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Turning Around: Ford's CEO drives company from its record $12.6 billion loss to $400 million operating cash
AP File Photo
Alan Mulally, Ford’s CEO, came to the company in 2006 with no experience in the auto market.
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Published: April 27, 2008
DEARBORN, Mich. - DEARBORN, Mich. - DEARBORN, Mich. -- Ford Motor Co., long considered the sickest of the Big Three U.S. automakers, is showing signs of a surprise turnaround.
When Chief Executive Alan Mulally took over in 2006, Ford was barreling toward the worst one-year loss -- $12.6 billion -- in its 105-year history. A frail U.S. economy and high gasoline prices were ripping into sales.
But in the past year, Mulally, a former Boeing Co. executive with no auto experience has improved year-on-year earnings each quarter. In 2007, Ford startled the industry by reporting $400 million in positive operating cash flow, something General Motors Corp. and Chrysler LLC have been hard-pressed to match.
At the same time, the quality ratings of Ford vehicles spiked (a trend that started before Mulally arrived) and now approach the lofty levels of Toyota Motor Corp. That chopped $1 billion off Ford's warranty costs last year.
Ford isn't done cost-cutting. According to people close to Mulally, he is looking at selling Volvo despite Ford's repeated statements that it intends to hang on to the brand. Similarly, he hopes to shut down the ailing Mercury brand.
More job cuts may be coming. In Ford's most recent buyout offer, only about 4,000 workers signed on, according to a person familiar with the matter, about half the desired total. Mulally will likely offer one more round, then could resort to layoffs, people familiar with the matter say.
He declined to comment on the possibility of a Volvo sale, and has long maintained that Ford is committed to Mercury.
As have GM and Chrysler, Ford has trimmed costs in ways big and little. It has eliminated more than 46,000 North American jobs in the past few years, or about one-third of its work force. It has reined in a mind-boggling level of vehicle customization, which jacked up costs. Until recently, for instance, the Lincoln Navigator offered 128 options on its console alone.
But unlike Chrysler and GM, Ford has also rapidly pared back the number of brands it offers so it can instead focus on the core Ford lineup. Mulally shed Aston Martin, Jaguar and Land Rover -- acquired over the past 20 years -- to steer investment toward Ford and accelerate a push into new small cars, where sales are rising.
Getting rid of Volvo and Mercury would leave Ford with only two lines, Ford and Lincoln, plus a controlling stake in Mazda Motor Corp.
By contrast, GM is sticking with eight brands. Chrysler, a much smaller company, is still sorting out how to position its three.
"This is a classic example of how one can shrink to grow," said Peter Nesvold, an analyst at Bear Stearns. Mulally "is making many difficult decisions during a down cycle, which should benefit the company as they enter the next upturn."
Ford's restructuring could still lose traction. Rising energy prices, Wall Street's debt-market woes and the nation's housing downturn are also hurting auto sales. Annual sales this year could hit their lowest level in more than 10 years, according to J.D. Power & Associates.
And while Ford is doing well now with the Edge small SUV, Fusion sedan and Focus compact, car-buyers can be fickle. A few years ago, Chrysler had huge hits with the 300 sedan loaded with a powerful eight-cylinder engine, but its appeal has waned as gasoline prices zoomed well above $3 a gallon.
Moreover, Ford still needs cooperation from the United Auto Workers union to replace older workers with lower-paid new hires.
Still, Mulally, 62, has managed to improve the company's bottom line during the worst auto-sales downturn in more than 10 years, while shifting Ford's vehicle mix away from fuel-thirsty trucks and SUVs. In 2004, Ford relied on large trucks and SUVs for 70 percent of sales; in March that number was 43 percent.
Mulally came to Ford from Boeing, the aircraft-maker, where he had spent his entire career. Boeing twice passed him up for the CEO job despite his work rehabilitating Boeing's once-struggling commercial-airplane division by borrowing efficiency ideas from Toyota.
