Product plan, cost cuts spark hope at Ford

One year after the spectacular meltdown of the domestic auto industry and three years after becoming Ford Motor CEO, Alan Mulally's turnaround efforts are gaining traction.

Ford reported a surprise $1 billion profit last week, and Mulally credited the improvement to better products, prices, and market share. Mulally, 64, was interviewed by Associate Publisher Peter Brown, Editor Jason Stein, and Staff Reporter Amy Wilson just before the earnings announcement.

A year ago you were part of a three-man team from Detroit in front of Congress asking for help, and now you're kind of on your own. How would you assess how Detroit and Ford have weathered the past year?

In Ford's case, we have made tremendous progress. We were really there to support GM and Chrysler getting temporary help with their situation approaching bankruptcy and [because of] suppliers. They could have taken the entire industry down and taken a recession into a depression.

How much did the cost cuts GM and Chrysler achieved through bankruptcy help you get your balance sheet under control?

We were absolutely pleased that we're creating a strong business without going through bankruptcy. In respect to the debt itself, our plan always was to finance the restructuring. [That is] why we went to the markets three years ago and borrowed the money. Now they are actually pleased that we are paying back the money. As we return to profitability and free cash flow, it will just accelerate the improvement of the balance sheet.

We might be just a little bit disadvantaged right now with respect to some of the people that got help in bankruptcy, but the advantages of running the business as a strong business far outweigh any near-term down side on debt.

Have industry sales reached bottom?

In Ford's case, we're looking at the bottom and starting to turn up. We've been increasing our share and production on the strength of our products. We're cautiously optimistic that this is going to keep going. We're assuming a slow recovery in the fourth quarter and then a slower-than-normal recovery from the recession next year.

Do normal U.S. sales get back to the 16 million to 17 million level during our working lives?

For planning purposes, we're assuming not. For a number of reasons: lower fuel prices, lower interest rates, lower savings rates in the past, and the cars are becoming even more reliable. One of the things that has happened during this recession is consumers are thinking more about living within their means, and I think that's a good thing.

How do you make money with a more balanced portfolio? Can you make money on small cars in North America?

Absolutely. We made a tremendous improvement in our cost structure, plus we have a transformational agreement with the UAW which allows us to make smaller vehicles in the United States and make them profitably. Going past that is the leverage in our assets worldwide. Within two or three years, 80 to 85 percent of our product line will be on global platforms. The combination of scale, along with our suppliers worldwide, along with our cost structure, allows us to make money on every size vehicle everywhere where we make it around the world.

Gasoline prices are still low here.

Over time fuel prices are going to go up. And you look at the mismatch between demand worldwide and capacity: We're going to be paying more for energy. Plus, all around the world people are becoming more conscious of the resources and what we're consuming.

Are you pushing for higher fuel taxes in Washington?

It could be one piece of a comprehensive energy policy.

Do you see a rebound in the pickup segment?

It's already rebounded. Even though fuel prices are up, there was still a tremendous market for pickups because 50 percent are used for work. We really learned a great lesson: no matter what the size vehicle, the owner wants a vehicle that works for their life, but they also want it to be fuel-efficient. But we'll be trying to give them that kind of capability in a little bit smaller, more efficient vehicle.

GM is creating orphaned customers with the elimination of Pontiac and Saturn. And GM and Chrysler are closing dealerships. Are you getting some of that business?

We are really pleased with the customers' acceptance of the new Ford product line. We're picking up market share, and we're increasing production. We're picking up new customers that were choosing Japanese cars before and also from GM and Chrysler.

You've been trying to consolidate dealerships for years.

We've been doing it.

You've been doing it and trying to do it. Your domestic competitors have rather dramatically fired a whole bunch of dealers. Does that affect your own strategy?

We are really pleased with our distribution network. The only areas where we're still focusing are in some of the big metropolitan areas where we have too many dealers that are competing against each other instead of the competition. We are making great progress with the dealers in a collaborative way.

These are independent businesses. They want their throughput up, they want their profitability up so they can keep investing in the stores, and so they are highly motivated to figure out how to get the network in the big metropolitan areas down to the right number.

To go out into the hinterland--Nowheresville, Kan.--is there any downside to having a dealership selling 50 new vehicles a year in a place like that?

Not if they make money.

They're the fabric of the community. The key thing is that they have a viable business plan, because they need to be successful for all of us to be successful. If you're not making money on a dealership, it doesn't work for them. They don't invest. It doesn't work for us. And that's part of the agreements we have with them, is that they need to be successful.

How long will it take to get to where you're satisfied on consolidation, to the ideal number of dealerships?

We're getting close. Over the next couple of years.

Your suppliers say better things about you now. How are you getting more productive relationships?

Partnership and transparency. This wasn't just a Ford problem. Every year they would promise [suppliers] volumes and simplification, and they didn't come through. And so we went to work on including them by telling them what the real volumes were, taking out the complexity. They're a part of the plan, and we shared the productivity and the quality gains. It's a whole other relationship. They are part of the design team.

What does that do for your costs?

Dramatically reduces the cost. This whole cost structure was based on complexity and volumes that weren't realized.

One of your biggest concerns about GM's and Chrysler's bankruptcies were the hardships that would be placed on an already stressed supply base. Is that still a significant risk?

It is very fragile. Their challenge is to bring back the production. A lot of them have been down. They've got to get the talent again, they've got to get the financing, they've got to ramp up production. It is really a stressful situation. This next two or three months is going to be critical. In Ford's case, we have dramatically increased our cooperation and our working together with every key part--because any part can stop you.

Do you want supplier consolidation to happen quicker?

The most important thing is get the production capability sized to the real demand, and we have overcapacity still in the United States. It's a very serious consideration. We have overcapacity at the OEM level, at the supplier level, at the dealer level.

We're going to continue to consolidate our suppliers. We're going to have fewer suppliers. We're going to have more capable suppliers. And we're going to have even tighter business relationships with the ones we have left.

(Source: Automotive News)