22 Dec 2008
Dec. 22 (Bloomberg) -- In one of his first acts after joining Ford Motor Co. as chief executive officer in September 2006, Alan R. Mulally set up weekly meetings with his Asian-Pacific, European, and North and South American regional bosses -- people who rarely gathered in the fragmented company. They came together in person and on video screens in a large conference room at headquarters in Dearborn, Michigan.Mulally told them to present reports during the meetings using green, yellow or red labels to show whether they were hitting their plans. Even though Ford was about to post the worst annual loss -- $12.6 billion -- in its history, every manager used only green labels in more than a month of meetings.
Finally in November of that same year, Mark Fields, who leads the North and South American units, flashed a red label because of a production delay with the new Edge wagon.
"A red basically says you're off plan," Fields says. "There was kind of dead silence. I was sitting next to Alan. Then Alan starts clapping. What he was communicating was it's okay to be transparent."
Mulally, the first outsider to lead the iconic 105-year-old automaker, began a bumper-to-bumper overhaul in 2006. Not only was Ford addicted to profits from large gas-guzzling vehicles that consumers were shunning. It operated as four separate companies, duplicating parts and labor costs while the global operations of its Asian rivals hummed in unison.
Two years into his work in progress, the CEO now faces his biggest test -- to endure the pounding of a global recession that made Chrysler LLC and General Motors Corp. wards of the state -- until 2010. That's when Mulally's transformation of Ford into a leaner global manufacturer of fuel-efficient cars should finally bear fruit.
‘Too Little, Too Late'
"Did Ford wait too long?" asks John Casesa, a former Merrill Lynch auto analyst who's now a partner at consulting firm Casesa Shapiro Group in New York. "The answer is yes. To Mulally's credit, he's been on the right path. I hope it's not too little, too late."
Hope is one thing that's hardwired into Mulally's personality. Just weeks after taking the reins at Ford, he predicted that the company would be profitable by 2009 -- a forecast he pulled in 2008.
The global credit crisis hasn't shaken his faith. In September 2008, with U.S. auto sales plunging 27 percent, Mulally, 63, displayed in his office an almost boyish enthusiasm. He called Ford's first-quarter profit in 2008 "fabulous" and the design of the 2010 subcompact Fiesta "neat."
One Ford
Mulally then took a reporter's legal pad to explain why the company won't go down after losing $24 billion since 2005. He methodically drew a grid showing Ford's finance, manufacturing and human resources functions and its four regions. The CEO wrote the words "working together" across it to stress the meaning of his One Ford plan.
"When we came together, we decided on One Ford," Mulally says. "We're going to operate as a global company. That's a new strategy. We were going to focus on the Ford brand. Huge, huge strategic decision. We were going to have a full complement of cars, utilities and trucks. Huge issue. The U.S. plan was to concentrate on the trucks and SUVs. That's the new Ford."
Two months later in November, with the decline in auto sales accelerating to 37 percent, Mulally and the CEOs of Chrysler and GM -- Robert Nardelli and Rick Wagoner -- took their private jets to Washington to beg for a bailout. While Ford was seeking a credit line in case it needed it, Chrysler and GM demanded cash fast to survive the year. To lawmakers, the CEOs' imperious behavior exemplified all that was wrong with Detroit.
Mulally's $49.9 Million
After countless restructurings since the 1973 oil shock -- Ford alone has been through six major revamps -- the automakers still didn't make many fuel-efficient cars, still didn't match Toyota Motor Corp. and Honda Motor Co. in quality, and still hadn't pared down their plethora of duplicate brands: Ford's Mercury Milan and Lincoln MKZ are essentially the same car.
At a hearing of the U.S. House Financial Services Committee on Nov. 19, Representative Peter Roskam, a Republican from Illinois, asked Mulally if he would forgo his compensation. The CEO's enthusiastic embrace of restructuring didn't extend to his own pay. Mulally, who made $49.9 million in 2006 and ‘07, seemed oblivious to the public outrage over excessive CEO pay when he answered no.
"I think I'm okay where I am," Mulally said.
