New man must work to save Ford

The Ford name is ubiquitous in Detroit. Bill Ford Jr, chairman of Ford Motor, owns the Detroit Lions football team, which plays at Ford Field. Not far away is the Henry Ford Health System, one of the city’s top hospitals. The city also boasts an Edsel Ford freeway, a Henry Ford Heritage Centre, an Edsel & Eleanor Ford House, and more.

But suddenly the company that Henry Ford started 103 years ago has, for the first time in its history, an outsider as chief executive – neither from the family nor a lifetime Ford employee.

Alan Mulally knows why the call came. As the man flown in from Boeing starts running Ford, he will have seen all the problems the carmaker faces: sliding sales, half-empty factories, poor productivity, an inflexible workforce, huge and growing losses and rock-bottom morale.

Mr Mulally will join Ford’s other directors at a board meeting next week to put the finishing touches to a plan aimed at reversing years of falling share in the key North American market and missed financial targets (markets put a probability of about 40 per cent that Ford will default on its bonds or file for bankruptcy within five years).

It will mark the third attempt in less than five years to reinvigorate the company. Mr Ford acknowledged in a memorandum to the company’s 300,000 employees last week that “the business model that sustained us for decades is no longer sufficient to sustain profitability”.

Ford occupies a special place in the automotive industry. The family has remained at the helm of the company long after Motown’s other pioneers – Dodge, Chrysler, Olds and Buick, to name a few – lost control of their businesses. Ford is still the world’s third biggest carmaker, after General Motors and Toyota. Until recently its woes were eclipsed by a crisis at GM, which has racked up heftier losses and is considered by many to be in a more fragile financial state.

GM’s North American operations lost $6.8bn (£3.6bn, €5.3bn) before tax in the first half of this year, compared with $243m at Ford. Nonetheless, the troubles at Ford (which incurred a worldwide net loss of $1.3bn in the latest six months) are arguably deeper and more intractable, because they are rooted in a culture that is both flawed and deeply ingrained.

“Ford has always been nervous about leadership: they love being second to GM,” says Martin Goldfarb, a consultant who ran the group’s market research for more than a decade to 2001. “It was not about being the best,” he adds. “It was about what they have to do to maintain a position, as opposed to leapfrog a position. They always talked quality but never invested in quality.”

Amid the gloom infecting Ford’s boxy headquarters in Dearborn, near Detroit, there are precious few bright spots: the Mustang muscle car is doing well, Canadian sales hit a six-year record last month.

Cast an eye further afield, though, and Mr Mulally – as well as Ford investors – can find an example to counter the pessimism in Michigan. That example is Fiat, long the basket-case of the European car industry but, under a new leader, now back on the autostrada and motoring.

The parallels between Fiat’s position two years ago and Ford today are striking. Both have taken a decision, rare in the car industry, to parachute in a leader with no executive automotive experience (in the case of Mr Mulally, no motor experience at all). Both have strong family shareholders unwilling to cede control of the company. Both needed problems to be fixed urgently to prevent financial meltdown, and both had gone through a rapid series of strategy changes, at Fiat accompanied by five chief executives and three chairman in two years.

Both companies have high-profile executive chairmen far more experienced in the company than the chief executive they recruited. Just as Bill Ford has surrendered the chief executive’s post to Mr Mulally, Luca di Montezemolo, a long-standing friend of Fiat’s controlling Agnelli family, spent many years as chief executive of Ferrari, a Fiat subsidiary. Finally, both Mr Mulally and Sergio Marchionne, who took the helm of Fiat in June two years ago, inherited business strategies drawn up by their predecessors – plans in which markets have littleconfidence.

Yet Mr Marchionne has succeeded in turning Fiat from a company that, in his words, “somehow lost its ability to compete” into a profitable business, winning back market share and beating the targets he inherited. Fiat is also, for the first time in 19 years, worth more than Ford or GM, which are both much larger companies by turnover.

Certainly, the task will be difficult at Ford, a company seen by many as plagued by bureaucracy and a way of life that insiders characterise as “meetings about meetings”.

This in turn has had its effects on Ford’s relationships with others in the industry. One rubber-products supplier complains that Ford engineers have repeatedly turned down invitations to visit his company’s plant in Japan – either because they do not have a travel budget or because the three or four levels of management required to approve the trip have not come through with a decision.

This sluggishness became evident even as Ford – like GM and Chrysler – saw profits soar in the late 1990s from surging demand for sport-utility vehicles and pick-up trucks. Ford was in the forefront of the rush to SUVs and pick-ups. Its flagship Explorer became America’s most popular SUV, with sales reaching a peak of 445,000 vehicles in 2000, equal to 11 per cent of Ford’s total US unit sales.

