The Happiest Man in Detroit

Quarter after quarter for almost two years, the news out of Ford Motor (F) was astonishingly good. Under Chief Executive Officer Alan Mulally, who'd joined the company from Boeing (BA) in 2006, Ford had not simply avoided bankruptcy and a federal bailout, it had turned itself into the world's most profitable automaker. It beat analyst estimates for seven consecutive quarters and drove its stock to a nine-year high of $18.79 on Jan. 27, up from $1.26 on Nov. 19, 2008. Last year, hits such as the Fusion family car and Fiesta subcompact propelled sales of Ford models upward at twice the rate of the overall market. And the 65-year-old Mulally, a gifted and relentlessly upbeat salesman, wasted no opportunity to look into the eyes of analysts and reporters, squeeze their forearms, and remind them how "fabulous" Ford had become.

Late last year, however, Mulally began to see some new signs of trouble. Inside the Thunderbird Room on the 11th floor of Ford's Dearborn (Mich.) headquarters, the windowless conference chamber where Mulally meets around a circular table with his 15 top executives every Thursday at 7 a.m., some of the news suddenly wasn't good. At these 2 1/2-hour meetings, known as BPR for business plan review, he requires his direct reports to post more than 300 charts, each of them color-coded red, yellow, or green to indicate problems, caution, or progress.

At the BPR, Ford Chief Financial Officer Lewis Booth might give an update on debt reduction, or Americas chief Mark Fields might go over the mix of red, yellow, and green on new model launches. (Fields is famous for being the first Ford executive to put up a red light four years ago when he delayed the launch of an SUV because of a balky tailgate, earning him applause from Mulally for his candor.) Afterward, the adjoining Taurus and Continental rooms are papered with these charts so Mulally can study them. As the CEO likes to say, "You can't manage a secret. When you do this every week, you can't hide."

The Ford executive who couldn't hide in December and January was European chief Stephen Odell. His slides told Mulally that heavy discounting was going on in the European Union, a market where there were too many car factories and too few buyers. Mulally had assured analysts that Ford would make money in Europe, but the risk of a fourth-quarter loss was rising. As the rectangles on Odell's slides turned from green to yellow to red, Mulally decided not to follow his competitors into the bargain basement. He was trying to elevate Ford's reputation; unloading cars at just above cost might have helped his quarterly return, but he was certain it would hurt his brand. "So we gave up a little bit of market share," Mulally says. "Even though that meant taking a hit to our guidance, it was the right thing to do for the long term."

What Mulally did not do was offer revised guidance to Wall Street. As a result, on Jan. 28 Ford shocked investors by posting a $51 million pretax loss in Europe—one that helped drive a companywide 79 percent fourth-quarter profit decline to $190 million, or 5 cents a share. On an adjusted basis, Ford came in 18 cents below analysts' forecasts. And despite earning $6.6 billion for the year—the most since 1999 and a stunning reversal from the $30 billion Ford lost from 2006 through 2008—investors suddenly seemed to believe Mulally had lost his touch. Ford stock traded down 13 percent to $16.27, the biggest one-day decline in 20 months.

Moving into damage control, Mulally told a conference call of analysts and reporters that he would review how Ford communicates with Wall Street to better manage expectations. Three days later he insisted that he'd done all the communicating he needed to do.

"I'm very proud of the way we provide the most accurate guidance that we can," Mulally said in a Jan. 31 telephone interview with Bloomberg Businessweek. "We really believe we gave very good guidance. We have a track record of exceeding everybody's expectations, so I'm sure they were building a little bit of that in."

Just don't accuse Mulally of being a cheerleader-in-chief who only communicates happy news. "I'm not Pollyannaish," he says. "I'm not enthusiastic unless there's a reason to be."

If Mulally appears to be a corporate choirboy—he sticks to blue blazers and primary-color ties, and his comments generally do stay on the sunny side—that's just a public persona. Behind the scenes, the former aerospace engineer has been shrewd, nimble, and tough, with a decision-making style based on huge data dumps and a cool assessment of global trends. When he took over Ford, he made a radically simple diagnosis—if the company was to have a future, it had to fix its namesake brand—then followed through on the implications of the idea. He sold off the European luxury lines—Jaguar (TTM), Land Rover, Aston Martin, Volvo—and improved everything about the everyday Fords. His mission is to surpass Toyota (TM) and Volkswagen (VLKAY) not just in profit but also in reputation, even if it means suffering some bad quarters along the way.

