Ford's Survival Strategy Based on New Product Launches

LCT Staff
Posted on November 13, 2008

DEARBORN, Mich. - For the last six weeks, Ford Motor Co.'s top executives met almost daily to craft a plan to keep the company solvent in the face of the worst financial crisis in decades. Surrounded by black-and-white photographs of Henry Ford and the Model T in the Thunderbird Room on the 11th floor of Ford's world headquarters, they waged a battle to decide Ford's future.

CEO Alan Mulally and his leadership team worked through lunch, taking quick bites of Caesar salad as the global credit crisis deepened and automobile sales collapsed. With gasoline prices falling, some argued that Ford should abandon its costly plan to retool North American truck factories to produce smaller, more fuel-efficient cars from Europe. Others pushed to curtail future investment in key products like the F-150 pickup that have seen sales drop off dramatically in recent years.

Global product development chief Derrick Kuzak - backed by Mulally - countered: If Ford has a future, it depends on delivering a new generation of class-leading cars and trucks that people actually want to buy. They fought off every challenge to one of the most ambitious product plans ever put together, albeit at the cost of thousands of jobs.

"We're only going to be in business if we create products that people really do want and value," Mulally told The Detroit News in an exclusive interview Tuesday. "This is the essence of creating a viable Ford."

Unlike rival General Motors Corp., which has curtailed its investment in some new vehicles to conserve cash, Ford is betting the business on new cars in a make-or-break bid to turn the company around before time runs out.

Ford's latest launches have done little to arrest its decade-long decline in U.S. market share, and it is far from certain that the cars and trucks in Ford's pipeline will be enough to turn the tide. Yet, Wall Street analysts such as Eric Selle of JPMorgan say this is the only way forward for an automaker that has wasted too many years producing lackluster products that barely covered its costs.

"The status quo is no longer acceptable," he said. "Abandoning the product plan would have been a bad move."

Ford has demonstrated that it can make money off its small cars in Europe, Selle said, adding that the concessions it won from the United Auto Workers union last year should allow Ford to do the same thing in this country.

In Mulally's Thursday morning meetings, already the stuff of legend in Detroit, Ford's top executives review the company's progress on the turnaround plan. By the end of September, the full magnitude of the global credit collapse was becoming all too apparent to Ford and the company needed to take urgent action to shore up its liquidity.

The weekly meetings became daily sessions. Mulally summoned the leaders of Ford's Asian and European operations to Dearborn. Along with Ford Americas President Mark Fields, Kuzak and other key executives, they began looking for ways to conserve Ford's liquidity.

Each time, they would emerge from the Thunderbird Room with orders for their respective teams, which would then work long into the night crunching numbers and running models.

They worked Saturdays and Sundays, poring through the company's business plan looking for places to shave more costs. But the discussion always returned to the product plan.

Vehicle programs are a huge expense. Cutting one is an easy way to balance the books. GM is postponing new investment in its pickups to save money. Chrysler LLC canceled part of its product portfolio earlier this year. Some at Ford wanted to do the same thing.

"It was like, OK, which one do you want to cut out? Which one do you think we don't need? Remember, this is to stabilize our position in the marketplace and actually grow. We're not going to stabilize anything" if we keep cutting, Mulally said. "You have to allow that debate to happen, because we had to still come up with all of the hard actions."

Kuzak told The News that he saw little point in preserving cash at the expense of Ford's lineup.

"Outstanding products are the heart of any turnaround of our business and its future success," he said. "The whole intent from the beginning was to protect the product plan and the capital spending and engineering that goes with it and look for every other element of cash that isn't directly tied to the products."

Mulally's turnaround plan is based on consolidating Ford's worldwide operations to better leverage its global scale. Kuzak said many elements of that plan are ahead of schedule, and he challenged his department heads around the world to study their budgets to determine what could be eliminated in light of these newfound efficiencies. Other executives did the same.

They also began a careful analysis of Ford's most efficient operations, like its new joint-venture factory in Nanjing, China. Chinese partner Changan had introduced some cost-saving tooling practices there that Ford rushed to implement at other facilities around the world.

As part of this effort, executives decided to cut another 10 percent of the company's salaried payroll in North America. Benefits, including the bonuses paid to Mulally and other senior executives, are being cut. So is advertising.

Ford was already on track to cut at least $5 billion in annual operating expenses because of its earlier restructuring actions. These new cuts, announced Friday, are expected to save another $8 billion to $9 billion.

At the same time, Ford is transferring money from its lending arm, Ford Credit, to the parent company and will continue debt-equity swaps to raise additional capital. These actions, combined the possible sale of assets like its stake in Japan's Mazda Motor Corp., are expected to raise another $6 billion to $8 billion through 2010, when the full benefits of the new UAW contract kick in.

The product plan remains largely intact. In the end, Ford only delayed one new product program -- a European crossover that had not even been announced. It is also postponing plans to offer a diesel version of the F-150, as well as the freshening of a few of its poorer sellers in the United States.

Because Ford's plan assumes no help at all from the federal government, some of these actions could be reversed by a federal bailout. And Mulally said Ford's approach should help make the case for government assistance.

"Whoever is going to invest or loan us money wants to know we're taking the actions to create a viable company going forward," he said. "We are absolutely taking the appropriate actions. We've demonstrated that we're making progress."

Source: Detroit News

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