Arrogance and Complacency Damaged Ford
There is usually something humorous about the cyclical nature of the automobile industry—if it weren't generally so tragic. The case in point would be the problems facing Ford Motor (F). A trail of giant missteps—starting in late 1997 with the corporate consolidation of Ford dealerships in many major metropolitan areas and continuing with questionable acquisitions (such as the British car-repair chain Kwik Fit, not to mention Jaguar, Volvo, and Land Rover)—has left the company struggling to find direction. In the end, Ford will once again become a much smaller company; similar to what happened in the early 1980s.
For years, Detroit's success made its executives think they are the smartest guys on the planet. Even during the good years, there were plenty of bad ideas. What, for example, did Hughes Aerospace do for General Motors (GM) or Gulfstream for Chrysler? As I recall, six years after purchasing Hughes in 1985, the General lost $21 billion, then went through one of the most severe downsizings in American corporate history.
Similarly, only four years after Lee Iacocca purchased Gulfstream, also in 1985, Chrysler was laying off 11,000 white-collar workers, and troubling financial statements had Iacocca quietly trying to sell Chrysler to Fiat (FIA). One has to give Ford credit in that its Volvo, Land Rover, and Aston Martin purchases at least had something to do with the automobile industry.
These automotive follies always end badly. In Ford's case, for now 16 factories will be closed and 44,000 workers will lose their jobs; and this is after Ford's white-collar workforce has been downsized and may be again. These losses don't include the jobs that suppliers will have to cut, or the dealership staffs that will be reduced to match sales—or, for that matter, newspaper jobs lost when dealers buy far fewer ads than they did when their volumes were twice what they are now.
Moreover, Ford's situation is among the most tragic, in that none of the problems it faces today should ever have happened. For the fact is that, just eight years ago, Ford was on a path that could well have put it ahead of General Motors for the first time in 80 years, and it threw away that opportunity.
Now, only days after Bill Ford told Newsweek magazine that he was not looking to replace himself as CEO, the company has done it for him; Alan Mulally, formerly No. 2 at Boeing (BA), is at the helm. Some insiders hail Mulally as one of the most competent executives in America today; some believe he is far too thin-skinned and autocratic.
And, of course, over the past week the pundits have written that an executive with an aircraft company is an inspired choice for the beleaguered Ford; others say the opposite. One writer even called the airline business every bit as competitive as the automobile industry; but Boeing's one and only strategic competitor is Airbus, and each company's government often helps it secure buyers with international airlines.
Ultimately, I have my doubts about this new arrangement, if only because the history of Ford amply demonstrates that the best and the brightest rarely last long there. Big Bill Knudsen, responsible for plant construction and manufacturing in the early days of Ford, was fired by Henry Ford with the line: "Bill, you're the best manufacturing man around—too good for me."
Ford's loss was GM's gain, as Knudsen would quickly take over at Chevrolet. Charles "Tex" Thornton brought his Whiz Kids to Ford in the days after World War II; while the team was largely responsible for Ford's success in the 1950s, Thornton quit Ford two years later for Hughes Aircraft (before starting Litton Industries).
Clearly, Ford's history doesn't suggest that exceptional executives should count on long careers with the company.
On the upside, at 61 years of age, Mulally can probably make it to retirement with Ford. If not, he will at least be well compensated for his time. So it couldn't hurt to suggest that, if he wants to succeed, there's only one thing he has to do: help Ford have some really better ideas. Help the company stop making unfortunate decisions, alienating its dealer body, and letting less-than-stellar products bear its brands' badges.
MAKING UP FOR LOSSES.
To be fair, the stratospheric prices of oil and gasoline havE dented Ford's ability to earn the big bucks on its sport-utility vehicles. That's a shame, as the latest version of the Explorer (see BusinessWeek.com, 9/1/06, "Ford's Explorer Loses Its Way") could be called the finest example of a mid-size SUV on the market today.
Then again, the same could be said regarding the new Fusion and its near cousins at Lincoln Mercury, or even describing the Ford Mustang (see BusinessWeek.com, 8/25/06, "Detroit Thoroughbred"). Yes, in the middle of all of these problems, Ford has delivered some of the most gratifying and value-loaded vehicles in the company's history. Therein lies one problem: There's just not enough new product to entice more buyers to Ford.
Ford execs can discuss their Way Forward plan until the cows come home. And certainly, considering Ford's declining market share, expenses must be cut in a quick and dramatic fashion. However, it's axiomatic that you can't just cut your way to a profit. No, Ford's got to make amends to its dealer body and motivate them again—after years of converting much of the dealers' profits into its own.
Considerable amends may be required for moves like ending the Blue Oval program, which paid dealers for exceptional customer service and was financed by raising the invoice amounts of Ford products; or for charging dealers on the invoice to offset having to pay them retail for Ford parts when warranty repairs were required. Many dealers have told me that Ford's cost cutting of the past four years has lost them hundreds of thousands of dollars in annual profits.
Yet even this could be rectified if Ford started selling more cars. Again, the history of the automobile industry is full of stories where dealers have suffered as greatly as the manufacturers, yet all is forgiven when sales come roaring back up.
FOCUS, FOCUS, FOCUS.
Ford's real problem is that it spent so much time and so much money on foolish things, when its time, energy, and working capital should have been concentrated solely on bringing new and hot products to market. There's nothing wrong with Ford Motor that two more Fusion-size hits wouldn't cure.
On the other hand, finding a way to build twice as many Fusions as it now does would be a good start. Additionally, more consistent excellence in new products would be helpful, because for every Fusion, there's a Ford 500; for every Mustang, there's a Ford Freestar; and so on.
Ford brought a great minivan to market but priced it thousands of dollars higher than the benchmark Honda (HMC) Odyssey—then immediately had to give dealers thousands in backdoor rebates to sell any of them at all. When Bill Ford starts talking about a strategic alliance with Renault/Nissan (NSANY), just say, "Two words: Mercury Villager."
If I were a Ford exec, I would probably stop lying awake at night trying to find ways to get my truck and SUV sales back up and start figuring out how to get more new and fuel-efficient cars to market. That would be a crucial start; after all, how many years in a row can you keep on selling the same Ford Focus?
There is one positive that Ford has going for it: History proves that Ford can go from being almost written off by the public to well over a decade (starting in 1986) of seriously improving its U.S. market share, and GM has not accomplished any such success during the same period. And if Ford has done it once, they could well do it again. America is best served when all the car companies doing business here are succeeding.
(Full disclosure: Wallace owns Ford stock.)