Road to Recovery

Having turned Ford around, how will Alan Mulally grow the company and secure its future?

October 31 2010 by JP Donlon


Not long ago, news about the U.S. automotive industry was almost all bad. The exception was Ford Motor Company, the only maker that avoided bankruptcy and refused TARP money from the government. Alan R. Mulally, who just turned 65 and is one of the few leaders to hold leading positions at two iconic American enterprises, has pulled Ford out of a ditch. In the first six months of 2010, Ford has made more money than in the previous five years. The company that had reported record losses in 2008 now reckons it will see 2011 end with more cash than debt. Since Mulally’s arrival, Ford’s shares have risen in value about 74 percent through the first eight months of this year.

This is a startling turnaround for a company that experienced a $12.6 billion loss in 2006, the year Mulally left Boeing to join Ford as president and CEO. At the time Ford’s bonds were reduced to junk status by credit rating agencies and many analysts were sure it would be the first of the big three to fail, as it was caught in a vise between lower-cost Japanese transplants and Asian automakers and the high fixed costs of the domestic industry’s generous pension and healthcare plans.

Trained as an aeronautical engineer, earning degrees from University of Kansas and MIT, Mulally had 37 years of experience as an operating executive with Boeing, where he ran its commercial airplanes unit. While Bill Ford first called him to take the job as CEO, it was an earlier Ford CEO, Don Petersen, who served on Boeing’s board when Mulally was chief engineer on the 777 airliner, who first exposed him to the inner workings of the Dearborn company. “Don asked me if I would like to meet the Ford Team Taurus, so I invited them out to Seattle for three days to compare notes on technology, process and being market driven,” the Kansas-born Mulally recalls. “So when Bill Ford called asking me about Ford, I felt like I was coming home.”

As he relates in the following interview conducted in his Dearborn office, Mulally practically had to mortgage Ford’s future, borrowing billions to stay afloat and fund an ambitious product plan. The company had to reduce excess capacity severely—closing nine plants, cutting 41,000 positions and eliminating the JOBS bank—to get into survival mode. Niche product lines like Jaguar, Volvo and Land Rover were shed. Mercury is to be sold. The number of global chassis platforms was reduced from 20 to eight in order to free up resources and simplify operations. Close to two-thirds of Ford’s products are on global platforms, which means they vary little regardless of where they are made. Some $10 billion in structural costs were taken out of the business. Ford’s line-up is slimmer and more focused.

Bruce Clark, Moody’s SVP, said “We think Ford now has a healthy and sustainable business model. The cost side of the equation has largely been addressed by the massive restructuring associated with the renegotiated UAW contract. This significantly reduced the company’s break-even level.”

By 2008, 70 percent of its models were new or redesigned. By 2010 the entire line-up was new. The automaker also had to shift away from reliance on trucks and large SUVs, which at one point represented 70 percent of its output. Most critically, however, Ford has pulled ahead of rival Toyota and other Japanese makers in perceived overall quality among buyers, according to Consumer Reports and J.D. Powers.But the transformation isn’t just about new car design. The company has pushed major tech innovations into its vehicles, such as the SYNC system that enables mobile communication apps. In 2011, it is launching the MyFord Touch system that offers a next-generation cockpit feel to communication interfaces.

Having broken the mold of what an auto executive can do, the question remains what can he do in Act II? There may be still too much capacity in the industry. After years where industry sales topped 16 million vehicles in the U.S., that figure hit 10.4 million last year—about 1982 levels. Ford thinks this figure will reach 11.5 or possibly 12 million units this year, but several analysts peg it at 11.3 or lower. Then there is the question of Ford’s $25.8 billion in debt at the end of the second quarter. (GM and Chrysler have relatively little debt, thanks to government funded re-organization.) Mulally predicts Ford will regain investment-grade status sooner than expected, thus lowering its borrowing costs. Having regained its operational footing, he believes his company is well positioned to leverage its new products with a variety of untraditional marketing activities (such as its Facebook launch of the 2011 Explorer crossover and the Fiesta Movement, which put the car into the hands of young buyers) helping to achieve a resurgence of the Ford brand. (Following are highlights of CE’s conversation with Mulally; the complete interview is available on www.chiefexecutive.net)

Having returned Ford to profitability, reduced the number of plants and dealerships and trimmed the size of the workforce, you now have the opportunity to think long-term in growing the business. What is your plan?

