FORD USA and the New Mustang.
The following article was circulated by Mustang-Matters, Vol 4 No 29, August 3, 2004
Bill Ford Says Mustang May Help Save His Family's Enterprise
(Published in Bloomberg Markets magazine, August 2004. By John Lippert and Bill Koenig )
July 19 (Bloomberg) -- William Clay Ford Jr. faced a truckload of challenges when he became chief executive officer of Ford Motor Co. in 2001, and among the most treacherous was the introduction of the redesigned Mustang sports car. It was a high- profile project, one that could help restore the automaker to prominence -- or, if it failed, upset Ford's plan to invigorate a company that was losing U.S. market share to competitors such as Toyota Motor Corp. ``If you mess up a product like the Mustang, you could ruin the entire Ford Motor Co. brand,'' says Barb Samardzich, 45, the company's executive director of Mustang development. That was the prospect Bill Ford confronted. The project was six months behind schedule and hundreds of dollars per vehicle over budget, and the engineers were asking him to invest another $1 billion. He said no at first and then decided to go ahead using cheaper parts and fast-paced development methods from Mazda Motor Corp., which Ford has controlled since 1996. The plan worked, and the Dearborn, Michigan-based automaker will start selling the new Mustang in October. The company will also introduce two sedans and a sport utility vehicle built with Mazda's engineering methods and designs imported from Volvo AB's car unit, which the company bought in 1999. Ford, 47, says that outcome marks a turning point in the carmaker's road back to financial health -- and in his own learning curve as manager of his family's enterprise. ``The Mustang was a good test for me in terms of my own resolve,'' he says. ``If we didn't get a sense of discipline into our product development system, we were going to die.''
A Crippling Burden
The overseas designs that Bill Ford is importing into North America represent his best chance to trim manufacturing costs that average 10 percent to 20 percent more than those at competitors such as Toyota, says Phil Martens, 44, Ford's group vice president of product creation. These bloated costs are a crippling burden at a time when Toyota is clearing land in San Antonio for a pickup truck factory aimed directly at the F-150, which accounts for about half of Ford's profits. The second-largest U.S. automaker earned $1.95 billion during the first quarter, up from $896 million a year ago, as its redesigned F-150 helped increase revenue 9.5 percent to $44.7 billion. Company officials say second-quarter operating profit may almost double from a year ago, to 45 to 50 cents a share or about $984 million, based on 1.8 billion shares in April. Ford will report its second-quarter earnings tomorrow. David Dreman, chairman of Dreman Value Management LLC, owner of 3.5 million Ford shares, says investors are still waiting to see if the company can boost profit on more than just pickup trucks.
There's been a turnaround at Ford, but the earnings have to be a lot more, and they can't just come one year in 10,'' he says. Ford shares traded at $14.85 on July 16, down 7.2 percent during 2004 compared with a 0.9 percent drop in the Standard & Poor's 500 Index. Intensifying competition means the company's Ford, Lincoln and Mercury brands could capture only 15.5 percent of U.S. sales by 2009, down from 18.8 percent this year and 24.1 percent in 2000, says Michael Robinet, an analyst at CSM Worldwide Inc. in Farmington Hills, Michigan. Declining market share, in turn, could threaten Ford's ability to cope with his $33 billion unfunded liability for retiree health care, Robinet says. In Japan, Toyota's retirees belong to a taxpayer-funded plan In March, Ford had $171 billion in outstanding debt at its automotive and finance companies, compared with $72.3 billion at Toyota, says Standard & Poor's analyst Scott Sprinzen.