The CEOs flew home empty-handed. Two weeks later, the repentant bosses drove their hybrids for a return visit to Washington, armed with detailed restructuring plans and pledges to work for $1 a year and sell the company jets. Senate Republicans such as Richard Shelby of Alabama, home to nonunion plants owned by Toyota and Honda, rejected a House bailout measure because it didn't slash United Auto Workers wages and benefits.
Bush's Legacy
The Bush administration's rescue of Chrysler and GM on Dec. 19 with $13.4 billion in emergency loans mimicked the outline of the House bill. In exchange for loans from the Treasury's $700 billion bailout fund, the two automakers must demonstrate plans for profitability by March 31 or repay the money and face bankruptcy. The deal, which requires the automakers to make labor costs competitive with their Asian rivals in the U.S. by the end of 2009, should enable GM and Chrysler to wring concessions from the United Auto Workers.
The bailout, negotiated by Treasury Secretary Henry Paulson, prevents the collapse of the automakers from being added to President George W. Bush's legacy. With economists saying that unemployment will surge over 8 percent in 2009, Paulson was also trying to stop millions of additional workers from losing their jobs.
Ford Profits by 2011
Mulally, in another show of confidence in himself and his company, opted out of the Paulson plan. Ford borrowed $23.4 billion in 2006 and says it would need government help only if the recession deepens. Mulally says his restructuring should start paying dividends in 2010 with the debut of his first fuel efficient "world cars" -- single models that are sold worldwide -- and the unprecedented drop of labor expenses.
The CEO brokered a UAW contract in 2007 that puts Ford's retiree health-care costs in a union trust starting in 2010. The company's labor costs including wages and benefits will drop to $58 an hour from $71 today, narrowing the gap with Toyota and Honda. Japanese automakers, who offer fewer benefits, pay U.S. workers about $49 an hour. With these changes, Mulally says, Ford will reach a milestone in two years.
"We expect our automobile business to be profitable in 2011," the CEO told the Senate Banking Committee in December.
Litany of Missteps
Investors don't share the chief's bullishness. Ford's stock dropped only 7 percent from Sept. 5, 2006, when the company disclosed Mulally's hiring, to May 21, 2008. The CEO's retraction the following day of his profit forecast was a turning point for investors. Since then, Ford shares have tumbled 62 percent to $2.95, and hit a 26-year low of $1.26 on Nov. 19. GM shares plummeted 77 percent during the same period and Toyota's decreased 45 percent.
Brian Johnson, a Chicago-based analyst at Barclays Capital, warned in November that Ford wouldn't have enough cash to operate by the second half of 2009 without a government bailout or drawing down its credit line.
"It's unrealistic of Alan to expect Ford to survive, let alone profit, when they're experiencing a 30-plus percent decline in sales," says Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which rates Ford's debt a D, its lowest level. "Without a bankruptcy filing and a complete reorganization, Ford is not going to be profitable, period."
Aston Martin, Jaguar
Mulally is dealing with the consequences of a litany of missteps and missed opportunities by his predecessors. Ford never learned the lesson from the Arab oil embargo in 1973 about the dangers of relying on only large vehicles for profits. With gasoline prices soaring in 1975, Congress forced automakers to improve the overall fuel economy of their fleets. From then on, Ford says, it made cheap small cars in the U.S. simply to comply with the law and rarely if ever made a profit on them.
Even as compact-car specialists Toyota and Honda began putting up plants in the U.S. in the 1980s, setting the stage for their conquest of the market, Ford kept building bigger vehicles with bigger profit margins. With its eight-cylinder F-Series pickup truck already the best-selling vehicle in the U.S., the company introduced the six-cylinder Taurus in 1985, a sedan that would become the top-selling car in America seven years later.
Ford squandered its profits from the late ‘80s on European luxury brands in an attempt to spiff up its middlebrow image and diversify its fleet. It purchased a controlling interest in Aston Martin in 1987 for an undisclosed price and acquired Jaguar two years later for $2.5 billion. In 1990, Ford introduced the Explorer, a boxy vehicle that got 15 miles to the gallon in city driving and that ignited the market for SUVs.
William Clay Ford Jr.
The Explorer was a cash cow, enabling Ford in the ‘90s to snap up Volvo for $6.4 billion and Land Rover for $2.73 billion. As the company slashed investments in refreshing its own branded cars, the Asians moved in: Toyota's Camry and Honda's Accord surpassed the Taurus as the top-selling U.S. cars in 1997.