Back in January 2008, Mulally convened his top 300 executives in a Dearborn conference center and flashed two pie charts that divided the car-buying world geographically and by vehicle size. Ford was hardly playing in two of the charts' most crucial areas—Asia and the small-car market. "As soon as he got the pie charts out, it was pretty clear to everyone," says Jim Farley, Ford's global marketing chief, whom Mulally lured from Lexus in 2007. "Alan had a vision about what was next for the company. He just wanted to make sure it was everyone else's idea, too."

Mulally's vision quest was interrupted by the fall of Lehman Brothers. As the Great Recession gripped the U.S., consumers stopped buying cars, especially the gas-guzzling SUVs that had fueled Ford's profits. While General Motors (GM) and Chrysler were spiraling toward bankruptcy, Ford, too, was burning through cash, nearly $2 billion a month. It tapped every penny of a $23 billion loan Mulally helped secure in 2006 by putting up Ford's assets as collateral. That cushion allowed the carmaker to skirt bankruptcy and a bailout, which generated enormous goodwill and drew people into its dealerships as the recovery took hold. What they found on the showroom floor were cars that looked better, drove better, and went further on a gallon of gas than the Fords of their memory.

That little revolution took place because Mulally and his team had hammered the importance of quality and fuel efficiency throughout the ranks of the company. Today Ford places above Toyota in J.D. Power quality surveys, with its cars fetching higher prices and better resale values than some Toyota models. Ford's U.S. market share rose for the second consecutive year in 2010—a feat it hadn't accomplished since 1992-93. "He's got a chance to lead Ford to the destiny it's always had but never reached," says Jeffrey Sonnenfeld, associate dean of the Yale School of Management. "There's this sense of Prometheus unleashed. "

Prometheus had some bad days along the way—bound to a rock, feasted upon by an eagle—and it hasn't always been a joyride for Mulally either. He had to eliminate almost half of Ford's workforce, then slash pay and benefits for the survivors. Yet no one calls him Chainsaw Alan or Neutron Mulally. Instead, he's Detroit's only superstar, the man who saved an American icon. "We took Draconian actions," says Executive Chairman Bill Ford, the scion who hired Mulally to replace himself as CEO. "In almost every other case, whomever was in that seat would have been villainized. And yet the opposite happened during those difficult times. Our reputation rose. I attribute that to Alan and his style."

Throughout the crisis, Mulally never let his executives forget about Ford's weaknesses in small cars and Asia. He funneled billions into new compacts and forced the company to develop models for the entire world rather than for regions. The cost savings from this run into the billions. "The first day I met Alan, I told him we had to find a way to globalize product development and that the institutional resistance had been massive," says Bill Ford. "It's something I'd started but can't say we'd made a lot of progress, and I was very frustrated by it."

To underline the importance of Asia, Mulally installed as chief there a rising star named Joe Hinrichs, who had squeezed concessions from the United Auto Workers, saving the company a half billion a year. "Alan always kept this in front of us," Americas chief Fields says, pointing to the pie charts. "As if to say, this is not only about surviving now, but it's about setting ourselves up to thrive later."

"I am standing on Henry Ford's shoulders," Mulally declares, pounding the conference table in his 12th-floor office. He jumps from his chair and gestures at the huge Ford ad that hangs there, an 8-by-10-foot blowup from the Jan. 24, 1925, issue of The Saturday Evening Post with the slogan "Opening the highways to all mankind." "I walk in here every morning [at 5:15 a.m.], and the light comes on, and I stop and read it—to serve all mankind. It makes me cry."

Mulally knows most of the ad by heart, and he recites it regularly. He opened his Detroit auto show press conference last month with the ad on a giant screen above the stage. In his corner office, he pivots from the framed ad to the windows overlooking Henry Ford's massive Rouge factory, still spitting out cars nearly 90 years on. "Look at the Rouge," he says, swiveling back to the ad, where the same factory floats above a hilltop as a happy family gazes up at fluffy clouds. You almost expect a Boeing Dreamliner to fly past the window. "That's your story," he says. "That's your story. For me to get a chance to serve two American and global icons both committed to safe and efficient transportation for everyone. And you wonder why I'm smiling?"