Pay a Premium
To sell his debt, Ford must pay a premium. The yield on Ford Credit's 7.25 percent bond due Oct. 25, 2011, was 6.20 percent on July 16 - 126 basis points more than an index of BBB-rated industrial bonds of comparable maturity, according to data compiled by Bloomberg. A basis point is 0.01 percentage point. At least one of Ford's competitors says the family scion isn't the right man to take on the job of turning around the company. ``Ford is drifting,'' says Yukitoshi Funo, head of Toyota's U.S. sales arm. "There is no direction.'' Bill Ford could function effectively inside General Motors Corp. or Toyota, which have stable management systems, Funo says. He hasn't shown the bold leadership that Ford has needed to weather recurrent crises in its history, Funo says. `
After oil prices soared in 1979, for example, then chairman Philip Caldwell saved Ford by cutting its U.S. workforce in half. ``Judge me by the results,'' Ford says. ``We've had a lot of big personalities around here, some of whom delivered and some of whom haven't.'' Ford, who stands 5 feet 10 inches, with sandy hair and protruding blue-green eyes, holds a bachelor of arts degree in history from Princeton University and a master's degree in management from Massachusetts Institute of Technology. Over the years, he has embraced environmentalism, vegetarianism, Buddhist literature and tae kwon do. He earned $14.8 million last year. He and his family own 99 percent of the company's Class B shares, through which they control 40 percent of shareholder votes. He arrived as CEO in 2001, just as the company reported a $5.45 billion loss and closed five plants in North America. ``The scared-shitless days were that first year,'' Ford says, adding that he started to relax after his factories started building the new F-150 on time last year.
He says he enjoys himself now, especially when he can blend into crowds at auto shows to gauge customer reaction to new cars like the Mustang. ``All I need to do is look in the mirror from time to time and say, `Do I think we're on the right path?'`` Ford says. The crisis Ford inherited dates back to 1997, when the company earned a record $6.92 billion, says James Womack, president of the Lean Enterprise Institute in Brookline, Mass. Jacques Nasser, then president of Ford's automotive operations, called in the spring of 1997 to ask how he could adopt Toyota's production methods in four years, Womack says. Nasser said he had to move fast because Toyota was cloning the pickups and sport utilities that generated Ford's record income, Womack says. Nasser, 56, now chairman of Polaroid Corp., the Waltham, Massachusetts-based film products maker, declined to comment. Nasser's response was to set up five separate North American product development teams that acted as autonomous businesses, Martens says. He disbanded the central engineering group that designed components such as interiors and brakes and distributed such responsibilities to suppliers. He trimmed Ford's engineering staff through retirements.
`Old-Time Car Guys' `
`The old-time car guys were losing out, slowly but surely,'' says Bill Ford, who deferred on such decisions to Nasser as nonexecutive chairman starting in 1999. Nasser allowed his autonomous product development units to develop customized components to increase their appeal to target customers. By 1998, he was using three different platforms, or clusters of sheet metal and chassis components, for his full-size pickups and sport utilities. General Motors needed one platform. Nasser intended to pass on the cost of this variation to customers, an approach that may have worked in a growing market like China, Martens says. His approach began to fall apart in 1997, when, for the first time in 26 years, prices for new vehicles fell, according to the U.S. Bureau of Labor Statistics. Vehicle prices are 7.4 percent lower today than in 1997. They were driven down by zero percent loans and other discounts that General Motors announced eight days after the terrorist attacks in New York and Washington in 2001.
Most Visible Stumbles
One of Nasser's most visible stumbles came in 2001 with the $37,095 Thunderbird. The car's styling mimicked Ford's 1955 two- seat sports car that inspired Beach Boys lyrics like ``We'll have fun, fun, fun till her daddy takes her T-Bird away.'' Nasser predicted annual Thunderbird sales of 25,000. One month after starting the assembly line, he had to shut it down for two weeks because of a defective cooling system built by a supplier. Ford sold 18,100 Thunderbirds last year and plans to discontinue the car in 2006.