Ford spearheaded the transformation of the pick-up truck from a working vehicle to one that millions of American families wanted in their driveways. The F-Series truck remains the US’s top-selling vehicle, with sales almost double the Toyota Camry, the most popular car. The F-Series made up almost one-third of Ford’s total US sales in 2004, its best year.

In addition, Ford poured resources into hammering together a global luxury-car group. Having bought Jaguar in 1989, it added Aston Martin, Volvo and Land Rover over the next 11 years.

But it took its eye off the bread-and-butter North American car business. It allowed the Taurus, for years the US’s best-selling car, to age, then further damaged the brand by pushing it into car-rental and other fleets. Closure this year faces the Atlanta plant that builds the Taurus, even though Ford still sells more than 13,000 of them a month.

Lincoln, Ford’s North American luxury car brand, is a shadow of its former self. The Lincoln Town Car, once one of the most sought-after models by wealthy older Americans, is now used mainly as an airport taxi and fleet limousine. The model is widely expected to disappear within the next year or two.

In a series of mysterious about-turns that have become a Ford hallmark, Lincoln decided last year to change the name of its latest saloon from Zephyr to MKZ, pronounced Mark Z. Six months later, it switched the pronunciation to MKZ. “You’ve got to work really hard to do as badly as Lincoln has done,” says Kim Korth, president of IRN, a Michigan-based consultancy.

The neglect of the car business is hitting home at a time when high fuel prices, rising interest rates, a slowdown in the housing market and intensifying competition has dampened demand for Ford’s SUVs and trucks. Sales of the Explorer were almost one-third lower between January and August than a year earlier. A new model, introduced last autumn, has flopped – partly, say outsiders, because Ford failed to distinguish it more boldly from its predecessor. F-Series sales are down 13 per cent so far this year.

Such setbacks have been accompanied by management departures. Over the past year, Ford has lost, among others, its chief of North American product development, the head of North American vehicle operations, the head of its hybrid vehicle programme, and the group vice-president for North American marketing and sales. “They’ve already lost a whole generation of people, and more want to leave,” says one senior investment banker who does occasional work for Ford.

The one constant has been the Ford family. Henry Ford’s descendants – among them Bill Ford, aged 49, his three sisters and 13 cousins – own about 5 per cent of the equity but control 40 per cent of the voting stock. Bill Ford’s father, William Clay Ford Sr, and cousin Edsel also sit on the board. But Bill Ford’s tenure has been marked by missed deadlines and shifting targets.

First, he outlined a “revitalisation plan” that promised to produce $7bn in pre-tax profit within five years. Then, as it became obvious that the target would not be met, Ford devised another turnround plan, known as The Way Forward, which was unveiled with much fanfare in January. The Way Forward calls for the North American operations to return to profitability by 2008 through, among other measures, the closure of 14 factories and 30,000 job cuts.

Eight months on, Ford is clearly still struggling to find a real way forward. A pledge to reverse market-share loss this year is unlikely to be met. Ford shares have lost half their value since Mr Ford took the helm in October 2001, and markets will be looking to Mr Mulally to reverse that slide.

At Fiat, the approach Mr Marchionne took had two main thrusts: fixing the finance and changing the culture, which, like Ford, was inward-looking and resisted outsiders. He cleared out many top executives, removing the rigid hierarchy and creating a top team of young managers he refers to as “my kids”.

“We went through an initial period of assessment of the senior leadership and determined relatively quickly whether we had the right skills and values at the table to bring about the necessary cultural transformation of the group,” Mr Marchionne said in July. “Many did not make the cut.”

Beyond that, he concentrated on sell-offs and legal deals to repair the finances of the business, removing the uncertainty about Fiat’s future that had damaged morale and made recruitment difficult.

Adam Jonas, motor analyst at Morgan Stanley, says ending the bleeding is a key part of any turnround. “You have to get rid of these whispers of bankruptcy to get people focused and stop the distraction,” he says.

Could Mr Mulally take the same approach? Like Mr Marchionne, he has arrived to find some parts of the business already on the block and a wide-ranging review of the rest under way, conducted by Kenneth Leet, a former Goldman Sachs banker recruited to Ford last month.

Aston Martin, the British luxury car brand, is being sold by UBS, with a price tag put by insiders at close to $2bn, although analysts believe it is worth far less. The troubled Jaguar brand, together with 4x4 specialist Land Rover, are also expected to be put up for sale within the next couple of months, while Sweden’s Volvo and a stake in Ford Credit, the finance arm, could be sold ifnecessary.