From the time that I was asked to join and we put together the Ford plan, which was to create an exciting, viable Ford, delivering profitable growth for all. We aggressively restructured and changed the model mix of vehicles to operate profitably at lower demand. We took out a home improvement loan to finance this. Now we are paying the loans back, and we’re leveraging all of our assets worldwide.

We’re growing the business now by serving all the markets around the world. Our position in the U. S. is growing. We’re growing in Europe. We started later in Asia-Pacific, but are accelerating growth there. We’re doing this with a complete family of vehicles, small, medium and large, cars, utilities and trucks, all with one single brand.

What differentiates the company and its products among its global competitors?

One is that Ford is the only brand where the brand name is also the name of the founder. We sold off all the other brands that Ford had bought because we were a house of brands, so that we could focus laser-like on the Ford brand.

Second, Ford today represents a complete family of vehicles. When you walk in the Ford showroom anywhere around the world, you’re going to be able to choose the vehicle that you want and works for you. Whether it’s a small vehicle, a medium-sized vehicle or a large vehicle. Whether it’s a car, whether it’s a utility or whether it’s a truck. The next differentiator is that every Ford vehicle will be worldwide best in class in quality, in fuel efficiency, in safety, in really smart design like SYNC and MyFord. Third parties such as J.D. Power, Consumer Reports, and other source data say that every one of these vehicles now is best in class.

The other differentiator is that Ford is contributing to a better world, meaning that Ford is working in the public and private partnerships on economic development, on energy independence and energy security, and on environmental sustainability.

This isn’t the first time that Ford has had to transform itself. Twenty five years ago, I sat across from then Ford chief Phil Caldwell, who was faced with the threat then posed by Japanese transplants. Years later both Alex Trotman and Jacques Nassar said similar things. So how is this transformation different from all the previous ones that were said to make a difference?

Really insightful question. The answer is that this time the company has taken a fundamentally different direction. World-class companies today must have absolute clarity on what the brand stands for. People are not looking for a house of brands. They are looking for a brand promise. They’re looking for a corporate reputation. They want to know what the corporation stands for. They want to know what the brand stands for. They want clarity in the products and services offered. We’ve done this.

Secondly, throughout this history that you describe, the company was a separate set of Fords around the world. Sometimes they were completely different Fords. That is no longer true today. Try to imagine when all of the vehicles around the world were completely different, and imagine the capital bill required to keep improving them. Now imagine the efficiency when the Fiesta, the Focus, the Escape, the Edge and the Fusion all around the world are the same. The difference is evident in our financial statements. We are improving the investment efficiency because we’re investing in far fewer vehicles. We used to have 97 different nameplates. Now it’s closer to 20. Can you imagine investing in 97 different nameplates? Let’s see, I think I’ll work on the Aston Martin from 8 to 8:10, and then I’m going to go down and work on the Ford Focus from 8:10 to 8:20. Sounds strange, but that was Ford’s world.

A laser focus on the Ford brand allows greater simplification of all the vehicles, but at the same time a comprehensive set of vehicles to serve all the markets. Our biggest breakthrough was taking the complexity out of the vehicles, because we made so many horrible combinations that it confused consumers, and it built in a cost structure that affected the company all the way through Ford’s supply base.

For example, when I first reviewed the Navigator console, we offered the consumer 120 different combinations of features. That was just the console! You know what 120 factorial is? All those combinations had to be designed and made. We’ve taken out 80 percent of that complexity, and are designing vehicles packaged the way the consumers really want them.

The combination of product line simplification, the laser-like focus on the Ford brand and the value it represents, the reduced organizational complexity, and our annual efficiency improvement scaled worldwide takes us to a new competitive level.

How can Ford maintain a capital position sufficiently competitive over the long term with GM and Chrysler–not to mention Japanese automakers—given the huge advantages they enjoy by virtue of having been bailed out with taxpayer money?

The answer is that we continue to improve our fundamental operation, grow the business, generate profits and free cash flow, accelerate the repayment of the debt, get back to investment grade as quickly as we can, and then we have eliminated any disadvantage that we have. Because during the worst of times, we have so many more advantages. We invested in a new product line. We restructured ourselves to operate profitably at the lower volume. It was the plan to borrow the money to do both of those. Because as most eased up on their research and development and their enabling technology, we actually accelerated ours.

So the only disadvantage that we have right now is we’re paying a little bit more on interest on the debt. But now, we have accelerated repayment of that debt. Every quarter, we’ve been paying down the debt. And we are on our way to investment grade.