One of Nasser's last public appearances with Bill Ford came during a celebration to mark the start of Thunderbird production in July 2001. Six days later, Ford combined his job as chairman with Nasser's job as CEO. They shared decision-making authority until Ford ousted Nasser three months later. The company can't afford a repeat of the Thunderbird debacle as it rolls out the new Mustang, a four-passenger sports car that was conceived after a recession in 1958 caused second thoughts about the chrome-plated, tail fin-adorned Cadillacs that captivated Americans after World War II.
Engine and Chassis
The first Mustang shared its engine and chassis with the Falcon economy car championed by Ford President Robert McNamara before he left to become U.S. secretary of defense in 1961. Lee Iacocca, then vice president of the Ford division, helped give the Mustang pizazz, including a long, low stance that his designers copied from passenger cars they'd seen in Europe during the war. Iacocca introduced the Mustang at the 1964 New York World's Fair, two months after the Beatles appeared on the Ed Sullivan Show and just as 77 million baby boomers were starting to drive.
"Life was one diaper after another until Sarah got her new Mustang,'' one of Iacocca's ads said. He put on folk concerts to appeal to the budding counterculture, and he sponsored a national television broadcast featuring Motown music star Martha Reeves dancing along the Mustang assembly line at the River Rouge manufacturing complex in Dearborn, Michigan.
Time and Newsweek
Iacocca and his $2,368 Mustang appeared simultaneously on the covers of Time and Newsweek. He sold 22,542 Mustangs on the first weekend. He rushed to open two additional assembly plants by October 1964 and sold 418,812 Mustangs during the first year. The Mustang spawned imitators including the Chevrolet Camaro and Plymouth Barracuda and inspired a generation of purists who howled in protest -- and forced Ford to back down -- when the company came close to building four-cylinder, front-wheel-drive Mustangs in 1989. Edsel Ford, Bill's cousin and a Ford director, says his father, Henry Ford II, had no idea the Mustang would be a hit. ``I don't think one ever knows,'' Edsel Ford says.
The Car's Aficionados
Ford sold 140,350 Mustangs last year, down from a peak of 549,436 in 1966, yet thousands of the car's aficionados still cling to the brand. At a recent 40th anniversary celebration in Lebanon, Tennessee, Tim Rigsby, 38, displayed his red 1967 Mustang convertible. He held up calloused hands to show why he doesn't want to roof houses forever, and he said his dream is to make a living restoring classic cars. He buys every Mustang he can find and has three dozen parked in the toolshed and field behind his house in Morrison, Tennessee. ``My first wife, she didn't like Mustangs,'' Rigsby says. ``My second wife, she likes them just fine.'' For the new Mustang, designer J.C. Mays, 49, echoed the car that actor Steve McQueen drove over the hills of San Francisco in the 1968 movie ``Bullitt.'' The new Mustang has the same long hood, short trunk and forward-leaning front end. Its styling is intended to tap the emotions that many Americans have attached to Mustang during its 40-year history.
`An All-Time High'
These emotions are particularly strong when the U.S. is at war, Mays says." When patriotism is at an all-time high, the Mustang is espousing very much the American sentiment at the moment,'' Mays says. "Americans like to be tough.''
After the Nasser upheavals,
Ford engineers knew they couldn't raise prices, which start
at $19,000 for Mustangs with a V6 engine and $26,000 for
those with a V8, says chief engineer Hau Thai-Tang, 37.
They had been debating since 1999 whether to build the car
from a modified version of the engine and chassis used for
the $37,095 Thunderbird or to update the existing Mustang
The decision horrified purists who favour suspensions that allow rear wheels to bounce up and down independently; such suspensions are so popular that Nasser installed them on pickups. Martens insists he can make up for the compromised wheel motion with a stiffer body and a beefed-up suspension. Changing the axle meant redesigning everything from the rear of the door to the back bumper. Under traditional Ford methods, these changes would have delayed the program another year. ``All the Ford folks said we couldn't make that change,'' Thai-Tang says. Martens avoided the delay with methods he'd learned while serving as product development director for Mazda from 1999 to 2002.
