A Talk With Ford's Alex Trotman

Ford's chief sees flat prices, with cost-cutting the surest way to boost income

Ford Motor Co. earned a record $6.9 billion last year, and Chairman Alexander Trotman is sitting on a cash pile of $21.3 billion. Is it time for the No.2 carmaker to scoop up some deals in Asia? Perhaps. In an interview with BUSINESS WEEK editors, Trotman said it's possible that Ford would increase its 33.5% interest in Japan's Mazda Motor Corp.

But first, Trotman must contend with what he predicts will be a deluge of competing vehicles sold in the U.S. by Japanese and Korean companies. Pricing pressures are brutal--Ford's North American vehicle sales were down in the first quarter, and its revenues fell 2%, to $37.6 billion. Still, Ford managed to boost its operating income 15%, to a record $1.7 billion, mostly thanks to sales gains in Europe and relentless cost cutting--a process, Trotman says, that will never end. What follows are edited excerpts from the interview.

Q: These certainly seem like bountiful times for Ford. What's your biggest challenge to keep them rolling?

A: The major business factor that is not widely talked about and not well understood--and it pertains not only to automobiles, but to many other business sectors--is we're now into a flat-revenue world and that is driving consolidation in many sectors of business, not only in America, but around the world.

We saw it a few years ago when we really set out to become substantially more competitive than we were--to drive costs out of our business and become more efficient. We're about three or four years into that major reprocessing [known as Ford 2000]. I'd characterize our progress as four or five on a scale of 10. We'll never get there on the cost sense, because we have to drive it down forever. [Ford cut a record $3 billion in costs in 1997 and is targeting another $1 billion in 1998.]

We'll take revenue if we can get it. But we're certainly not banking on revenue to drive our performance or to be a major contributor to our performance.

Q: Why can't you raise prices?

A: It's about a real mean customer. The [cost] of survival in the auto industry will grow substantially as the customer gets meaner and meaner and refuses to pay for new widgits. Prices aren't going up--but customers are buying champagne instead of beer.

Q: Do you see any signs that the boom in sport-utility vehicles, minivans, and pickup trucks is slowing?

A: Not that I can see. Trucks are going to go over 50% of the market in the next year or two. I don't share the worry that some people have that we're going to wake up one day and there will be a huge reversal to traditional cars. I don't think that's going to happen because vehicles like Explorers are not trucks, they're Explorers as far as the customer is concerned.

The so-called truck business is in the process of enormous fragmentation, like the so-called car business went through for 20 or 30 years. Over the next 10 years, you'll see all sorts of iterations of trucks, right down to very small ones that are off car frames and all the way up to the big ones like you see today--maybe even bigger ones than you see today. We'll do all of them for every person in every size requirement.

Q: Are car buyers loyal to a particular brand anymore, so that they start with a Ford and work up to a Lincoln?

A: As the world is becoming more competitive, brand loyalty is waning. I'm not talking about Ford, but for anything--in fashions, in consumer goods, in automobiles. It's less and less likely that somebody says: "My family is a brand-X family. We've always had brand X and my dad had one, and, by God, I'm a brand-X guy." That's the way it was in America 20 years ago, but less and less is that the case today. Now, it's: "I'm not a brand-anything guy. I'm going to buy the mousetrap that I like if it's the right value and quality. I don't care if I used to buy it or not."

Q: How does that affect your planning?

A: It incentivizes us to be more competitive in terms of value and technology. And to recognize the necessity to produce exciting new types of products that will grab these people who are becoming more and more fickle. You can't say, "Well, I have an Explorer now and it's selling 400,000 a year, that's terrific, I'll sit in it forever." That doesn't work because you know 16 other people are chasing the Explorer.

Q: So then does the brand become Explorer, rather than Ford?

A: Yes, we've talked about that a lot. Some of the products are so strong, like Mustang, that Mustang almost becomes the brand. It's not a Ford, it's a Mustang. The Explorer is almost in that category. And the Navigator almost is not a Lincoln Navigator, it's a Navigator.

Q: Do you still feel like you need a vehicle at every point of the spectrum of car buyers, from entry level on up?

A: No. It's desirable, but we don't have to. If we can't make business sense of it, we won't have it. We had an Aspire [entry-level small car] until last year and we dropped it. We just simply can't find a way to make good business sense of it in the U.S.

Q: Other U.S. companies are increasing their investments in Asia. What is Ford waiting for?

A: We're not waiting. We're very well connected, and we have quite a few people on the ground in Asia....We're very alert to what's going on in Korea and what's going on in Japan. We have a controlling interest in Mazda today and with the yen [at a weak 132 to the dollar], if bargains emerge, we certainly would consider them.

Q: Is there anything preventing you from buying all of Mazda's stock?

A: I'm not aware of any Japanese or U.S. government restrictions that would prevent that....Down the road, if Mazda were to become a much more profitable company than it is today, then 100% [ownership] would be more advantageous than 33.5%. Mazda's performance is improving from a very weak position a couple years back, and I expect it will continue to improve. We have no plans to increase our equity stake today, but we certainly are not ruling out any options.

Q: Will the weak yen let the Japanese gain more of the U.S. auto market?

A: We're going to face increased pressure in Western Europe and North America from the yen because they're suffering so heavily in their region. Their solution, as always, is: Let's get the ships loaded up and send them to Europe and America. We're going to see very substantial trade difficulties this year between Japan and the U.S. as the deficit grows.

Q: Do you think the Japanese want market share as much as they used to?

A: They want it more now. [Toyota Motor Corp. President] Mr. [Hiroshi] Okuda is frequently saying he wants to grow and knock off Ford as No.2 in the world. I hope he keeps saying that because it motivates us wonderfully. When all of our work force reads that, it really energizes them to come to work the next day even more determined.

Q: Has Ford picked up any of the U.S. share GM has lost through the years?

A: If you look over 30 years, you could say that GM has funded all the Japanese growth in America. Over the long haul, Ford stayed flat. Ford was approximately a quarter of the market, went down to 19%, and we're back to a quarter. GM was at 50% or so and now is at 30%. And the Japanese, of course, have come from nothing to [make up] the difference. I'd like to think we gained by not losing at Ford. It's something of an achievement, perhaps, that we managed to stay flat when you look at what happened around us in America in the past 30 years. It's not bad.

Q: Is the global playing field level?

A: It's fairly level, in the sense of fairly open markets. There aren't any major restrictions to the free flow of manufactured goods. There's China, of course, and places in the developing countries where there are still major barriers to the free flow of goods. But in the major markets of Europe, North America, and Japan, it's pretty open.

Q: That's the kindest thing I've heard anyone from Detroit say about Japan.

A: Well, with the [exception] of the currency, and there are some major restrictions on parts.... The dealer issues are still difficult. But there are no big tariffs and no big barriers to shipping vehicles to Japan.

Q: Then why aren't you selling more than the 35,000 vehicles you sold in Japan last year? [That's down 23% from 1996.]

A: The [Japanese] economy is in seriously bad shape. It is a very, very difficult and nationalistic market. It's a very hard market to penetrate. We're just going to keep driving at it.

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