The auto industry is notoriously hostile to people who come from the outside. When you arrived in 2006, you inherited a senior team that was not of your own choosing.

Yes. Absolutely. Anybody would.

And so therefore, you had to work with people you did not pick, at least initially.

Yeah. Or replace them.

So how did you make it work? That is, apart from benefiting from the “burning platform,” to borrow Larry Bossidy’s famous phrase.

First, I did my due diligence before I came. I’ve been through this a lot. I clearly had thoughts about what Ford needed to do. When I joined Ford, I bonded with the team, as you described. We pulled together around a compelling vision and what we thought we had to do to create an exciting, viable Ford. We developed a very comprehensive and detailed plan, which we’ve talked about. And then every Thursday we meet as a team for at least two and half hours—we’ve done this for four years and go through every element of the plan, including forecasts against the plan. We identify every area that needs special attention to get back on plan. And the entire team [of 17] is in the room around the table.

We go right across the businesses around the world. We go through the product development plan, how we’re going to improve efficiency, what the plan is, what the status is, and what areas need special attention. It’s a relentless focus on implementation at all levels. Here’s next Thursday’s meeting [holding up document]. We look at everything around the world.

During the GM and Chrysler bankruptcy, we were meeting once and sometimes twice a day. And we’d go through the very same thing every time. Any one of us only knows what we know, but together, around the world we can make adjustments to our plan and make them immediately. It’s a relentless implementation of a very comprehensive plan that delivers a compelling vision.

Every CEO coming from the outside discovers or comes to appreciate something even his best efforts at due diligence didn’t completely uncover. What was your revelatory discovery once you settled in behind the steering wheel here at Dearborn?

One, was how complex Ford had become. It’s hard to appreciate how complex the house of brands was until you start going to meetings about Volvo and Aston Martin and Ford, and see in detail, the gravity of that complexity. Managing a house of brands is really complex. There better be clear synergies and strong working coordination if you’re going to achieve the value out of it.

Another facet was how independent the Ford operations were around the world. So when you combine the this brand complexity with these independent Fords—Ford Europe, Asia, and South America with no mechanism in place to work together, you soon realize the critical importance of having everyone at the table at the same time looking at the same plan. Because once they’re there, you don’t have to tell people what to do; they know what to do because they see where you’re going.

Although the media are smitten with electric vehicles, the public’s view tends to become more sober when the total costs of operating such cars are understood. What are the practical alternatives to the internal combustion engine that Ford is seriously considering and how far away are they from marketable products?

The internal combustion engine has a lot of room for improvement. This is why we developed things like EcoBoost, where you have direct fuel injection and turbo-charging using new lightweight materials, integrated electronics, and improved air dynamics. The simplification of electronics allows for smaller vehicles with smaller engines. We create engines with extra torque at lower RPMs that give vehicles like the new Ford Explorer a 30 percent improvement in fuel mileage.

Next is alternate fuels. We’re going to make internal combustion engines work with biofuels like ethanol, because there are places around the world that demand it.

We need to make hybrids more affordable, because it’s costly to carry around two power trains. As fuel prices continue to increase, the value of these alternate power trains will increase. All electric vehicles will need an infrastructure that isn’t in place yet. You need batteries that work that weigh less than 600 pounds and don’t occupy the entire car. You need batteries that can charge quickly and hold their charge whether it’s warm or cold weather. In addition, just using electricity is not going to create the future we want unless we also generate clean electricity.

Hydrogen as a possible fuel source for transportation is still years away, but this too will require an infrastructure we don’t yet have.

Natural gas has a bit better infrastructure in place, but the packaging of natural gas in vehicles is really hard. Big tanks take up a lot of room. Will there be breakthroughs here? Probably. We are very focused in our research on natural gas as an alternative fuel, too.

Hybrid diesels could be a possibility, too. The only problem with diesels is that it depends on what we’re going to do about diesel fuel. In the U.S., early experience with pollutants from diesels has left us with regulations that make the economics of diesels very tough. But countries such as Brazil, where they switch between diesel, gas and ethanol, continue to make great progress.

The reason I’m not giving you a simple answer is that we aren’t going to decide this. No single company can. The citizens of the world will decide the answer. It will have to be a system-wide solution, but whatever it is, Ford will be ready.

What about breakthrough differentiators, such as using human machine interfaces—sensors, cameras and other electronic technologies that empower and protect drivers—perhaps using heads-up displays similar to a pilot’s cockpit?

