How Mulally Will Tackle Ford's Troubles
Some kids, from the very start, believe they are destined for greatness. Alan Mulally was one of them. As a lad in Lawrence, Kan., he sat in the front pew at church, the better to study how the minister revved up the congregation. When he was 17, Mulally considered President John F. Kennedy's call to send Americans to the moon a personal message for him. "I got in front of the TV and said 'I'm ready,'" Mulally once recalled in an interview with BusinessWeek. He signed up for extra classes in science, math, and chemistry. He even took flying lessons.
Mulally never made it into orbit. But he found plenty of space to nurture his ambitions at Boeing (BA) where he arrived as a junior engineer in a VW Beetle in 1969 and eventually ascended to president and CEO of its fabled commercial airplane division. Now he is taking on a challenge that may be even more daunting than putting a man on the moon: turning around the ailing Ford Motor Co. (F) as its new CEO (see BusinessWeek.com, 9/6/06, "Ford's Latest Recall").
The youthful-looking, enthusiastic, sometimes temperamental 61-year-old executive has not been on anybody's list of hot CEO candidates since the late 1990s, when he was offered top jobs at Raytheon (RTN) and Teledesic, a failed commercial satellite company.
Nor was Mulally Ford's first choice. Since taking the CEO job himself in late 2001, Chairman William C. Ford Jr. has tried several times to find someone to take it off his hands, going after such industry luminaries as Renault-Nissan (NSANY) CEO Carlos Ghosn and DaimlerChrysler (DCX) Chairman Dieter Zetsche. The fact that he has had to go outside of the auto world to fill the post raises a profound question: Can a non-car guy fix Ford?
Mulally brings with him knowledge that will be invaluable as he straps on his seat belt at Ford. Boeing is an old-line industrial giant that has endured epic problems and successfully reinvented itself. Mulally has made brilliant product strategy decisions, namely his big bet on the fuel-sipping 787 rather than the gas-guzzlers favored by archrival Airbus. He has experience dealing with unions, though not all of it is positive.
He is also something of a turnaround artist. After September 11, he quickly slashed more than 30,000 jobs, closed plants, and kept his unit in the black. And somehow Mulally has managed to spend the last three-and-a-half decades at one of America's most scandal-prone companies without getting much mud on his reputation. "I've been in some tough situations," Mulally told BusinessWeek. "I'm here to help a great company continue to survive." (See BusinessWeek.com, 9/7/06, "An Interview with Bill Ford and Alan Mulally".)
But the former engineer also has significant gaps in his résumé. It's clear that he has never faced anything like the challenges he'll see at Ford. For starters, this is a much larger company than the division he ran at Boeing—with six times as many employees, eight brands, vs. one, and 110 plants worldwide, vs. six.
Boeing launches a new line of airplanes about every 13 years. Ford cranks out new car models every few months. Boeing does almost no consumer marketing, while Ford is one of the biggest advertisers in the land. Finance isn't a particularly strong suit for Mulally, which is a little worrying at a company bobbing in a sea of red ink. And, finally, he has never had the high public profile typical of auto executives. If anything, Ford's new CEO is averse to the limelight and tends to be thin-skinned.
CURSE OF THE INTERLOPER.
At Ford, Mulally is going to have to get used to a very hot glare. The company's sales are in free fall, and it has lost $1.4 billion so far this year—with further losses sure to come. His supporting cast is made up mostly of the same executives who have failed to pull the company out of its current tailspin. These people may resent his outsider status and actively try to thwart him.
Yet Mulally will have to depend on them while learning the car business on the fly. He'll also have the omnipresent Ford family looking over his shoulder, not to mention the United Auto Workers.
Perhaps even tougher, Mulally will have to break the interloper's curse. Few outsiders get top jobs in the auto business, and Detroit has a nasty way of chewing them up. In the 1990s, brand managers like Bausch & Lomb (BOL) executive Ronald L. Zarella and a host of other consumers-goods marketers tried to fix General Motors (GM). Ford hired plenty with similar résumés only to see them fail. By 2002, most of them were gone.
NOT TIED DOWN.
Mulally "is not that anchored in the industry. He doesn't even know what he doesn't know," says Jeffrey A. Sonnenfeld, senior associate dean at the Yale School of Management. But his status as an outsider also has some upside. "You're not married to the prevailing models of an industry," Sonnenfeld adds.