First, Martens hired a Japanese company, Fuji Dietec Corp., to make the dies, or heavy engraved molds, on which the Mustang body panels are stamped out. He rejected Ford's traditional approach of spending $100 million at the outset for a complete set of rough and finished dies to make parts conforming perfectly to individual specifications.
Hammers and Scissors
Instead, he adopted Mazda's approach of using rough dies, and sometimes even hammers and scissors, to make parts that conform roughly to their specifications. He assembled them and determined how well they functioned in relation to each other before committing himself to the expense of cutting the finished dies. Besides saving money, Mazda's die construction method saved months of development time, executive director Samardzich says. In addition, Martens adopted Mazda's method of releasing design specifications to suppliers.
Traditionally, different engineering teams at Ford released designs for bumpers or door panels as soon as they completed their work. Under Mazda's approach, they're all required to sit in one room, with top management and outside suppliers, poring over drawings and computer data together, before releasing anything.
The process, known as "final drawing judgment,'' requires two weeks of round-the-clock work. It cuts down on late design changes and defects, Martens says. At the same time, Bill Ford liberated Mustang from the River Rouge complex, where Henry Ford started building submarine chasers in 1918. The Dearborn Assembly Plant inside the complex used North America's second-oldest elevators, which often broke down, says site manager Dennis Profitt. Skylights had been painted black for security during World War II and never cleaned off. A leaky roof meant rainwater filled the pits in which workers stood to attach parts to the bottom of the Mustang. On May 10, when the factory built its last car, Lonnie Spight, 49, watched as the last tire rolled down the same conveyor at which he'd been stationed in 1973. He would carry the 40-pound tire and wheel over to the car, hang it in place, put four bolts into a cluster of hydraulic socket wrenches and tighten the bolts. ``The jobs were overloaded,'' Spight says. ``They ran a real tight budget.''
Three years ago, Bill Ford sought to convince workers like Spight that he was shedding the company's authoritarian ways. He signed a United Auto Workers union contract that reorganized workers into teams that help monitor quality. In 2004, customers reported 116 problems per 100 Mustangs, down from 158 in 2001, according to J.D. Power & Associates, a Westlake Village, California-based market research company. Mustangs that needed 55 hours to go from a bare piece of metal to a finished vehicle made the trip in 28 hours this spring because they needed fewer repairs, Profitt says. Spight works now at an F-150 truck plant that Bill Ford opened this spring inside River Rouge. He rubs the trucks with alcohol before they're painted.
The new plant bristles with worker-friendly technology, like electric devices that carry tires to the passing trucks. Even so, Spight wonders whether Ford will overload the jobs as production accelerates. ``We're on a honeymoon now,'' Spight says. At Dearborn Assembly, metal bodies for the Mustang were welded together by the same machines that clamped them in place. The machines were designed to handle one body style over and over.
At the Mustang's new home, the Auto Alliance International Inc. factory that Ford runs with Mazda in Flat Rock, Michigan, the body panels are held in place by metal frames that roll back and forth on railroad tracks. As the frames hold the body panels together, robots dance around to apply the welds, and a frame for the next car rolls into place.
The new Mustang body shop is identical to those that Ford plans to install in three-quarters of its North American assembly plants by the end of the decade. In countries like China, where production volumes are smaller than in the U.S., the company will use more workers and fewer robots. The body shops can handle up to nine different models. They cost up to $225 million to build, or about 10 percent less than traditional equipment, says Roman Krygier, group vice president of manufacturing. The big payoff comes when new models are introduced. Only computer software and clamps that touch the vehicle need to be changed, cutting changeover costs in half, Krygier says.
Toyota is already using similar methods in all of its assembly plants worldwide. Maryann Keller, an auto analyst at Maryann Keller & Associates, rates Bill Ford's commitment to flexible manufacturing, even in the face of heavy losses during 2001-2002, as one of his biggest achievements. ``You can put three or four different models in a factory and not pay a penalty as you constantly change the mix,'' says Keller, whose firm is located in Greenwich, Connecticut.