Mulally faces challenges that might have given Henry pause. Ford still has a junk-bond credit rating and $19.1 billion in automotive debt, and it remains barely competitive in China, with just 2.7 percent of the world's largest and fastest-growing auto market. Despite gains in the U.S., South America, and Europe, Ford's weakness in Asia caused its global market share in 2010 to fall to an estimated 6.9 percent, from 7.4 percent in 2008, according to researcher IHS Automotive (IHS), which now ranks Ford fifth worldwide, behind Toyota, VW, GM, and Hyundai. The key to reversing that decline is China.

"President Nixon and Henry Kissinger flew in to see Mao to normalize relations between the United States and China on a Boeing 707," Mulally says. He wasn't far behind, as the first Westerner to sell planes to the Chinese. "Alan has a lot of experience in growing the business in Asia Pacific for Boeing," Hinrichs says. "He really envisions Ford being able to do the same."

Ford, though, is playing catch-up, says auto analyst Michael Dunne, president of Asia market consultant Dunne & Co. in Hong Kong. GM and VW established beachheads in China in the 1990s that have made them the biggest-selling foreign automakers there today. Mulally wants to make up for lost time and expects Hinrichs to generate 70 percent of Ford's growth this decade in Asia. "It's O.K. to be late to the party, provided you're well-dressed," Dunne says. "Good new products are the key to lifting market share in China. Ford in the past did not offer enough of them."

Ford is on a building binge in Asia, spending $1.5 billion on new factories, including two assembly plants and an engine plant in China. One of those, in the southern city of Chongqing, is expected to produce an SUV and a luxury car, Dunne says. Ford might even try selling a Lincoln in China, he says, where luxury cars and SUVs are the fastest-growing categories.

Mulally has to hope that selling Lincolns to the Chinese will prove easier than selling them to Americans. With an aging buyer base and an image dominated by the airport-shuttle Town Car, Lincoln has fallen to eighth place among luxury brands in the U.S., from first in 1999, when the Navigator SUV was riding high. Mulally plans to spend billions to get Lincoln back in the game. He sold the European luxury lines to funnel resources into seven new models for the brand.

The 900 Lincoln dealers who gathered to meet with Mulally in Dearborn last Oct. 4 weren't sure gratitude was in order. They were still feeling the blow from four months before, when Mulally killed Mercury, which accounted for most of their business, leaving them with nothing but a faded luxury brand—named after America's 16th President—whose sales have fallen 63 percent since 1990.

As the dealers waited to hear from the CEO inside a concert hall across Michigan Avenue from Ford headquarters, they knew their financial futures were on the line. Mercury was gone, and now Ford was asking them to spend as much as $2 million apiece to make their dealerships more luxurious and Lexus-like. In exchange, all Ford could promise was that the next-generation Lincolns—arriving from 2012 through 2014—would sell better than the current uninspired lineup, which basically consisted of Fords with bigger grilles and fancier trim.

"We have some decisions to make," said Beau Boeckmann, vice-president of Galpin Motors in Van Nuys, Calif., the largest Ford dealer in the U.S. His family owns two Lincoln dealerships and was thinking about closing one because the upgrade costs would be steep. "And there's no lack of urgency, considering we don't have Mercury anymore. It will be a tough emotional decision."

Then Mulally walked in and delivered a fresh blow. If Lincoln was to transform itself from codger to contender, he said, one-third of the dealers had to go. No one could accuse him of sugarcoating it. Lincoln's slide into irrelevance, he said, had been driven in part by too many dealers chasing too few sales with too-deep discounts. Oh, and the Lexus LS 430 he owned before coming to Ford was "one of the finest vehicles in the world." Lincoln, on the other hand, "isn't where we need it to be on any level or by any measure," Boeckmann recalls Mulally saying.

When Mulally finished delivering these sentiments, the dealers stood and clapped. "He still has to fix Lincoln, and that's no small task," said Boeckmann, who was among those on their feet at the end. "But he saved our businesses. If it wasn't for Alan Mulally, Ford would have gone through bankruptcy, no question."

Reminded of the moment a few weeks later in his office, Mulally's eyes moisten. "I was surprised, and I appreciated it," he says, without offering the slightest hint that his stance might soften. "You have to deal with the current reality, not what you want it to be."

The first glimpse of Lincoln's new look was scheduled to arrive in April 2011 at the New York Auto Show, say three people familiar with Ford's plans. Mulally had intended to unveil a concept of the next-generation MKZ sedan. Larger than the current model, it also looks more elegant while retaining the prominent split-bow grille Lincoln introduced three years ago, according to two people who have seen the car.