We’re working on phased array antennas— exactly the same technology we use for navigation and guidance control on commercial airplanes—but used in miniature as a safety feature. Most accidents occur when someone is backing out of a corral-type parking lot where drivers can’t see who is behind them. With this device, the distance between your vehicle and another moving object can be measured, alerting the driver that cross-traffic is in back of you.

Another example is MyFord and SYNC. Everybody has their favorite communication device. Ford has chosen not to embed a communication device in your car, because communications technology is moving too fast and people will want whatever they choose at the moment. What we want to do is manage the interface, so that you can have your smartphone, or whatever, with all the apps managed by the car. Any information it communicates to you is voice activated. You keep your hands on the wheel and your eyes on the road, and you have access to all the information and guidance information you want, but with no need to physically move or manipulate the information around.

Another cool thing, using your cockpit example, is presenting to the driver a heads-up environment, where you don’t need to look down. All information about the vehicle is voice activated. No need to remove hands from the wheel. It’s going to be the single biggest improvement contributing to better driver safety.

So technologies like SYNC become the killer app?

We try not to use the word “killer.” But it’s the app of choice.

Considering the increasing role of technology as a component of the auto vehicle, will we see something analogous to Moore’s Law, where the doubling of computing power every 18 months or the halving of the cost of the same amount of power, applies to vehicles?

In terms of value for the consumer, yes, absolutely. Because we serve all markets around the world and have the scale we can bring more technology to more vehicles. Our suppliers are all aligned with this. We want the cost structure of wherever we operate to afford enabling technology. I was recently with our dealers who are excited about Ford’s operation in India and in China because they’re watching the scale of Ford go up, with more technology going in and costs going down.

Speaking of China, although Ford sales in China have shot up 53 percent in the first half of this year, volume still trails that of GM and VW. So what is your plan to do better?

It didn’t make sense for us to try to accelerate our expansion in China until these last four years. We got Ford of the Americas operating properly followed by Brazil, Europe, and Russia. We are now profitable in every operation around the world, which allows us now to accelerate our product line-up in China. We are accelerating our growth to Indian and Chinese customers as fast as it prudently makes sense because we have to maintain our focus on quality, fuel efficiency and safety while we do so. Our expectation for Ford China is to grow substantially faster than we are today.

Given that Ford is spending about 25 percent of its marketing budget on digital, what do you reckon is the return that you’re getting on that versus traditional marketing? And where is this going in terms of your messaging about Ford in the future?

This is one of the most exciting developments for all of us as consumers. The days of just paying to get our message out are gone. People don’t want to hear talking heads. They want word of mouth. They listen to people they respect that have the main knowledge. Consider the purchasing decisions that people make: 60 to 70 percent say they talk to people that know the product. This is why our Fiesta movement campaign—where we gave those vehicles to real-life customers and they had no constraints in how they reported their experience using social media—was such a success. It had more credibility than having a Ford person out there talking about the product. Was it a risk? Sure. But if you’re confident about producing the best cars and trucks, it’s worth taking. The Fiesta is selling itself.

Years from now, when you sit down and write your memoirs, or teach an MBA class at your MIT alma mater at Sloan, what are the one or two percepts you will cite that raise a CEO’s effectiveness in cases of extreme adversity?

The purpose of business is to create value. To make products and services that people want. Do it more productively than the competition. The most important thing is that times change, the business environment changes. When this happens it’s important to have a point of view about the future. Above all, deal with the current reality. You can’t wait for it to get better. You need a plan that deals with the current reality.

In terms of Ford, the most important thing was to realize the world was slowing down, fuel prices were going up, our house of brands wasn’t working. We had to deal with that. At the same time, be prepared to take tough aggressive action. You have to be decisive. In doing so, pull everybody together and offer a compelling vision and a strategy to achieve it. This is why I emphasize relentless implementation. Get everybody at the table. Everyone must participate, know what the plan is, and know the current status against the plan, the areas that need special attention. It comes down to using everyone’s talents— and I mean everyone.

Maybe only your wife or best friend can answer this but since they aren’t here, let me ask you, how has the experience of the last four years changed you?

I would say that it has reinforced for me the importance of contributing something meaningful, a compelling vision, a comprehensive plan that includes everybody. Why do I get up each day? Why am I excited to come to work? I am more convinced than ever that we can do whatever we want to do if we use the key principles I mentioned earlier.