Why Ford Should Worry

Chief Alan Mulally and his executives are rightfully proud they avoided bankruptcy. But they're not safe yet. Not by a long shot

By Joann Muller
Published: Feb 23, 2012
LONG ROAD AHEAD CEO Alan Mulally is sitting pretty at Ford, but he shouldn’t get too comfortable
Image: Sam varnhagen/ Ford Motor Co.
LONG ROAD AHEAD CEO Alan Mulally is sitting pretty at Ford, but he shouldn’t get too comfortable

The coronation went exactly according to Ford’s script. At the North American International Auto Show in Detroit, 2,400 reporters hushed as video screens the size of tractor trailers flooded their vision. A booming voice shook Joe Louis Arena: Two household names, Toyota Camry and Honda Accord, dominated the midsize car business last decade. “Then,” said the voice, “something changed.” Their sales and market share ran flat in 2008. When the recession hit, they plummeted. “What you might not realise is that Camry and Accord never recovered.” Camry sales fell 31 percent between 2007 and 2010. The Accord fell 28 percent. Both slid further after the 2011 quake in Japan.

But not the Ford Fusion. Its sales rose 66 percent in the last four years. By 2011, it passed the Accord, but still trailed the Camry and Nissan’s Ultima.

Cue the loud music, the smoke machine and the car: The reinvented Fusion, a pretty sedan with premium features like technology that keeps you in your lane or helps you parallel park. When it goes on sale later this year, it’ll be available with a variety of fuel-efficient power trains: Gasoline, hybrid and plug-in hybrid that Ford says will get the equivalent of 100mpg—better than a Chevrolet Volt or a plug-in Toyota Prius. No price just yet.

The message is unmistakably aggressive, arguably arrogant: Ford just redefined the midsize-car market. The rest of the field, including General Motors’ redesigned Chevrolet Malibu and the popular Hyundai Sonata, should pack it in. “I think we’re going forward with some quiet confidence,” Ford’s president of the Americas, Mark Fields, said later that evening over a filet mignon dinner with reporters at the stately Detroit Athletic Club. Aggressive? Nah. “We’re just laying out some facts.”

As anyone in this town will tell you, believing one’s own hype in the car business is more reckless than texting while driving. Just ask General Motors.
Ford should keep this in mind. While it would have you believe that the new Fusion is the latest in a string of product home runs—stylish, fuel-efficient cars, loaded with technology, that consumers around the world are dying to drive—here in the US facts suggest otherwise.

Let’s start with the Fiesta, Ford’s smallest car. Introduced in 2010, it had a decent first year, but it’s already fading. In the last two months of 2011, Chevrolet’s new Sonic handily outsold the Fiesta, which is among the highest priced in the segment. Ford ended the year with 126 days of supply, but says that’s typical for December. Dealers generally like to have 60 days’ supply or less.

Then there’s the Focus, Ford’s new compact. It, too, has great looks and lots of premium features (and a premium price). But it was outsold by the Toyota Corolla, Honda Civic, Chevy Cruze and Hyundai Elantra in 2011. Launch issues last spring hurt production—some bad dashboards and transmissions—but those seem to have been ironed out. Now there’s a glut: 89 days’ worth.

There’s no denying that the new Ford Explorer, now more car-like and fuel efficient, is a bona fide hit. And sales of Ford’s bestseller, the F-series pickup, rose 11 percent as the housing market started to improve (but Chevy and Ram trucks sold faster, so Ford lost market share). Some of Ford’s other best-known products lost ground in 2011, too, including the Taurus, the Mustang and the Flex. Oddly, Ford’s hottest sellers are products that are in the last year of their life cycle and about to be replaced: The Fusion and the Escape. Best guess: Bargain shoppers are scooping up great deals on these out going models.

Ford ended the year with 16.5 percent market share, one-tenth of a percentage point better than in 2010. But it achieved that only by shoveling more cars into commercial fleets and rental lots. Counting only showroom sales, Ford lost an estimated two-tenths of a point. (This, by the way, will hit top executives in the wallet, since their bonuses are tied to retail share growth.)

In fact, Ford sells more of its cars to rental agencies and other fleet customers than does any other major carmaker. In 2011 about 32 percent of the 2.1 million cars Ford sold went to fleet customers (45 percent of Focus sales). GM, by contrast, sold 23 percent to fleets. Most others were below 10 percent. Why does it matter? Because fleet customers buy in bulk, they tend to pay less than showroom buyers, and that means carmakers earn less profit on those sales. While fleet sales aren’t necessarily bad, most car companies prefer to limit them. Toyota and Honda, for instance, sell very few cars to fleets.

Another interesting statistic that challenges conventional wisdom: Ford recalled 3.3 million vehicles in 2011, almost as many as Honda (3.9 million) and Toyota (3.5 million), according to the National Highway Traffic Safety Administration. Meanwhile, GM recalled 500,000 vehicles, and Chrysler, usually tagged as having the worst quality among the domestics, recalled 773,000.

