Soon after Alan Mulally arrived as Ford’s chief executive in September 2006 he organised a weekly meeting of his senior managers and asked them how things were going. Fine, fine, fine, came the answers from around the table. “We are forecasting a $17 billion loss and no one has any problems!” an incredulous Mr Mulally exclaimed. When he asked the same question the next week, Mark Fields, head of Ford’s operations in the Americas, raised his hand and—in what once would have been a moment of career suicide—admitted that a defective part threatened to delay the launch of an important new car. The room fell silent, until Mr Mulally began to clap his hands. “Great visibility,” the new boss added.
Four years on, Ford is making record profits. Its revival began with this new willingness to recognise its faults. In the old days management at Ford was preoccupied with executive rivalry, recalls Mr Fields. “Now it is about who’s helping whom,” he says. When Mr Fields stuck his hand up at that meeting and won Mr Mulally’s approval, colleagues soon began chipping in with helpful suggestions to overcome the problem with the new car. It was more than a symbolic moment for a business which used to be run like a collection of principalities rather than a global enterprise. As far as Mr Mulally is concerned, demolishing those management divisions has been the most important factor in turning Ford around.
That turnaround is impressive (see chart 1). Despite the sluggish recovery in the North American market, in the third quarter Ford’s automotive businesses made an operating profit of $2.1 billion, twice as much as a year before and the fifth quarterly surplus in a row, on revenue of $29 billion. Its net income was a quarterly record of $1.7 billion. Analysts at Morgan Stanley, an investment bank, expect the company to make a profit of $10.5 billion in 2010. In 2009 it made one third of that. Ford has also slashed $12.8 billion off the automotive debt of $33 billion it had at the start of the year. By late November the company reckoned it had lowered its annualised interest costs by nearly $1 billion.
Ford is not alone in staging a comeback, but there is a big difference between its revival and those of Detroit’s two other big carmakers. Both Chrysler, the smallest of the “Big Three”, and the larger General Motors (GM), ended up in the government’s hands (via bankruptcy). GM is making money again and returned to the stockmarket last month with America’s biggest-ever initial public offering. Chrysler is partly owned by Fiat and, in a partial flotation likely next year, the Italian company is expected to take majority control. So, having not availed itself of the opportunity of purging its balance-sheet and restructuring its operations under the protection of a bankruptcy filing, Ford has arguably steered a harder road to recovery.
On the brink
One reason why Ford took this direction is that it had already begun sorting itself out, having been in a worse position than either GM or Chrysler before the credit crunch and recession struck in 2008. When Ford celebrated its centenary in June 2003 doubts were growing about its future. One analyst at UBS, a bank, went so far as to suggest Ford might not last another decade. Through much of the 1990s Ford had raked in money, but a profit of $7.2 billion in 1999 had turned into a loss of $5.4 billion by 2001. What had gone wrong?
Many fingers point at Jac Nasser, a Ford veteran who moved up the management ranks to become chief executive in 1998. Something of a visionary, he formed the Premier Automotive Group (PAG) as a separate part of Ford. It lumped together Ford’s Lincoln and Mercury brands; three British carmakers, Jaguar (bought in 1989), Aston Martin (acquired in 1994) and Land Rover (taken off BMW’s hands in 2000); and Sweden’s Volvo (purchased in 1999). The idea was that PAG would broaden the company’s product range and help Ford ride out the ups and downs in the mass-produced part of the car business. Eventually PAG was supposed to provide a third of the company’s global profits. But those earnings never materialised and the division came to be seen by many as a costly and distracting diversification.
Mr Nasser was forced out in 2001 and William Clay Ford, great-grandson of the founder, Henry Ford, took over as head of the company. Mr Ford began a “back-to-basics” campaign to return the carmaker to its roots as a mass producer. Although a restructuring plan was in the works, Ford suffered a series of other blows. The company had long boasted that “Quality is Job One”, but the cars from European and Asian producers were seen as better and more reliable. Symptomatic of this was the Ford Taurus, once America’s bestselling car. By early 2000 it had been reduced to a little-loved rental vehicle.
Like GM and Chrysler, Ford had been busy making easy money from pickup trucks and sport-utility vehicles (SUVs), which were more profitable and partly protected from competition because similar vehicles made by foreign producers were subject to import duties. But the Asian producers started making more SUVs and pickup trucks in their North American factories to escape the duties, and then a rising oil-price led many motorists to abandon these often gas-guzzling vehicles. Ford ended up making too many cars but not having enough buyers. From 2002 the company began the laborious task of trying to cut capacity rather than continue to slog it out on the dealer forecourts with ever bigger discounts to lure buyers. Cutbacks were also ordered in Europe, but progress wielding the axe in America was slow because of divisions among executives about where cuts should be made. Strong union opposition also slowed things down.