Ford's $4.79 billion loss in 2001 after seven straight years of profit was a wake-up call for the Ford family, which controls the company. Chairman William Clay Ford Jr., who had held various executive jobs in the company, ousted CEO Jacques Nasser and took his job at age 44. After cutting 23,000 jobs in 2002, he chased fuel- efficiency by bringing out a $27,000 hybrid version of the Escape SUV. To make the hybrid, Ford licensed technology from Toyota.
The U.S. automaker began hemorrhaging money again in 2005 as Explorer sales fell 29 percent from the prior year. The CEO said in early 2006 that Ford would slice off another 30,000 jobs during the next six years. The automaker's U.S. market share had sunk to 17.5 percent in 2006 from 25.7 percent in 1995. Bill Ford needed help and began to pursue Mulally, then a vice president at Boeing Co., the No. 2 commercial aircraft maker.
Boeing Turnaround
The son of a mailman, Mulally grew up in Lawrence, Kansas, in the 1950s, then a small town of about 23,000. President John F. Kennedy's famous speech in May 1961 about landing a man on the moon spurred Mulally to study aeronautical and astronautical engineering at the University of Kansas in Lawrence in the hopes of becoming an astronaut.
"It was so exciting because it was so important," says Mulally.
While in college, he was evaluated by NASA , which discovered that he was slightly colorblind and thus ineligible for spaceflight. Mulally received a bachelor's degree in 1968 and a master's the following year.
Ford Family
He took an engineering job at Boeing in 1969 and steadily earned promotions to the top of the commercial aircraft unit in 1998. The Sept. 11, 2001, terrorist attacks in the U.S. made people afraid to fly and spurred air carriers to slash orders, driving down profit in Mulally's unit to $707 million by 2003. He cut jobs by more than 50 percent while making his factories more efficient and halved the average time for building a 737 aircraft to 11 days by 2006. That year, Mulally's do-more-with-less approach paid off, with his unit posting operating earnings of $2.7 billion.
Mulally says he initially rejected Ford's job offer because it was hard to leave Boeing after 37 years. Joining the automaker would also mean working for the Ford family, which has often demanded a say in major management decisions. The Fords control 40 percent of voting power through 70.9 million Class B shares, a structure set up when the company went public in 1956. Two family members, Bill Ford and his cousin Edsel Ford II, 59, sit on the board.
"The family is in a position to second-guess everything," says Gerald Meyers, a professor at the University of Michigan Business School and the former CEO of American Motors Corp. "You always have to think of it in terms of what will the Fords think. Anytime you have the possibility of being second-guessed, you come to be over cautious."
Firing Lee Iacocca
In 1978, CEO Henry Ford II stripped his president, Lee Iacocca, of some of his power. They clashed, and Iacocca was fired. Twelve years later, after Bill and Edsel Ford publicly complained that CEO Donald Petersen had relegated them to minor assignments on the board, the chief resigned.
Mulally, who signed a five-year contract to lead the automaker in September 2006, says he worked closely with Bill Ford to develop his strategy. The new CEO added to his predecessor's cuts, slashing at least another 25,000 jobs in North America.
"Bill Ford Jr. was so relieved when he came in," says David Lewis, a University of Michigan business professor who's written six books on Ford. "Releasing people, cutting jobs, cutting plants, really cutting into the fabric of Ford -- he couldn't bear himself to do some of the hard things that needed to be done."
In addition to gutting Ford, Mulally set a new course for its remaining employees. In his first week, he moved to end the Balkanization that was most acute between Ford's North American and European regions. Before Mulally, regional chiefs met no more than once a year.
Focus a Lemon
"Probably the biggest shock for everybody was when I called everybody together," Mulally says. "They said, ‘This is great, why don't we get together next year?' I said, ‘Why don't we get together next week?' We were up against competition using all of its global assets, and we were this very regional operation. ‘How is this going to work guys?'"
The company's prior attempt to stitch itself together was undone by turf wars between regions. In 1995, Ford created five vehicle design centers worldwide and centralized decision making in Dearborn. But bosses and engineers in the U.S. and Europe didn't cooperate enough and produced lemons like the first-generation Focus, says Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan.