By the summer of 2006, Ford's troubles were mounting. William C. Ford Jr., then CEO as well as chairman, decided that the automaker needed a new chief executive. A member of Ford's board suggested Mulally.
On a Saturday in July, Mulally flew out for a meeting at Ford's home in Ann Arbor, Mich. The two quickly hit it off. They also agreed that, to restore profitability, the company should focus on its core Ford business.
But it wasn't long before Mulally ran up against a corporate culture that viewed Ford as just one brand among many. In one case, he recalls, colleagues suggested that he remove the blue Ford logo from the pages of a PowerPoint presentation lest colleagues from Volvo, Jaguar, Lincoln or other brands feel slighted.
"You're going to alienate everybody," Mulally recalls being told. He capitulated.
A big cause of Ford's trouble was becoming clear to the automaker's new CEO. Ford, as did GM and Chrysler, profited greatly on trucks and SUVs during the 1990s but ceded to the Japanese in cars. Ford only had one small car, the Focus, compared with Toyota's six.
Mulally was also dumbfounded to learn that Ford's various global regions operated independently. After one product-development review, he learned that Ford built two Focus small cars, with different parts, depending on the market -- one sporty, hot seller in Europe and a cheaper dud in the U.S.
"Can you imagine having one 737 for Europe and one 737 for the United States?" Mulally said.
There is a business rationale for designing individual vehicles for different markets. For years, Ford adhered to the strategy as a way to cater to regional consumer tastes.
Mulally accelerated Ford's restructuring plan, among other things curtailing low-profit-margin bulk sales to rental-car fleets. The move was risky and caused Ford's market share to drop below 15 percent. For the first time ever, Toyota passed Ford as the second-largest automaker, behind only GM, in the U.S. by sales.
But Mulally wanted Ford's market share to reach its "natural level" -- the volume where cars sell without big discounts.
"I don't care what market-share level you are," Mulally said, the goal is to "get back to profitability."
Last year's 6 percent production cut helped Ford command higher prices for its cars, narrowing its annual pretax loss by $4 billion.
To attack Ford's far-flung operations, Mulally turned to Derrick Kuzak, the North American development chief who had also worked in Europe, where Ford builds several highly regarded cars.
The mission: Build a portfolio of "world cars" that share most of their components no matter where they're sold. This is the holy grail for automakers because it improves economies of scale. But it's tricky because it requires global teamwork to build vehicles that appeal across cultures.
Ford's first big test will be the reintroduction of the Fiesta subcompact, its first world car under Mulally, which will go on sale in Europe and Asia this year, then hit U.S. showrooms in 2010. How well Americans receive it will go a long way toward determining whether Ford can compete with foreign rivals.
Meanwhile, Mulally was thinking about distractions -- namely, Ford's other brands including Jaguar and Land Rover. A courteous Midwesterner who often describes things as "neat," Mulally can resort to profanity when discussing Ford's past acquisitions of noncore brands like these, people familiar with the matter say.
Mulally said he isn't judgmental about Ford's past decisions.
Ford had already sold Aston Martin, the niche British sports-car maker. In early summer 2007, Mulally told Ford it should also part with Jaguar and Land Rover. Earlier this year, Ford sold the brands to India's Tata Motors Ltd. for $2.3 billion, less than half what it originally paid.
Ford said he remained "in total sync" with Mulally "from day one" about selling the luxury brands. Any differences, he said, arose over minutiae in completing a sale.
Last fall, the company made two other big strides. To create a new image for Ford, Mulally poached Jim Farley, a Toyota marketing guru. In November, the company reached a landmark cost-cutting deal with the United Auto Workers union.
By then the sales start of the Focus was under way, and the voice-controlled Sync was such a hit that Ford started offering it as a standard feature on other models. So far this year, vehicle sales in the U.S. are down 8 percent, but Focus sales are up 23 percent.
This past January -- about 18 months after his first, logo-free, PowerPoint presentation -- Mulally started making managers carry around pocket-sized plastic cards outlining his "One Ford" vision in bullet points. At the top of the card: Ford's blue oval.
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