That’s not to say that Ford is falling apart. It’s done a lot right. While its major US rivals went bankrupt, Ford muddled through an out-of-court restructuring that has since been hailed as one of the greatest corporate turnarounds in decades. After losing a record $30 billion between 2006 and 2008, Ford turned profitable in 2009, earning an estimated $16 billion during the last three years (not counting an expected special tax gain for 2011, which will be announced on January 27). Analysts estimate Ford revenue for the year was around $135 billion.

The hero is Chief Executive Alan Mulally, who arrived at Ford from Boeing in September 2006, after Ford’s previous turnaround plans stalled. Mulally signed off on a plan by Executive Chairman Bill Ford Jr. and then chief financial officer Don Leclair to mortgage everything Ford owned, including its patents and blue oval trademark, in exchange for a $23 billion loan.

That cushion is what helped Ford to avoid bankruptcy, unlike GM and Chrysler.

Upon arrival Mulally dumped Jaguar, Land Rover, Aston Martin and Volvo, and reduced Ford’s stake in Mazda. He focussed on fixing the flagship brand and took advantage of Ford’s global scale to build cars that could be sold worldwide.

He called the strategy “One Ford” and gave his executives laminated wallet cards to drive home its tenets: Working together, accepting reality and developing new models that buyers want. Every Thursday morning, he convenes senior managers for a business review and encourages them to put problems on the table so everyone can chip in to solve them. “Alan made it a safe place to bring up issues, which was not always the case,” says Fields, a reference to Ford’s infamous backstabbing culture under past leaders.

“We’re like a giant flywheel engine,” he adds. “It takes a while to get going, but we’ve got a lot of momentum now, and it’s changed how the company works together.”

But overconfidence is what got Ford into big problems last time around. In the late 1990s, Ford was on cruise control; GM was a basket case; Chrysler was struggling after its merger with Germany’s Daimler. Huge profits from Ford’s trucks and big SUVs, as well as its Ford Credit unit, made it easy to overlook Ford’s sagging car business, losses in Europe and problems elsewhere in the world. Its strong balance sheet allowed Ford to go on a spending spree, paying top dollar for those European car companies and even buying up peripheral businesses like repair shops, Hertz car rental and a junkyard.

Things started to go bad in 2000. Quality suffered, productivity fell and then came the Ford-Firestone fiasco, costing billions in repairs and goodwill. After the terrorist attacks of September 11, 2001 Detroit automakers entered a decade of disastrous discounting that ate profits and killed their brand equity.

When Mulally arrived he invoked a more disciplined approach: Ford would build only enough cars to match consumer demand. When the 2008 credit crisis hit, Ford closed factories and reduced its workforce, just as GM and Chrysler did in bankruptcy.

It’s all been good for Ford, which has emerged as a leaner, better-run company—and without the stigma of government ownership. Last month, Ford reinstated its quarterly dividend, which had been suspended in September 2006, signalling renewed confidence in the company’s financial outlook.

Ford has posted 10 consecutive quarters of net profits and has continued to whittle away its massive debt, which now stands at $12.7 billion. By the middle of the decade, Ford plans to have just $10 billion in debt.

In October, the three major credit rating agencies upgraded Ford after the company’s 41,000 unionized workers ratified a new four-year labour contract. Now Ford is within one notch of investment grade at all three agencies, and two have assigned the company a positive outlook. The last time Ford was rated as investment grade by all three agencies was in May 2005.

But Ford is not in the clear, not by a long shot. Mulally told analysts that various challenges—Thai floods, rising commodity prices and worker bonuses—hurt fourth-quarter results. “Outside of that we’re on track,” he said.

But the European debt crisis looms, and Ford is scrambling to catch up in Asia, with four new plants in China, two in India and one in Thailand. And Ford still must revive Lincoln, its sagging luxury brand.

Meanwhile, competitors are stronger. GM and Chrysler are back on their feet, turning out great vehicles and profits, too. Toyota and Honda are reloading their arsenals with a wave of new products coming in 2012. Nissan has been steadily growing in the US, and Volkswagen is threatening.

The Fusion is the latest Ford model—after the Fiesta and the Fo cus—to be developed under Mulally’s ‘One Ford’ plan. Designed as a midsize car for global markets, it will be sold in Europe as the next-generation Mondeo. But clearly Ford’s bet on premium smaller cars, along with hybrids and plug-ins, carries some risk as long as fuel prices remain relatively modest.

Ford has achieved a lot, but company leaders need to be honest with themselves. Their work has been good. But it is far from over.


(This article is excerpted from the latest Forbes India 02 March, 2012 issue which is now available at news stands and book stores. You can buy our tablet version from Magzter.com)

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