Call it tossing Wall Street a bone. Ford Motor Co. (F ) said Aug. 17 that it will shed 5,000 salaried employees. The severance costs, along with other write-offs, will shave $900 million from second-half profits. The move was designed to show investors that Ford is serious about tackling its problems while buying the carmaker time to figure out its restructuring game plan.
That unenviable task falls to Nick Scheele, 57, Ford's new chief of North American operations. He comes to the U.S. after whipping Ford's Jaguar division into shape and starting a promising overhaul of ailing Ford of Europe. But investors are alarmed by slumping U.S. sales and profits, a possible dividend cut, a cash position that has fallen to $4 billion from $15 billion in a year, and now, the possibility of a credit downgrade. So Wall Street wants the 35-year Ford veteran to make $5 billion in cuts and is already clamoring for plant closings, more layoffs, and more supplier price squeezes. Scheele has yet to say what he will do. But Ford CFO I. Martin Inglis says "nothing is off limits."
DON'T CLOSE PLANTS. One thing should be, however: cuts in funding for new car and truck development. Inglis doesn't want to do that. But it will be tempting to dip into the estimated $10 billion set aside for product development. Scheele should make a gutsy call, declaring product development sacrosanct. That's the key to Ford's turnaround. New cars and trucks are Ford's best hope of shoring up sales, especially among young buyers the company hopes to turn into repeat customers. Higher sales will also reverse the declining market share that leads to continual downsizing. And the product-development process is where Ford can boost productivity and car quality. Forget about closing plants, says Sean McAlinden of the Center for Automotive Research in Ann Arbor, Mich. "Better to go back to the drawing board," he says, "and design better cars and trucks."
How to start? First, concentrate on revamping bread-and-butter vehicles like the F-150 full-size pickup truck. Ford has already unwisely delayed the latest version of the F-150, its U.S. best-seller. "Ford is getting destroyed by competition from General Motors," says Wesley R. Brown of auto consultant Nextrend Inc. "The last thing they need to be doing is delaying product."
With a lineup in place, Scheele should next help Ford's engineers and product planners to devise a system to design cars that can be built quickly, cheaply, and defect-free. Good product development can cut costs. Ford could save a bundle, for instance, by sharing mundane parts--everything from fuel pumps to steering columns--among its vehicles.
Making product development Job One has worked for other auto makers. When Renault's (RNSDF ) Carlos Ghosn started overhauling Nissan Motor Co. (NSANY ) in 1999, he declared everything at the auto maker fair game--except product development. "That was gospel," says Michael Robinet, managing director of auto consultant CSM Forecasting. "That's what Ford needs to do." Ford could also learn from DaimlerChrysler's (DCX ) months of soul-searching on how to turn around its Chrysler Group. Chrysler Group CEO Dieter Zetsche is revamping the company's once-stellar product-development teams to boost quality and cut costs.
Scheele's big headache, however, will be funding new vehicles. Ford is cash-strapped thanks to acquisitions --Volvo and Land Rover--the Firestone tire recalls, and share buybacks. So the pressure on Scheele to delay new products will be intense, especially since other cost-cutting options are problematic. With its U.S. vehicle sales down 12% through July, Ford does have excess capacity. But labor contracts make plant closings difficult. More white-collar layoffs will only further erode morale. And Ford has already hiked its price-cut demands to suppliers to 6% from 4%, pushing them to their limits.
Ultimately, Ford can't cost-cut its way out of trouble. That won't lure buyers into the showrooms. The answer is as simple as it has always been. Just make better cars.
By Kathleen Kerwin
With Joann Muller in Detroit