By 2006 the situation had become so bleak that Mr Ford and Don LeClair, then his finance director, decided to undertake a dramatic refinancing of the business by raising bank loans secured against the company’s assets. This they saw as the only hope of financing a turnaround in Ford’s core North American business (Europe, at least, was already improving). But because the Big Three had unveiled umpteen unfulfilled turnaround plans over the years, Mr Ford needed to give this latest effort credibility, especially with the company’s bankers. To do that he began a search for his own replacement as chief executive (he remains chairman). Eventually he looked outside the motor industry. Which is how Mr Mulally’s phone at Boeing came to ring.
Mr Mulally joined Boeing as an engineer in 1969 directly after leaving college. He became boss of Boeing’s commercial-aircraft division, which he ran for eight years and steered through the violent shocks inflicted on the industry by the slumps in air travel after the terrorist attacks on America in September 2001, the SARS scare and the Iraq war. However, in 2005 Mr Mulally was passed over for the second time when Boeing sought a new chief executive. By the time he arrived at Ford’s headquarters in the Detroit suburb of Dearborn, things were worsening rapidly, with the $17 billion loss looming. His first task was to finalise the recovery plan and sell it to the banks.
Just the one
Mr Mulally boils that plan down to a number of key decisions he took with his close lieutenants: Lewis Booth, a veteran member of Ford’s executive suite, who became finance director, and Mr Fields, the boss of business in the Americas. The first decision was to concentrate on the Ford brand and sell off the PAG businesses even if it meant taking a loss. “You cannot believe the difference this makes,” says Mr Mulally, who ridicules the idea that top management can focus on Jaguar before breakfast, attend to Volvo or Land Rover before lunch and then consider Ford and its Lincoln offshoot in North America in the afternoon. Aston Martin was sold to private investors in 2007; Jaguar and Land Rover were sold to the Tata Group of India in 2008; and Geely, a Chinese carmaker, bought Volvo in August 2010. The Mercury brand is being phased out.
It was also decided that Ford should have a much narrower range of cars, albeit higher-quality ones, carrying its familiar blue oval logo in all segments of the market. At one point, together with PAG, Mercury and the vehicles tailored for different countries and regions, Ford’s designers and engineers had to cope with 97 different models. Now that is down to 36 and may go lower.
Along with the rationalisation of the product range came a raising of sights to build better vehicles. Previously, says Mr Fields, Ford used to talk about simply being “competitive”: hence a Ford Taurus would claim to compete with Toyota’s best-selling Camry. Mr Mulally, however, has shifted the emphasis to try to make each car Ford sells the “best in class”.
In some areas Ford has shown it is capable of doing this, especially in Europe with several models designed under the leadership of Richard Parry-Jones, formerly head of product development. Ford’s Focus car and its Galaxy people carrier became class leaders in Europe. A number of the new cars being created under what Mr Mulally calls the One Ford policy are coming from Europe. Quality has improved dramatically, according to some of the industry’s outside arbiters (see chart 2).
The next step was to ensure that regional successes, such as the Focus and the Galaxy, could become global successes too. Ford has tried to make global cars before, but mostly failed. Under a much ballyhooed overhaul in the 1990s, called Ford 2000, so many styling and engineering changes were made to a single supposed “world car” that only two parts remained the same on the versions sold in America and Europe. The internal reason for the failure of previous attempts to make world cars, according to Mr Fields, is that decisions that were supposed to be global were mostly made in Dearborn. Tastes in different car markets were more marked back then, says Mr Booth (who was a member of the Ford 2000 task-force). “Customers’ tastes are now converging,” he adds. “Fuel economy matters everywhere.”
As a result, eight out of ten of the basic Ford platforms (the floor pan and its underpinnings) are global, with only a few regional platforms, for example for Lincoln. Onto these platforms Ford can build different models (known internally as “top hats”) to account for regional tastes in cars and variations in regulations. This means that within a few years the basic small-car platform for Fiestas will be used for several models, but at an overall scale of 1.4m units annually. Sharing a platform between different models is a better investment than building just a few hundred thousand of each one on bespoke platforms. The various Fiesta-based cars may look different, but the idea is that two-thirds of their parts will be shared. Likewise, the larger Focus platform will support production of over 2m units a year and about 80% of its parts should be common. This platform strategy takes a leaf out of the production book of Japanese producers, such as Toyota and Honda, who have been doing much the same thing for years.
