Getting Ford In Gear CEO Bill Ford must cut costs and stop feuds to turn his company around.
By Alex Taylor III

(FORTUNE Magazine) – Ford Motor could use an expert repair job. If one of its vehicles had hit as many potholes as the executives running the company, the car would have broken down long ago. Under the leadership of family scion Bill Ford, the automaker has been losing money almost everywhere it sells cars. It has major gaps in its product lineup and weak cost controls. Its beleaguered PR staff deals with rumors ranging from delayed new-product programs to impending bankruptcy. Like its domestic rivals, it has large unfunded pension and retiree medical liabilities. Also like GM and Chrysler, it faces declining market share and intensifying foreign competition. Ford's stock reflects these woes: It is trading over $9 per share, some 40% lower than when Bill Ford became CEO 18 months ago.

The challenge for Bill is not just to solve these problems, but to do so with a team of managers who don't particularly like one another. Although Ford executives have long been known for sharp elbows, things have gotten so bad that executive coaches are teaching business etiquette to president and COO Nick Scheele and EVPs Jim Padilla and David Thursfield. Bill Ford, who gets his own coaching from the company's head of human resources, has met with the men several times, asking them to resolve their differences for the good of the company. "If executives don't work together well, the wheels fall off," says Carl Reichardt, a longtime board member who works closely with Bill Ford. "That doesn't mean they have to love each other."

Add it all up--lousy business, large legacy costs, executive turmoil--and some industry observers have begun to ask: "Can Ford survive?" The answer is yes, for now. But the next eight months will be a critical test both for the company and for the CEO. He must keep promises made in January to increase 2003 market share and to drag the money-losing automotive operations back to breakeven (before taxes) this year. Credit rating agencies are watching carefully. Standard & Poor's, which has already put Ford on negative outlook, says reviving the auto business is critical to maintaining Ford's credit rating. Writes S&P analyst Scott Sprinzen: "If Standard & Poor's came to believe that Ford was not on a trajectory to meet this objective, the long-term and short-term ratings would be reassessed." That would hurt since Ford is rated BBB, just two notches above junk.

The company recently surprised analysts by reporting that accelerated cost-cutting produced a first-quarter profit (pretax) in the auto business, as well as positive operating cash flow. "A terrific quarter," is the way Bill Ford described it. But international operations and the luxury-car group lost money, and analysts say the outlook for the rest of the year is cloudy.

Among the major automakers, Ford inhaled the late-1990s economic vapors most deeply and suffered most when they evanesced. Its pickup trucks and sport utilities produced gobs of money--Ford made an adjusted profit of $2,032 per vehicle in North America as recently as 2000--and the company's ambitions expanded accordingly. Ford executives went so far as to say they no longer wanted to be part of Detroit's Big Three; they felt they belonged on a higher plane, alongside elite Japanese and German companies. There was talk that Ford would pass GM in U.S. sales and take its place as America's preeminent auto manufacturer.

The company's subsequent collapse rivals that of the dot-coms. CFO Allan Gilmour says Ford became so preoccupied with the performance of individual units that it lost its advantages of volume and scale, just as GM rediscovered them. The ensuing incentive war kicked off by GM, combined with stronger truck competition and Ford's sloppy engineering and manufacturing, produced big losses in North America of $2.15 billion in 2001. The company unwound some unsuccessful efforts at diversification, and it abandoned ventures in retailing and the Internet. But it is still propping up unprofitable acquisitions as it tries to raise quality and reduce costs. Ford narrowed the loss to $559 million last year but did so at the expense of market share, which has fallen from 25% in 1998 to a little over 21% today.

Nothing symbolizes Ford's failed ambitions better than its luxury-car business. After acquiring Volvo in 1999 and Land Rover in 2000, Ford added Lincoln and Jaguar to the mix of what it called the Premier Automotive Group (PAG). From the start, PAG was geographically unwieldy, with engineering in Sweden, England, and Michigan, and marketing in California. As executives conjured up grand plans for each brand, business collapsed. Lincoln lost $1 billion in 2001, Jaguar dropped $500 million in 2002, and Land Rover only recently turned profitable. Lincoln has been sent back to North American operations, and expansion plans have been scaled back. PAG lost $88 million in the first quarter of this year.