By hiring Mulally, however, Ford is getting a manufacturing maestro with few industrial peers. If there's one thing Mulally is good at, it's taking a broken or underperforming production system, figuring out what's wrong with it, and then making it better than it ever was.
Nothing tested his skills like the production meltdown that nearly sent Boeing crashing to earth in 1997. At the time, the company was trying to boost efficiency on the entire production line, even as it was ramping up to take advantage of a flood of orders. The system collapsed under the strain, costing the company $2.6 billion and forcing it to post its first annual loss in half a century.
Enter Mulally, who had just been named chief of the commercial aircraft division. He quickly identified the causes: inefficient production techniques, poor supplier relationships, overly ambitious airplane delivery targets, and a culture that encouraged managers to hide problems. Mulally attacked these interrelated problems with a simple plan that had clear productivity targets. Within weeks of his arrival, he gave airplane production managers responsibility for profit and loss, a first at Boeing. "We celebrated every delivery and every production increase," Mulally told BusinessWeek in an interview in 2001. By 1999, orders had nearly doubled to 620 planes, and operating margins were up fivefold.
Ford badly needs a manufacturing Mr. Fix-It. The company has the lowest utilization of its plants of any automaker, according to Harbour Consulting. Ford used only 79% of its capacity last year, compared with 90% for GM and 94% for Chrysler Group, while Toyota (TM) ran at 106%. Ford also has the dubious distinction of being the least productive automaker in terms of man-hours per vehicle, an hour worse than GM and five hours worse than Nissan Motor. "Ford has not invested in, nor focused on, productivity gains in recent years to the same level as its competitors, and it has cost the company real money," says Ron Harbour. Here's one place where Mulally has an opportunity to make shareholders smile.
Mulally's turnaround experience will be critical at Ford. The rebound that he engineered at Boeing's commercial division came to an abrupt halt on September 11, 2001. After orders for new airplanes nosedived, he swung into action, closing several plants, and renegotiating delivery schedules for some 500 airplanes. As business recovered, his kept his unit in the black.
This turnaround experience is going to be critical at Ford, which has botched the restructuring that began under Bill Ford five years ago. The company has not acted swiftly enough to cut its head count and get its productivity up. Meanwhile, the restructuring blueprint keeps changing. Ford said in January that it would cut at least 25,000 jobs and close 14 plants in North America by 2012. Then Ford last month said it would cut fourth-quarter production by 21% due to falling demand. An announcement speeding up that schedule of closures is expected this month.
Mulally's ability to cut Ford down to the right size is going to depend upon securing cooperation from the UAW. It's a union with a much louder bark and toothier bite than the International Association of Machinists he worked with at Boeing. Yes, the UAW is a somewhat diminished force. But the union can still make matters ugly for Ford.
Perhaps Mulally has learned something from the strike that shut down many of Boeing's plants for 23 days last year. After all, his hard-nosed bargaining was largely responsible for the stoppage. In the days before the Machinists walked off the job, Mulally thought he had shrewdly divided the union along generational lines. By offering hefty bonuses and retirement goodies, he hoped to entice younger workers to sign on. A similar strategy had worked in 2002. But not this time. Mulally was forced to negotiate a settlement that gave the union most of what it wanted.
With that memory still fresh in labor circles, Mulally will have to tread warily with the UAW. Ford needs to downsize as fast as it can. Traditionally, the UAW has been cool to drastic job cuts. But the direness of Ford's situation is apparent to even militant unionistas. Says David Cole, who runs the Center for Automotive Research: "I'd be surprised if they can't get something very constructive hammered out."
While Mulally has plenty of relevant background in manufacturing and labor relations, he has precious little in finance. At a time of financial crisis, Mulally will have to lean on Ford's financial whizzes, including Kenneth Leet, the former Goldman Sachs (GS) banker brought in to consult on asset sales and other strategic financial matters. Not only does Ford need to restore the balance sheet by making tough decisions but the company also requires someone who can calm Wall Street and rating agencies, which have pushed Ford into junk territory. That role doesn't come naturally to Mulally.