More painful has been Mr Mulally’s decision to persist with dramatic restructuring to match Ford’s production capacity to the number of cars it can sell. Since 2006 Ford has halved its shop-floor workforce in North America and cut a third of office jobs. By the end of next year a total of 17 factories will have closed, including parts-makers. In all, Ford’s employee numbers in North America will have fallen from 128,000 to 75,000. The number of dealers has also been cut by a fifth. Outside North America cuts have been less severe, since Ford took the axe earlier to its European operations, notably pulling out of making cars at its historic Dagenham factory in East London, site of Henry Ford’s first expansion outside America.
Building what sells
The increasing use of new tools such as computerised virtual design helps cut the cost and length of time needed to bring new models to market, but it is still an expensive process. Like its competitors, Ford is now wedded to the idea of design engineers working in parallel with their manufacturing colleagues so that problems are identified early and dealt with. Ford’s whole product range has been renewed since 2005, and analysts at Merrill Lynch, a broker and investment bank, estimate that the company has the freshest fleet in the industry. Yet Mr Fields says the company intends to crank its renewal rate up further in the coming years.
Ford had mustered its own resources for its turnaround before the economic crash in 2008, and the firm’s resolve to go it alone was hardened after the Big Three’s bosses were summoned to Washington to be ritually humiliated by Congress. Mr Mulally and his colleagues decided they could do without federal aid available under the Troubled Asset Relief Programme. According to some sources, a Chapter 11 bankruptcy filing was also opposed by the Ford family, which could have seen its controlling B-class stock wiped out.
Avoiding bankruptcy certainly helped to boost Ford in the public mind. Jim Farley, head of marketing for Ford worldwide, reckons that the halo effect of Ford’s standing on its own feet has been worth $1 billion in favourable publicity for the company and has attracted appreciative Americans into its dealers’ showrooms.
Ford plainly has problems to deal with. Every carmaker claims to be focusing on profitable growth rather than market share. GM could make a pre-tax profit of $19 billion if North American car sales reached the 17m annualised rate achieved in the last peak. At present they are running at an annual rate of 11.5m. Mr Mulally has forecast that America’s car sales could rise to 13m next year, but even that would produce another $4.3 billion in revenue and $1.1 billion in pre-tax profit for Ford, according to Morgan Stanley. Ford’s domestic market share is 17%, but that is likely to be squeezed as Toyota recovers from its quality problems and the South Korean carmakers—Kia and Hyundai—continue to make progress (see chart 3).
Another, potentially even bigger problem is that GM is now more international than Ford: two-thirds of its sales come from outside America, whereas half of Ford’s sales are domestic. GM has also shot past the 2m mark for sales in China, whereas Ford has barely 500,000. Mr Mulally, of course, is bullish about boosting Ford’s market share in China, pointing out that the company’s new cars do not have to win over Chinese buyers from GM or Germany’s Volkswagen (VW), the other big Western carmaker in China. Simply participating in the growth of what will soon be the world’s largest car market, he says, will do the trick for Ford. Well, maybe.
Ford has been at a disadvantage in China. The Chinese opted to bring in GM rather than Ford as an early joint-venture partner when the market opened up in the 1990s. Ominously for Ford, GM and its Chinese partner are now joining forces for an assault on Asia’s other giant booming car market, India. Ford, though, is spending to bolster its relatively weak position in emerging markets. Over the next five years the company will be investing $4 billion in the Asia Pacific region, with India and China absorbing most of that. Likewise the company is spending $2.5 billion to develop its business in South America.
Europe might also give Mr Mulally a headache. Ford slipped into loss in Europe in the third quarter. The market is plagued by overcapacity, mainly because the big French producers, Renault and Peugeot, and VW have not cut capacity, and discounting is rife. Europe has long been a shining success for Ford, but if the market takes a turn for the worse it may be a struggle to make much profit there. A plus, though, is that the new Focus went into production in Europe this week.
However, nearly all the growth in car demand is likely to be in China, India and Brazil. So Mr Mulally’s big challenge is to ensure that Ford gets a share of it. It is an item that is going to pop up quite a bit at his weekly meetings, peppered as they are with hundreds of colour-coded charts designed to reveal the true state of Ford’s business. These are the tools he likes to run a company. “The data sets you free,” says Mr Mulally with his fondness of business-speak. And because “you can’t manage secrets,” he encourages openness and teamwork. So he will be expecting a lot more honesty from his executives as they try to expand the business in those big emerging markets on which Ford’s future may ultimately depend.
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Fonte: http://www.economist.com/node/17673258?story_id=17673258 (09/12/2010)
