Reality bites Ford as it eyes new path


Published: Friday, January 26, 2007 at 6:01 a.m.
Last Modified: Friday, January 26, 2007 at 12:00 a.m.

DEARBORN, Mich. — Just 10 months ago, William Clay Ford Jr. vowed that his auto company, despite its mounting losses, would "reclaim our legacy" in the American car market and "emerge stronger than we've ever been."

But there is a new message coming out of the chief executive's office at Ford. Alan R. Mulally, recruited last fall from Boeing to run the Ford Motor Co., has signaled that the bigger-is-better worldview that has defined Ford for decades is being replaced with a new approach: less is more.

Instead of insisting that Ford reverse its slide, Mulally says that Ford will become much smaller. Its forecasts show it may fall from second to fourth place this year in the American market, behind General Motors, Toyota and Chrysler.

The hiring of Mulally, leaving William Ford as chairman, marked the first time any Detroit carmaker has reached outside the industry for a new leader. And Mulally has broken with tradition in a hurry. He flew to Japan to meet with top executives of its toughest competitor, Toyota, to seek their advice on ways to streamline Ford's manufacturing operations.

When asked about his priorities for fixing Ford, Mulally said in an interview this week, "At the top of the list, I would put dealing with reality."

It is a harsh reality. On Thursday, Ford reported that it had the worst year in its history in 2006, when it lost $12.7 billion. In the last three months of last year, it lost $5.8 billion.

A big part of that was related to one-time charges from worker buyouts. But Ford's losses are also accelerating because of falling sales of its big SUVs and pickups, and its inability to sell vehicles without offering costly rebates.

One Wall Street analyst, Jonathan Steinmetz, calculated that Ford's "terrible" 2006 performance was equal to a loss of $4,700 per vehicle. Earlier this decade, Ford earned profits of that size on its big vehicles, a time when it held almost a quarter of the U.S. car market.

Ford, whose market share dropped to 17.5 percent last year, is in the middle of shedding 44,000 workers, a third of its total staff. It is also closing 16 plants, and has said it does not expect to make any money in North America until 2009. By then, it expects to sell only about 14 percent of the cars and trucks purchased in the United States.

Mulally is trying to be both optimistic and pragmatic, creating of sense of urgency while reassuring his anxious workers that the company has a future.

Mulally is in a honeymoon period and has escaped any blame for Ford's poor results last year, even though the worst performance came last quarter, when he was in charge.

Ford executives in the past also have made similar claims about breaking with tradition, installing new ways of working and accepting reality. In the end, Mulally will be judged as much by Ford's success or failure in the marketplace as for his management techniques.

Mulally is learning what a difficult tightrope he must walk in managing expectations amid the dire news. As Ford announced its record loss Thursday, he acknowledged the company might pay bonuses to some executives despite its dismal financial results. It did not pay bonuses in 2005, when Ford performed far better than it did last year.

The issue is likely to touch a nerve with the United Automobile Workers, but Mulally said bonuses might be needed "to make sure we are paying competitive wages and benefits," an explanation Detroit executives have offered for years in the face of union grumbling.

Mulally is used to such grumbling, though, having faced off with unions during his 37 years at Boeing.

And to his eye, there are other remarkable similarities between Ford and Boeing.

Boeing bets billions to develop new aircraft. And Ford, under Mulally, has literally mortgaged the company, pledging as collateral things like factories, its headquarters and the blue Ford oval trademark to raise $25 billion in financing.

If Mulally is feeling strained, he is not showing it. "We have the money and plans in place," he said Thursday.

Despite his lack of automotive experience, Mulally said his years running a big manufacturer, and his technical background, have prepared him for the challenges facing Ford.

He has made quick changes to the way Ford is managed. He demands weekly progress reports from his executives to reach the goals in the turnaround plan, called the Way Forward, that the company set last year before he arrived.

Instead of discussing business plans on monthly or semi-annually as they used to, executives now visit Mulally's office every Thursday. There, they analyze things like gasoline prices, manufacturing methods and new automobiles from Ford and its competitors.

The in-depth sessions are a contrast to executives' previous efforts to explain away bad news, said Donat R. Leclair, Ford's chief financial officer.

"The difference I see now is that we're actually committed to hitting the numbers," Leclair said Thursday. "Before, it was a culture of trying to explain why we were off the plan. The more eloquently you could explain why you were off the plan, the more easy it was to change the plan."

Mulally sees a similarity in the upheaval that affected both the automotive and aerospace industries in the 1970s, when airlines had to deal with deregulation and auto companies faced new competition from Japanese automakers in the aftermath of two energy crises.

Deregulation "meant that each of the airlines now was going to be able to compete like never before, and the consumer would decide" who would survive, Mulally said. In the same fashion, foreign competition also means "the customer gets to decide," he said.

In the same way that he now is trying to map out Ford's future lineup, he had to take a similar gamble at Boeing on what its future would be — would airlines want to buy bigger and faster planes, or more-nimble medium-size aircraft that could be flown on the shorter flights favored by low-fare carriers both in the United States and abroad.

Earlier this decade, he convened a meeting of executives from 57 airlines to ask whether they wanted to see Boeing design a new super-fast plane, nicknamed the Sonic Cruiser, or proceed with development of a more fuel-efficient jet that the airline called the Dreamliner.

By a 57-0 vote, they opted for the Dreamliner, officially the 787, which since has become one of Boeing's fastest-selling planes, along with the 737.

Mulally made "a huge strategic decision there that really laid out the next 20 years of manufacturing competition, and I think Boeing got it right," said Brueckner, an expert on transportation who has been writing about airlines for more than two decades.

At Ford, Mulally may have more success than his predecessor, Bill Ford, who was seen as reluctant to break from tradition despite his private frustration over failing to halt the company's decline, said David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

"By bringing in someone from the outside, it conveyed a sense of urgency in the company," Cole said. "Bill Ford is a nice guy, and if he said the sky was falling, people would look at him and say, 'He doesn't mean it."'

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