Ford: Will Slow And Steady Win The Race?

As new COO, James Padilla has to keep the improvements coming

It was only two years ago that James J. Padilla, then the newly appointed head of Ford Motor Co.'s (F ) North American auto operations, had to sneak out of his suburban Detroit church before services ended. Many of his fellow parishioners had jobs tied to then-ailing Ford, and he wanted to avoid anxious questions about job security. Padilla, 57, no longer has to avoid his neighbors. In the first quarter, Ford earned a surprisingly hefty $2 billion, thanks largely to the stronger quality, lower costs, and juicier margins he has engineered.

Now those results have vaulted Padilla, a 38-year Ford veteran, even higher. On Apr. 22, he took over as chief operating officer, second only to Chairman and CEO William Clay Ford Jr. Padilla still faces big challenges. He must continue to restore Ford's quality reputation, solidify shaky progress in Europe, and rebuild its position in the U.S. passenger-car market, starting with the launch of a half-dozen cars this fall. Ford is "making impressive headway," says Merrill Lynch & Co. analyst John Casesa, but it "remains in a tough spot."

A tenacious manager, Padilla is known for zeroing in on a few basic issues and hammering away at them. Flashy, he's not. Instead, the manufacturing and engineering veteran ekes out steady gains through painstaking attention to detail. "Padilla is the guy who's getting it done," says automotive consultant Mary Ann Keller.

That was certainly the case with improving Ford's quality. After a series of costly recalls damaged its reputation, Padilla made it his top priority in 2002. Hundreds of employees were deputized as quality stewards, while engineers were ordered to focus on quality during the design phase. Says Padilla: "It's about fixing the process so problems don't recur."

Since then, warranty costs are down 27% and quality savings so far this year total $500 million. And on Apr. 28, J.D. Power & Associates reported that Ford's quality in the first 90 days of ownership is up 7%. But the job isn't done: Ford's score of 127 defects per 100 cars still lags the industry average.

LOWER SHARE, HIGHER PROFITS. This year, Padilla vows, Ford's North American unit will aim for profitability, even if it means lower market share. Already, he has cut low-profit sales to car rental agencies and killed such money-losers as the Mercury Cougar. In the first three months of 2004, Ford's U.S. market share fell 1.8 points, to 20.2%, from a year earlier. But thanks to those moves, as well as robust sales of F150 pickups and big sport-utility vehicles, pretax operating margins in North America rose to 8.4% in the first quarter, from 5.6% last year.

To get there, Padilla had to change a corporate fixation on bolstering sales, no matter how low the returns. That meant drumming into sales staffers' heads that they wouldn't be penalized for lower sales. And drum Padilla did, going red in the face and pounding the table for emphasis when necessary.

Padilla knows the heavy reliance on truck profits is risky. To help recoup share in the passenger-car market, which is now 15%, the auto maker is introducing the Ford Five Hundred and Mercury Montego sedans, as well as the Ford Freestyle crossover wagon.

It's too early to tell how these cars will sell, but Padilla has done one thing right. As the car market fragments, he has given up the notion of selling more than 400,000 units annually of any single model. Instead, he has backed a plan to introduce five or more midsize cars, each tailored to different niches, starting this fall.

Padilla will also have to focus more efforts on fixing his troubled European unit. Despite more than a decade of layoffs, plant closings, and belt-tightening, Ford of Europe is barely in the black. Besides further trimming costs, say analysts, Padilla must ensure Ford keeps launching products in such hot categories as microvans and diesel sedans, to goose sales and better define a fuzzy brand image. "Ford of Europe shows flashes of things starting to work," says a London-based auto analyst, but "they're not good on consistency."

Padilla must still show whether he has the product savvy and long-term vision to rebuild Ford's fortunes in Europe and in American passenger cars. But if dogged attention to the fundamentals is what's needed to restore America's No. 2 auto maker to past glory, Padilla has what it takes.

By Kathleen Kerwin in Detroit, with Gail Edmondson in Frankfurt

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