There will be big differences in any recovery at Ford compared to Fiat. Ford is about to embark on another gigantic job-cuts programme, widely expected to include voluntary early retirement and redundancy offers available to all staff. Mr Marchionne likes to boast that he has not closed any of Fiat’s factories, although its various restructurings over the past five years have led to more than 12,000 job losses.

The future of Ford, like that of Fiat, will be determined not by the ability to wield the axe – already well proven by Mr Mulally at Boeing – but by a skill at increasing sales through new and better vehicles. “No turnround has ever been done without new products,” says Mr Jonas at Morgan Stanley.

At Fiat, the new products were the successful Panda city car, just on the market when Mr Marchionne arrived, and the highly popular Punto hatchback, which has been the key to its growing sales.

At Ford, the Edge goes on sale in the US in November in the hope that it will become the first high-volume entry in the growing “crossover” segment of car-based SUVs. But there is so far little sign that Ford has a smash hit on the scale of the Punto hidden away in its developmentcentre.

Mr Mulally was known at Boeing for his skill in aircraft design. If he can find a way to transfer that ability to cars, perhaps he can put Ford back on the road.

Boeing high flyer aims to repeat the trick

Alan Mulally is the leader who kept Boeing in the commercial aircraft business following years of decline characterised by a tired product line-up and a litany of labour and production problems, write Doug Cameron and Kevin Done. Now, after 37 years with the aerospace group, he has swapped his office at Boeing’s sprawling plant near Seattle for a glass box in Dearborn, Michigan, where he aims to plot Ford’s own recovery.

The view from the executive suite may be different but that from the factory floor will be all too familiar to Mr Mulally, who took over Boeing’s commercial aircraft business in 1998 after a botched increase in production allowed arch-rival Airbus to close the gap between the companies.

Doubts and indecision over product development and timid investment in commercial aerospace left Boeing floundering in the early years of the new century. An arrogance born of years of industry leadership allowed it to underestimate its younger rival.

Admirers of Mr Mulally point to his infectious enthusiasm, deep schooling in engineering and belief in team working as attributes that will equip him well for his new role as chief executive of the second-largest US automotive group.

James McNerney, who pipped Mr Mulally for the group chief executive job at Boeing last year, says his former colleague “will have to learn the industry”. But the similarities between 21st-century automotive and aerospace manufacturing are striking.

Mr Mulally spearheaded the transformation of Boeing’s production processes, borrowing heavily from the lean manufacturing techniques and just-in-time inventory management pioneered by Toyota – which in July sold more cars than Ford in the US market for the first time.

Ford’s board were attracted by his leadership skills and ability to mobilise design, engineering and manufacturing staff based on different continents.

Mr Mulally also led the development of Boeing’s 777 aircraft – its first new model in 15 years – and helped convince his own board to press ahead with the 787. The all-new aircraft represents a step change in operating performance and has secured hundreds of orders, leaving Airbus scrambling to redesign its own competing plane.

Last year Boeing sold more aircraft by value than Airbus for the first time in several years and its likely to sell more by units as well in 2006. It expects to move back into the lead in delivery units in 2008 after falling behind for the first time in 2003.

The success of the 787 masks some mis-steps during the 1990s, however, including aborted plans for a new 747 jumbo – since revived – as well as the Sonic Cruiser, which would have flown faster than conventional commercial aircraft.

Airlines wanted planes to be cheaper, not faster – fares have fallen by a fifth in real terms since 2000. The 787 fitted the bill by using carbon-fibre to reduce weight, and boasts far more efficient engines to cut fuel costs.

However, the sharing of development costs with partners and splitting up manufacturing have been just as important in cutting total costs, a strategy that Mr Mulally can put to work in the automotive industry.

Success in the aerospace and car industries has evolved from managing assembly into a combination of astute marketing and efficient supply-chain management. Both industries have also made a virtue of developing products based on a single “platform”, making them cheaper to design, manufacture and maintain.

The 787 is a case in point. Boeing’s production facility at Puget Sound near Seattle is simply a vast assembly line, with almost none of the components made on-site. When Boeing wanted to show reporters how the 787 was progressing, they chartered an aircraft formerly owned by Andre Agassi, the retired tennis star, on a round-the-world trip.

The first finished parts of the 787 were completed by Fuji Heavy Industries in July and will be shipped to a plant in South Carolina for further work before heading to Seattle. Other main components will arrive from Italy and China.

Mr Mulally admits that he owns a Toyota Lexus but said that he “couldn’t wait to drive a Ford” – though the tired line-up at Ford’s own luxury Lincoln brand begs the question of what he will park in his garage.

The first design task for Mr Mulally may be to rework his quirky signature, which incorporates a head-on view of an aircraft with a smiley face. Imprinting his trademark grin on the front of a Ford may take a little longer.

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