diminishing role in ford of Europe

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