His relations with Wall Street have never been particularly strong. While he has laid off thousands of people, sold off small manufacturing units, and whittled down Boeing's production capacity, Mulally has never negotiated or managed a major merger or acquisition. And when Boeing sold a Wichita plant in 2005, the pressure to do so came from former Boeing CEO Harry Stonecipher, not Mulally.
This is not a moment to shy away from tough financial decisions at Ford. The company lost $1.4 billion in the first half of the year. And the second half looks to be even worse. With analysts worried about falling sales, expect the bottom line to get pummeled in the second half. Morgan Stanley analyst Himanshu Patel says the cuts will boost losses to Ford's North American business to $4 billion for the year. The company's North American business alone has already lost $1.3 billion in the first half of the year.
All eyes are on Ford's cash burn. The company spent $1.5 billion of its hoard in the first six months of the year. While rating agencies stress that Ford has about $23.6 billion in cash to cover new-car development, restructuring charges, and retiree costs, the cash drain will only accelerate once the automaker unveils yet another restructuring this month. Ford has already spent $700 million on separation packages and paid layoff expenses for union workers. Fitch & Co. analyst Mark Oline says that between the added restructuring costs and the operating losses, Ford will burn $7 billion in cash this year. Ford's B+ junk credit rating is already on credit watch with negative implications—and Standard & Poor's will decide this month if another downgrade is needed.
Yes, Mulally has enough cash to keep Ford afloat for some time. But not indefinitely. That's one reason why management is shopping its luxury brands. Even the idea of selling 51% of its profitable Ford Motor Credit finance business has been floated.
Why does Ford need the cash? If the next round of restructuring stems the losses, its revenues are expected to keep falling anyway. They're down $7 billion, to $83 billion, in the first half of the year. If that isn't stabilized, Oline says, Ford will have a tough time slowing the cash burn. And even though its pension fund in the U.S. is underfunded by only $2 billion, the company still lives with the risk that a downturn in equity markets could force it to pony up more cash. Since 2004, Ford has paid $5.3 billion in cash into its pension funds.
Mulally has earned high marks in the aerospace industry for his stewardship of two of Boeing's most successful projects, the 777 jet and, more recently, the game-changing lightweight 787. But developing smart products at an auto company, especially with huge holes in its model lineup, is an entirely different proposition. In an interview with BusinessWeek, an upbeat Bill Ford insisted that Mulally would get plenty of support. "Alan will have all the help he needs from inspired car guys," said Ford. "What our inspired car guys need is inspired direction."
Mulally demonstrated gold-plated leadership managing the 777 and 787 projects. The 777 was a gutsy attack on conventional wisdom. Plenty of safety experts believed twin-engine planes couldn't safely fly over the vastness of the Pacific Ocean. But Mulally pushed ahead—developing a plan, getting his troops to buy in, then focusing relentlessly on executing his vision. He has brought the same zeal to the 787 project.
GETTING CONSUMERS REVVED.
Impressive feats, but quite unlike the product and marketing challenges Mulally has inherited at Ford. Boeing's commercial aircraft division is essentially a B-to-B manufacturer; it builds planes for airlines and cargo haulers. For the most part, Ford is a consumer brand, and a badly degraded one at that. To excite buyers, it needs somebody who understands car color and fashion trends, things that don't matter much to aircraft manufacturers.
Ford's dire financial situation notwithstanding, what has investors and analysts most concerned is the automaker's serial inability to come up with hit products. Sales of the company's bread-and-butter SUVs and trucks are sliding amid high gasoline prices, but Ford can't seem to build passenger cars that people want. Merrill Lynch (MER) analyst John Murphy says that for the next three years only 60% of Ford's models will be replaced. That compares poorly with 80% at GM and 83% at Toyota. The upshot, according to Murphy: Ford will lose about one percentage point of market share a year until 2010. There's not much Mulally can do about that since it takes about five years for Ford to get a vehicle from drawing board to showroom.
"Going to market" is a phrase auto executives understand all too well, but it may take a while to fully resonate with the Boeing transplant. And Ford is a marketing nightmare. Not only has the message bounced all over the place, but the company must overcome a prevailing sentiment among consumers that the quality of its products just can't stack up against the Japanese. The fact that Ford's quality has improved in recent years simply hasn't registered with the driving public. The stick-to-it Mulally may be able to impose some consistency on the marketing message, but restoring luster to a fabled brand will take a marketing genius.