Ford: Europe Has a Better Idea

Can Detroit replicate the European turnaround at home?

In the annals of Ford Motor Co. (F ), 2001 will go down as its annus horribilis. The world's No. 2 auto maker was hit by a second Firestone tire recall, recalls of key vehicles like the Explorer, other quality glitches, and launch delays. Not to mention angry dealers, demoralized employees, and the autumn ouster of its CEO--all culminating in a $5.4 billion annual loss. Amid all this gloom and doom, though, there was one bright spot. Ford of Europe Inc., a subsidiary with almost $30 billion in sales, battled its way to breakeven after a $1.1 billion loss in 2000. This year a modest profit is likely, thanks to aggressive cost-cutting and a refreshed lineup.

Nice work. But Europe isn't just a bright spot for Ford--it's the model for the entire turnaround effort for Ford in North America. Nicholas V. Scheele, Ford president and chief operating officer and Chairman William C. Ford Jr.'s right-hand man, engineered the rescue of Ford of Europe. Bill Ford is gambling that Scheele can replicate his lifesaving strategies in Detroit: "Ford of Europe was the biggest turnaround of any unit in Ford's history," he says. "In many ways, it's the template for what to do here." But this strategy is not without risks. If the rebound at Ford of Europe stalls, then doubts about Ford's overall strategy will quickly multiply.

For clues, investors will be watching Scheele, the 58-year-old Briton who led the turnaround of Ford of Europe after having overhauled the Ford-owned Jaguar marque. The European unit racked up $2.5 billion in losses through the 1990s. "It was a broken business," says David W. Thursfield, Scheele's former No. 2 and current Ford of Europe Chairman. Development time for new models was laughably slow: The Fiesta compact bumped along for 12 years without a major remake. And Europeans had concluded that Fords were duds to drive and embarrassing to own. From 1994 to 2000, the Ford brand's share of the European car market shrank by one-fourth, to 8.2%. Nearly one-third of Ford's European production network sat idle. Capacity utilization--a key gauge--sank to 71% in 2000, well below the break-even level.

Scheele and Thursfield embarked on an overhaul. In just two years, they shuttered three plants and slashed more than 2,000 jobs--or nearly 2% of the unit's total workforce. The pair whittled away a fourth of the Ford brand's production capacity--600,000 units. One painful move was the decision to stop assembling cars at the Dagenham (Britain) factory after 69 years.

Just as important, Scheele and Thursfield overhauled Ford's four big car-assembly plants in Europe so they could produce more than one model on the same line. Such "flex factories" can save the company hundreds of millions of dollars it otherwise would have to spend on separate assembly lines. "Ford did it right in Europe," says J.P. Morgan Securities analyst Himanshu Patel.

The duo also attacked the lackluster lineup. Luckily, Ford already had one hit on its hands, the stylish $12,200 Focus compact, launched in 1998, and another in the pipeline, the $17,500 Mondeo, which debuted two years ago. Auto Motor und Sport magazine rated the Mondeo best in its class in 2001, ahead of VW's popular Passat. And this year's edition of the annual TUV quality survey showed the Focus had fewer defects than any other car sold in Germany since 1999. Bolstered by the success of these two models, Ford's market share in Europe has climbed to 8.8%, ahead of Fiat Auto. "The Focus is selling very well. It's a good value for the price," says Hans-Joachim Kremer, owner of the Ford Autohaus Kremer dealership in Frankfurt.

Ford of Europe is now rolling out more new cars--and faster. A new $10,200 Fiesta was launched last year nine months ahead of schedule, and the Fusion, a compact minivan, is due out in October. The Fusion is targeted at the growing number of Europeans who want something small and fuel- efficient but more versatile than a sedan.

These are the broad outlines of the Ford turnaround. But the little moments count, too. Thursfield convened weekly meetings in a "war room" at Ford's Merkenich design studio near Cologne (no sitting allowed). At one of those encounters, executives discovered they were paying one gas-tank supplier twice as much as another for the same-quality product. By picking up on those discrepancies, Scheele saved $900 million over the past two years. Thursfield wants to wring out a further $400 million this year. Says one Ford official: "The trick is to look at everything."

That's what Scheele plans to do in Michigan, where staff already has adopted some of the European methods. Dearborn headquarters now boasts its own war room, though officials prefer to call it the "energy room." Ford is also looking across the Atlantic for lessons on how to make better use of its plants. Ford's revamped Cologne factory is capable of assembling any model in the European lineup, from the Ka minicar to the Galaxy van. Bill Ford wants that kind of versatility in North America, where the company has no flex factories. "You don't need all your plants to be flexible, but you need a portion, probably about a third," he says.

To stanch the red ink at domestic operations, Bill Ford is adopting many of the measures the company implemented in Europe even before it's clear whether they are working there. Ford models are doing well now in Europe, but it's an unusual moment in the Continent's car cycle. Market heavies Renault and Volkswagen are both in the midst of major makeovers of their lineup. That's giving Ford some needed breathing room--but it won't last forever. PSA Peugeot Citroen is on a product roll, and GM's Opel is about to embark on a restructuring. Meanwhile, luxury marques such as Mercedes-Benz and BMW are putting the squeeze on middle-market players by producing smaller, more affordable models.

And the trade-offs Ford of Europe made between savings and quality may still come back to haunt the company. The new Fiesta has gotten knocks for its plasticky, cheap-looking dashboard. And the Focus comes less richly equipped than rivals. Antilock brakes are standard on the Fiat Stilo and the Peugeot 307. On most of the Focus range, they're an option. Small details, but they add up--and sometimes they turn potential customers off. Bill Ford can learn some lessons from Europe. He just has to make sure they're the right ones.

By Christine Tierney in Frankfurt and Kathleen Kerwin in Detroit

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