Ford is beginning to master the technology. Customers reported 109 problems per 100 redesigned 2004 F-150 pickups, down 6.8 percent from the best-in-class trucks they replaced, according to J.D. Power. In total, Ford's customers reported 127 problems per 100 2004 vehicles, down 6.6 percent from a year ago. Ford still trailed Toyota's industry-leading 101 problems per 100 vehicles. Company officials say they hope to sell 170,000 Mustangs next year. That would help fill the Flat Rock plant, only one- third of which was utilized last year, says Michael Ward, an analyst at CreditSights Inc. in New York.
Rebates Worth $2,500
If the new Mustang is popular, Ford can also cut back on rebates worth $2,500 per car. In total, Ford could earn $500 million a year by building Mustangs in Flat Rock, Ward says. That compares with $1 billion the company lost at the Dearborn and Flat Rock plants last year. Ford officials say they are looking for a similar swing as they convert an underutilized Taurus plant in Chicago to one that builds two Volvo-inspired sedans called Five Hundred and Montego, plus a sport-utility vehicle called Freestyle. Officials also say they plan to make three new sedans next year in an underutilized Focus factory in Hermosillo, Mexico. The new Mustang was a bridge to this flexible future because it gave the company confidence that Mazda's engineering methods could work in North America, Martens says.
In addition, the Chicago and Hermosillo vehicles embrace modular designs, in which suppliers deliver chunks of cars, such as instrument panels, as a single unit instead of individual pieces. Fragmented markets and low profits forced Mazda and Volvo to pioneer modular designs back home, Martens says. Such designs, spread over high volumes, can cut costs 25 percent, he says. Interior modules -- including seats, armrests, air bags and carpets -- now cost up to $2,500 a vehicle, says Dan Luria, an analyst at the Michigan Manufacturing Technology Institute. Within four years, about two-thirds of Ford's North American output will be using flexible manufacturing and modular methods developed by Mazda and Volvo, Martens say. Cost savings from such methods won't materialize if the new vehicles don't sell.
Credit for Trying
For now, Alan Baum, an analyst at Planning Edge, a market research company in Birmingham, Michigan, gives Ford credit for trying. ``At least they're not creating new versions of existing products, which is what General Motors is doing,'' Baum says. During a 40-city promotional tour this summer, the new models to be built in Chicago are intermixed with Mustangs. Even though the new Mustang hasn't shown much appeal outside sports car enthusiasts, it will likely increase showroom traffic, says Art Spinella, president of CNW Marketing Research in Bandon, Oregon. ``It gives them something to smack people between the eyes and say, `Hey guys. Ford is still around,''' Spinella says. ``The new Mustang offers a lot of bang for the buck,'' says Matt DeLorenzo, Detroit editor of Road & Track, the oldest car enthusiast magazine in the U.S., with 750,000 subscribers. ``Its performance, styling and price will converge to make it a hit.''
John Arege, an analyst for the $8.9 billion Merrill Lynch Basic Value Fund, says Bill Ford has done everything he can to improve things he can control. ``I'm surprised that the stock doesn't reflect the progress he's making,'' says Arege, whose company owned 19.5 million Ford shares in March.
`A Great Truck'
Guy Briggs, group vice president for manufacturing at General Motors, acknowledges an upswing at Ford. ``Their first- quarter profits were very strong,'' he says. ``The F-150 is a great truck.'' In 2002, Bill Ford pledged to turn his $2 billion operating loss in the prior year into a $7 billion profit by 2006. His big test comes in 2006, when he'll replace 21 percent of his U.S. lineup, according to Prudential Securities analyst Michael Bruynesteyn. Toyota will replace 65 percent of its models, including a redesigned Tundra pickup aimed at the F-150, that year. ``We're skeptical about Ford's ability to maintain their earnings improvement,'' Standard & Poor's Sprinzen says. Bill Ford says he will likely deliver his $7 billion operating profit by 2006. Achieving that would mean an operating profit margin of about 4 percent -- more than Ford's 0.8 percent last year and less than Toyota's 9.6 percent, says John Casesa, an auto analyst at Merrill Lynch & Co.