After its U.S. release in 1999, the car was recalled for faulty panels, cruise control and rear wheels, and the North American unit had to re-engineer it. Ford quit trying to operate as a global company and reverted back to regional control in 1999.
"That's one of the big problems with Ford," says Virag. "They always had this division between Europe and North America."
Mulally in Japan
Mulally says his weekly meetings force regional managers to cooperate and be accountable.
"Together we look at one set of data on one screen," he wrote in an e-mail to all employees during his second month at Ford in October. "We talk to each other with candor and respect. We will all participate, and we will all support each others' efforts."
In December, the CEO appointed North American executive Derrick Kuzak, 57, to a new position of worldwide product development head.
"A lot of what we're doing is bringing North America into One Ford," Kuzak says. "It drives investment efficiency. You have to do more with less. You're getting more out of engineers."
The same month that Mulally appointed Kuzak, he flew to Japan to meet with Toyota Chairman Fujio Cho. A student of Toyota's famously efficient global manufacturing process since his days at Boeing, Mulally keeps a book on the subject -- "The Machine That Changed the World" -- in his office. While the Japanese company has mastered the production of world cars such as the Corolla and Camry that are sold globally, Ford still does it backward: Its regions waste money making slightly different versions of the same model for sale in those areas.
World Cars
In the U.S., the $16,000 Focus is produced near Detroit at one of Ford's busiest factories. Inside, robots weld body panels to frames before workers install engines, transmissions, seats and instrument panels. Almost all of these parts are made exclusively for the U.S. model; in Europe and Asia, the Focus is built mostly with different parts.
Ford's move to world cars requires the kind of top-to-bottom changes in manufacturing that have tripped up the company before. Since 2000, Ford has spent at least $5 billion to make its North American plants flexible so they could, like Honda's factories, change the type of vehicle they produce in a matter of days rather than a year. The problem for Ford is that its SUVs and cars are built so differently that one plant can't quickly switch between the two.
Lack of Investment
In 2005, the company shelled out $300 million to rebuild a truck plant in Wayne, Michigan, so it could easily flip-flop between different SUV models. Now that sales of these large vehicles have plummeted, Ford is spending millions more and at least 13 months to retool the same factory to make smaller cars.
Honda, which makes all of its vehicles basically the same way, is now pressing its advantage. At a plant in Ontario, Canada, Honda says, it needed only two months to ramp up production of the subcompact Civic while stopping output of Ridgeline pickup trucks.
At a Ford plant in Dearborn, Bob Bradley, 46, is at work preparing dies -- stamps used to make vehicle body parts -- for world cars. In his 13 years working in several Ford factories in the Detroit area, Bradley has seen their assembly lines decay.
"In order to prop up profits, they were not investing in the facilities," he says. "Our press lines were not in good shape."
Under Mulally's One Ford plan, Bradley is converting standards for dies so they match the ones used in Germany. He says workers support Mulally effort to improve manufacturing because he's been consistent.
"He's started to grow on people because he's proven himself little bit by little bit," says Bradley. "It's not like he has one message one week and a different message the next."
Consumer Reports
In 2010, the redesigned Focus and subcompact Fiesta will be Mulally's first world cars to roll off assembly lines in North America and Europe. At least 80 percent of their parts will be identical. Other models will also share the Focus platform, which includes the suspension and chassis. Ford will reduce the number of platforms to 9 in 2012 from 25 in 2005. In all, world cars may save Ford as much as $25 billion over four years, says Virag.
"You don't need to re-engineer everything," he says. "You don't need two sets of tools."
Six months into his new job, in early 2007, Mulally traveled to the Consumer Reports vehicle test center in Colchester, Connecticut, to work on another weakness at Ford -- the quality of its fleet. Accompanied by two engineers and a spokesman, Mulally was the first Ford CEO to visit the center, whose rankings influence the sales of vehicles.
‘What the Hell'
The CEO and his entourage watched David Champion, the senior director of the center, examine Ford's 2007 Edge wagon, which sells for $26,000. As Champion pulled the lever used to adjust the back of the seat, it broke off in his hand. Immediately, Mulally began to pepper his employees with questions.
"‘How did we get to this point?'" the CEO asked, says Champion. "He looked at them with a ‘what the hell are we doing' look. It was an uncomfortable time. He wants to understand how Ford has gone wrong and wants to fix it."