Remember that childhood stunt of trying to rub your head while you pat your stomach? A toxic combination of strategic errors, operational miscues, and ferocious competition is forcing Bill Ford to perform the corporate equivalent. To rebuild earnings, he intends to cut $6 billion from the company's $30 billion corporate overhead by 2005, reducing everything from ad expenditures to lawn-maintenance budgets. At the same time, he is overhauling all core operations: reengineering the purchasing process to squeeze out more savings, refitting assembly plants to make them more flexible, and streamlining product development to get more new models out the door. The overhaul has produced a bulge in capital expenditures: Ford will spend $8 billion this year, $1.2 billion more than last year, a big number for a business that struggles to return its cost of capital. Ford executives say they will spend the money on Jaguar, Volvo, and Land Rover and on factory modernization.

Though Ford is holding its own right now, some analysts are skeptical about its ability to gain momentum. The company expects to increase North American market share this year, but J.D. Power & Associates forecasts another decline. Ford has vowed not to lower prices, but its resolve could wither in the face of a weak economy and GM's aggressive campaign of incentives. "The story will be one of accelerating cost-reduction offsetting to some extent, but not entirely, worsening industry fundamentals," writes Merrill Lynch analyst John Casesa.

Ford's great hope for 2003 is the redesigned F-Series pickup truck, which will begin rolling out of four assembly plants in October. Ford expects to sell 900,000 pickups a year--one-fifth of its total North American volume--when all the plants are operational. The F-Series has been Ford's profit engine, earning more than the company's entire line of passenger cars. But the redesign seems more in tune with the free-spending past than the impecunious present. Five distinct versions, from utilitarian to ultra-luxe, have helped make the new F-Series $2,000 more expensive to manufacture than the old. That wouldn't be a problem if Ford could mark up the price. But the truck will be under pressure from Chrysler, Toyota, and soon Nissan, plus GM, which also depends heavily on pickups. Although Ford has assigned hundreds of engineers to determine how to make the truck more cheaply, its margins are still likely be skimpier than before.

These issues weigh heavily on Bill Ford, 46, who has little experience running operations of any size, much less a company as complex as the one he's in charge of now. He excelled at repairing Ford's frayed ties with employees, dealers, union officials, and suppliers. "Bill is an excellent communicator and has a deep well of trust and affection from many of those constituencies," says longtime director Irvine Hockaday, the retired CEO of Hallmark Cards. "I think the leadership challenge at Ford plays right to Bill's strengths." Perhaps, but unlike previous CEOs, Bill Ford doesn't have an extensive background in functions like manufacturing, finance, or engineering. So while he helps set strategic direction and cost-cutting targets, he gives subordinates a long rope. Says Mark Fields, who runs PAG: "Bill lets operating divisions do what needs to be done to deliver." Whether that is a winning strategy is unclear. "The question is implementing it," says board member Robert Rubin, the former Treasury Secretary. "I think they've accomplished a lot, but they have a great deal to accomplish going forward."

Because retirements and frequent reorganizations stripped the company of experienced managers, Bill Ford has assembled an all-new operating team. Besides COO Scheele, 59, it includes EVPs Padilla, 56, who runs North America, and Thursfield, 57, who is in charge of Europe, PAG, and purchasing. All three have moved up the ranks very quickly in recent years--combined, they have held 12 jobs since 1998--and all are managing much larger operations than in the past. Four years ago, for instance, Scheele was in charge of Ford's tiny Jaguar business. Padilla is the only one with extensive North American experience, and none had worked with Bill Ford for any length of time.

Teamwork has been hard to come by. A few months after he became CEO, Ford assembled the three men to say, in effect, chill out. He made it clear that he would not allow their individual differences to sink his revitalization plan. Says Ford now: "If I hear about backbiting, I kill it right away. I confront it and I won't tolerate it." Several months later Ford met individually with Thursfield before naming him to head global purchasing. Thursfield, who worked his way up through manufacturing and is known as an enthusiastic cost cutter, has a reputation for being abrasive and caustic. Ford warned him not to be disruptive.

