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Ford must now switch from survival to profitable growth

William Clay Ford Jr. replaced himself as chief executive in September 2006, after Ford‘s ship almost sank to the bottom of Lake Michigan. He appointed Alan Mulally from Boeing as chief executive, a high-risk strategy given his lack of CEO and automotive experience. In his outstanding new World War II book, “Moral Combat”, Michael Burleigh quotes the then Australian Prime Minister, Robert Menzies, as saying in the early 1940s, “Churchill’s course is set. There is no defeat in his heart.” This is how Mulally must have felt when he became chief executive, because the wheels had fallen off the wagon: Ford lost a record US$30bn between 2006-2008, and Ford’s US market share continued to decline until 2009 when the company achieved its first share gains since 1995.

Within five years, the new kids on the block will be Chinese OEMs, which will flood the world with low-cost and attractive cars.

Mr. Ford and Mr. Mulally bet the farm in December 2006 with a US$23.5bn home equity loan – an historic all or nothing gamble. This one action literally saved Ford, because it allowed the company to develop its most competitive product line-up in history, including the long-neglected small car segment. Most importantly, Ford substantially reduced the number of platforms – from 25 in 2009 to 12 by 2013 – resulting in major cost efficiencies. Ford is also significantly expanding parts commonality, which is leading to lower development costs and major economies of scale. Concurrently, Mr. Mulally, and his outstanding ‘One Ford’ management team, have:

  • Reorganised Ford’s organisation structure and radically changed Ford’s culture
  • Focused on one brand by selling off the luxury brands.
  • Dramatically improved product quality.
  • Closed many assembly plants – thereby reducing capacity by 40% – and discharged tens of thousands of hourly and salaried employees (120,000 since 2006). This helped to dramatically reduce the breakeven point.
  • Improved manufacturing flexibility and the historically poor supplier relationship.
  • Reached an agreement with the UAW to improve Ford’s labour cost structure; nonetheless, labour costs remain uncompetitive – Hyundai and Volkswagen compensation costs in the non-unionised US South are US$27 per hour versus US$58 at Ford.
  • Strengthened the totally unsatisfactory Ford balance sheet.

Today, to paraphrase a Gaelic song, “Morning Has Broken” at Ford Motor Company. It is a true American success story of which we have had few in recent years. Mulally and his highly regarded ‘One Ford’ team utilised many of Professor Kotter’s change elements: created a vision, acted with urgency, involved all stakeholders, developed a change mindset, tirelessly communicated the vision, made the changes stick, and exercised strong leadership. Lastly, Mr. Mulally exhibits many of Winston Churchill’s and Harry Truman’s leadership traits, including vision, decisiveness, creativity, self-belief, charisma, integrity, collaboration, discipline and preciseness.

Ford’s playbook must now switch from survival to a profitable growth offensive – the tenet of Toyota, VW and Hyundai, which have an expansionary mindset – to ensure that its best days are still ahead.

Ford has recently announced ambitious goals to increase worldwide sales from roughly 5.3 million to approximately 8 million units by 2015, with heavy emphasis on sales in Asia, including 15 new models in China by 2015. The company plans to increase R&D spending from roughly US$4bn to US$6bn by mid-decade. Concurrently, Ford plans to reduce total Automotive debt to US$10bn by 2015, or almost US$24bn below the 2009 level.

The race for survival must continue in this world of constant ‘car wars’, and Ford must stay at the battle station with powerful ammunition. By 2015, everybody will again be chasing Toyota, which will be running on all cylinders. The line of fire will also be directed at Hyundai, which will be the unstoppable shark. In addition, General Motors will be a formidable competitor once more, and VW AG claims that it will be the new automotive industry shining star by 2018 (third place in 2010 with sales of 7.1 million units). Within five years, the new kids on the block will be Chinese OEMs, which will flood the world with low-cost and attractive cars. Ford’s playbook must now switch from survival to a profitable growth offensive – the tenet of Toyota, VW and Hyundai, which have an expansionary mindset – to ensure that its best days are still ahead.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Gerhard Geyer was an executive at Ford Motor Company for 30 years. He was involved in business and product planning and development, corporate strategy, divestitures, and the negotiation of joint ventures and licensing deals. Having handled assignments in North and South America, Europe and Asia, Geyer has an in-depth knowledge of the worldwide automotive industry. He is the author of “Ford Motor Company: The Greatest Corporate Turnaround In U.S. History“. For more information, click here.

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