$7 Billion Goal
Achieving the $7 billion goal would symbolize that Ford has stabilized,'' Casesa says. ``It would not be enough to say this will be a great company again, since Ford margins will still be well below many of its key competitors'.'' Bill Ford declines to discuss his post-2006 plans in detail, saying to do so might lessen the pressure he's putting on his employees to work toward the $7 billion target. He'll say only that he'll try to boost per-vehicle revenue in North America, invest in emerging markets like Russia and cut costs. Phil Martens says Ford can boost its margins by linking manufacturing and engineering efficiencies it's developing in North America with what he calls the unmatched global reach of upscale brands like Jaguar. ``It's the Toyota business model,'' Martens says. ``They generate hoards of cash.'' Ford can't achieve this linkage now because its North American product developers act as if they're in a different world than their counterparts in other regions, Bill Ford says. The company is selling its existing Focus compact car in the U.S., for example, even though it introduced a redesigned family of Focus vehicles in Europe.
This approach will be increasingly unacceptable as rising gas prices and increasing traffic congestion force North America to rely less on sport utilities and pickups, Bill Ford says. Eliminating this two-world approach, he says, became easier when James Padilla became chief operating officer in April. Padilla, 58, rose through Ford's manufacturing ranks and led restructurings at Jaguar and in South America. As chief operating officer, he'll be taking the jobs of two men: David Thursfield, 58, who was head of the international division until April and is now a Ford consultant, and current President Nick Scheele, 60. According to a person familiar with the situation, Scheele will soon retire. A long-simmering feud between the two men broke into the open last year when Thursfield's purchasing department questioned the ethics of giving Ford's global advertising account to WPP Group Plc, at which Scheele's son worked as an account manager.
Getting Rid of People'
It's encouraging that Bill is getting rid of people whom he had to clobber over the head to get them to do what he wanted,'' says Eugene Jennings, a business professor emeritus at Michigan State University, based in East Lansing, Michigan. ``He should have done it two years ago, but he didn't know enough about the available talent and didn't know how to use his authority wisely.'' In addition to moving up Padilla, Ford promoted a cadre of younger executives whom Ford describes as potential CEOs. They include Mark Fields, 43, president of the company's Premier luxury car group; Mark Schulz, 52, president of Asia-Pacific; Greg Smith, 52, president of North and South America; and Martens.
"The key to a turnaround is having a management team that will stay around long enough to live with the results of their decisions,'' says George Stalk, senior vice president at Boston Consulting Group Inc. ``Bill Ford is doing that.''
Bill Ford had preliminary discussions to lure Nissan Motor Co. CEO Carlos Ghosn to the company last year, a person familiar with the talks says. The talks broke off after Bill Ford made it clear he has no intention of relinquishing his CEO title, the person says. Nissan spokesman Gerry Spahn said Ghosn would not comment. Ghosn's rejection hasn't slowed down Bill Ford, says Sasha Kamper, who helps manage $65 billion in debt including Ford bonds at Principal Global Investors in Des Moines, Iowa. ``When he first took on the job, he seemed overwhelmed,'' she says. ``Now he seems to be hitting his stride.''
Ford says his first car was a dark green Mustang with tan leather seats, which he received when he graduated from high school in 1975. He drove the car to northern Michigan against the wishes of his father, William Clay Ford, and sub-freezing temperatures ruined the car's experimental paint, which contained tiny metallic flakes. He says he's already placed an order for two redesigned Mustangs: a black hardtop and a red convertible. So even if his dream of turning around the company doesn't work out, he'll be riding off into the sunset in style.