At a third meeting, in the summer of 2002, Ford told Thursfield and Padilla to be careful about criticizing each other's operations. "He wanted to let them know that the company desperately needed them both to succeed," said an executive. Both men have coaches; according to the executive, the goal is to make Thursfield "more cuddly" and the low-key Padilla "more direct." It seems to be working. "Padilla and Thursfield are part of the solution, not the problem," says Rubin. "On the evidence, their relationship is working very well."

The chatter about internal rivalries might have died a natural death. But in March a Detroit newspaper revealed that the company was questioning Scheele about steering advertising business to an agency where his son worked and where he had friendly ties. Detroit gossip had it that Thursfield was behind the investigation, which he denied. Scheele escalated the incident by writing a memo--also leaked to the newspaper--saying reports of bad blood between him and Thursfield were "scurrilous" and "beneath contempt." Scheele added, "Should you ever hear a rumor that David and I are in competition, I ask that you intervene--quickly and directly--and stamp the rumor out. It is simply untrue." Says Bill Ford: "This [sort of rivalry] has been a fact of life at Ford since I was a little kid, and probably before. But it is a little bit of a distraction."

Whether or not the rumors are true, Scheele may be the man out. His very public comments about losses at Jaguar and high costs for the F-Series have put him at odds with Bill Ford, who is said to believe Scheele should focus more on the nitty-gritty of operations and spend less time on external matters. As Ford gains more confidence in his skills, Scheele may have less of a role to play. Says an analyst: "I'm amazed that Scheele is still there."

When companies run into trouble, bad news sticks to them like Krazy Glue. Recently Ford had to fight a report that it was headed for bankruptcy. Sean Egan, co-founder of Egan-Jones, a small Pennsylvania credit rating agency, was quoted in Grant's Interest Rate Observer saying, "If it didn't have the name Ford, it would be in bankruptcy right now." Egan had been following Ford closely, and had downgraded its credit to junk status a year ago. He cited problems such as the company's pension fund liabilities and rising SUV inventories to support his dire prediction. But these were more a list of ills facing the company than a reasoned argument that it was close to insolvency. As other analysts quickly noted, Ford has a pile of cash that now totals $26.6 billion. "Over the near term, there is no liquidity concern," wrote S&P's Sprinzen. "They are in a position to sustain themselves for many years."

When it isn't swatting down errant credit reports or stories about executive intrigue, Ford finds itself scrambling to undo its own mistakes. In preparation for a financial presentation to securities analysts in January, someone mistakenly posted several slides on the company's website. One suggested that Ford privately harbored fears that its North American business would perform more poorly than expected (pretax losses of $2.8 billion in 2003), while secretly anticipating overly optimistic results for Europe ($2.2 billion in pretax profits). Another slide forecast higher car sales than most analysts were predicting. The company said the slides, which were yanked after a few minutes, were "draft materials prepared for background and scenario planning that contained inaccuracies." Commenting on the flare-ups, CFO Gilmour quipped, "We're running a fire department these days."

There could be more to come. Later this summer the company will begin negotiations with United Auto Workers over a new contract. Although Ford would like relief on wages and health-care costs (assembly plant workers earn $55,000 a year, and the company pays nearly 100% of their health plans), it will likely leave wages and benefits untouched if the union allows it to close unneeded plants.

There is not a lot of joy in Dearborn as Ford prepares to mark the centennial of its founding in June 1903. But there are some lessons from the past that Bill Ford might find useful. His uncle Henry Ford II was only 28 in 1946 when he took control of the company from his senile grandfather and set out to rebuild it. He hired the Whiz Kids (including Robert McNamara) and recruited Ernie Breech, a former GM executive, to manage operations and stabilize the company. Breech ran Ford for 14 years, until Henry thought he had learned enough to do it himself. Bill Ford won't admit as much, but he might do well to find his own Ernie Breech.

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