Just last month, Mulally opted to hold back that concept car to give Lincoln's new chief designer, Max Wolff, a chance to put his stamp on the brand. Ford poached Wolff, 38, from Cadillac in December. Just when the new Wolff-designed Lincoln will make its debut remains unclear; dealers remain anxious. "They need to refine their styling," says IHS Automotive analyst Rebecca Lindland, "because some of their products are turning heads for the wrong reasons."

In 2012, Lincoln will debut its small car, known tentatively as the MKC, which is based on the foundation of the Ford Focus. A small Lincoln SUV, based on the Ford Escape, will also hit showrooms in 2012 along with a larger sport-ute aimed at taking on the Lexus RX 350, the people say. The next generation of Lincolns designed entirely by Wolff, however, lies beyond those remakes.

Lifting Lincoln is a greater challenge than conquering China, says Allan Gilmour, a former Ford chief financial officer who is president of Wayne State University in Detroit. "The luxury market isn't just sitting there with a whole bunch of vacancies waiting for Ford to arrive," he says. "It takes an ethic to do a real luxury vehicle that Ford has not previously shown." Lincoln's U.S. sales rose 4 percent last year, while Cadillac, which GM spent $3 billion overhauling a decade ago, gained 35 percent. Lincoln's sales fell 21 percent last month, while Cadillac soared 49 percent. Lexus, America's favorite luxury line, outsells Lincoln nearly three to one.

When Mulally turned 65 in August, he could have retired a hero. But he isn't going anywhere, and he wants everyone—inside and outside Ford—to know it. "We've made it through the worst recession ever, and now we've got the products people want and we're growing. I can't think of anything that's more fun than doing this right now."

It's not clear when he'll bring this performance to a close. He'll get no push from Bill Ford. "I would love Alan to stay as long as he's healthy and feels good about it and feels he's ready to take on all these tasks," says Ford.

On those rare occasions when Mulally gets discouraged, he walks 15 steps across the hall to the great-grandson of Henry Ford for counsel. "I've seen Alan have tough times, but probably nobody else has," says Ford, 53. "These jobs are very lonely jobs, and he and I have each other to let our hair down. It allows us to either blow off steam or to admit to some insecurities."

Ford says he's not worried that Mulally's deferred departure will stymie succession or chase off his ambitious lieutenants. Two of Mulally's potential successors, Farley and Hinrichs, are still in their 40s, and Fields just turned 50 last month. A fourth contender, European chief Odell, is 55 and new in his job. Ford poached Mulally from a 37-year career at Boeing after he'd been passed over for the CEO job. "Nobody's been passed over here yet," Ford says. "That next phase is yet to be written."

There is an odd man out: Booth, the well-traveled CFO who turned around Mazda and Ford's European operations. At 62, Booth is running out of time, but he says he's at peace with that. "Everything I have is because of Ford Motor Company, and we got preciously close two years ago to losing it all," says the son of a Liverpool, England, car dealer. "If between us all we can get this place straight, then we can retire in peace."

Mulally acts like a man who doesn't want to miss a moment of Ford's comeback. Asked by an engineer at a town hall meeting in November what gets him up each day, Mulally again recounts his morning ritual of reading that 85-year-old ad. "We're accelerating Henry's original vision," he says. "If you can't get excited about that, then you better check to see if you're alive."

Mulally's greatest challenge may be avoiding complacency among the ranks. The automaker, which now employs 164,000 people, has a history, as Bill Ford concedes, of "losing the plot in the good times." At the November town hall meeting—with 200 employees on the day he announced record third-quarter earnings—Mulally brings up this history of squandered advantage. "We're excellent at crisis management," he says, pacing the stage. "And then it seems like we'd forget why we're here." He implores his charges to keep up the intensity, but the town hall quickly turns into a pep rally. "This is the first town hall where you've not worn a red tie," employee Adam Kessler tells the boss to peals of laughter from the raucous crowd. "It's symbolic that you don't have to project an image of success because we are success now."

Mulally, whose tie is yellow, reminds his acolytes that the job is not nearly done. "We've moved from a stage where we were trying to survive," he says. Now it's time to do "something Ford has never done before"—grow profitably. "It might feel a little stressful. It's going to take different muscles." And inflict some growing pains as well. No problem—he relishes the challenge. It's just part of a comeback that still has a very long way to go.

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