Under Mulally, Ford began ordering its managers to examine warranty claims daily and send information about defects to plants so they could be fixed. While the quality of Ford's vehicles has improved, Champion says, they still don't match those made by the Asian companies.
In the October 2008 issue of Consumer Reports, Toyota, Honda, Nissan Motor Co., Hyundai Motor Co. and other Asian brands captured the top 10 slots in the quality rankings. The U.S. automaker's Lincoln earned No. 11 while Mercury was No. 15 and Ford's namesake brand was ranked No. 17.
$4 Gas
By early 2008, Mulally had something to crow about -- his job cuts in the prior two years helped Ford post a first-quarter profit. In March, he also agreed to sell Jaguar and Land Rover for $2.4 billion -- less than Ford's purchase price for Jaguar alone -- to Tata Motors Ltd. of India after shedding Aston Martin to an investment group for $931 million a year earlier.
In the next four months, as gas soared to $4 a gallon and credit markets froze, Ford's truck and SUV sales evaporated. Mulally realized that his turnaround plan wasn't moving fast enough.
In July -- on the same day Ford reported an $8.7 billion second- quarter deficit, the worst quarterly loss in its history -- the company said it would accelerate the production of fuel-efficient cars. The CEO says his weekly meetings made it possible to rush four more small cars designed in Europe to the U.S. market in 2010 and ‘11.
"We were all watching the fuel prices," Mulally says. "Nobody knew at what fuel price there would be a structural change on consumer behavior. What if we got together once a year?"
General Patton
Almost four decades after the ‘70s oil crisis, Ford is set to finally offer a full mix of better-quality compacts, sedans and trucks -- allowing it to adjust to shifts in consumer demand as gas prices rise and fall.
But the company may need a bailout to get to 2010, because for all Mulally has accomplished, it's not enough, says Kevin Tynan, an auto analyst at New York-based Argus Research Corp. Mulally should have produced smaller cars faster and pushed for union concessions to take effect before 2010.
"He played the cards he was dealt," Tynan says. "What you needed was someone who would throw back the cards and say, ‘This won't work.' You needed General Patton, somebody who is not going to accept this is how things are done. It was essentially a missed opportunity, maybe the last chance."
Senator Shelby says the only way to save the automakers is by letting them go bankrupt. Only a bankruptcy court can bring down labor costs so they equal those of Asian automakers, Peter Morici, an economist at the University of Maryland, told the Senate Banking Committee on Nov. 18.
Bankruptcy Risk
"Sooner or later this industry has to go through the ultimate reorganization that brings its cost structure absolutely in line with its competition," Morici said.
The risk is that shoppers will avoid a bankrupt automaker's vehicles because of fear the warranty wouldn't be honored, says GM's Wagoner, dooming the company to liquidation. That would set off a chain reaction, Mulally says, disrupting thousands of suppliers that all three companies share. More than 2.5 million people in auto and related businesses would lose jobs, says the Center for Automotive Research Projects in Ann Arbor, Michigan.
"I've always been fearful of my job with Ford," says Bradley, the tool and die maker. With two daughters aged 10 and 15 and a mortgage on a one-and-a-half-level bungalow, Bradley also remodels kitchens and bathrooms on the side. "When I'm laid off, nobody has any money either. My backup plan as a contractor isn't a real good backup plan unless I relocate," he says.
‘Feeling Love'
In October, at a town hall meeting near Ford's headquarters, about 350 information technology employees crowd into a conference room hoping to hear reassuring words from Mulally. "What role do you see for us under One Ford?" a woman asks. Standing in front of the room, with a wide smile on his face, Mulally tells his workers that Ford will survive.
"I really like our Ford plan," he says. "If you're not feeling love, I'll show you more. I'm looking at people who are important to our operations at the highest level." As the 45-minute meeting ends, the employees stand and applaud.
Since that meeting, with surging jobless claims in December signaling a deepening U.S. recession, Ford's chances of survival have dimmed even more. If the automaker can eke out an existence until its new, fuel-efficient cars show up at dealerships worldwide -- and if consumers buy those vehicles -- then Mulally's chronic optimism may finally be justified.
