American Icon

by Bryce G. Hoffman

  On Tuesday, May 20, Ford’s senior executives gathered in Mulally’s office to go over the numbers one more time. They squeezed in around his rectangular conference table. It was more cramped than the Thunderbird Room, but this would be a short meeting. There was no need for slides, either; they all knew how bad the numbers were. Mulally could read it on their faces. They were each given a draft of a press release that summed up Ford’s situation.

  “Have we looked at all the data?” Mulally asked. “Does this reflect everybody’s view?”

  All the executives nodded.

  “Is there anything else we can do?”

  They all shook their heads.

  Two days later, on a conference call with industry analysts and reporters, Mulally began reading one of the most difficult statements of his career.

  “Based on everything we can see on the outlook for fuel prices, we do not anticipate a rapid turnaround in business conditions. We have analyzed the data, and our best judgment is that a large part of the recent changes are structural as opposed to cyclical,” he said. “We have assessed our ability to find other offsets internally, and we believe we have identified about as much as we can without damaging the long-term health of our business. As a result, our judgment is that it will be extremely unlikely we can achieve profitability in 2009 for either North America or for our automotive business in total.”

  Once again, it looked like Ford was going back on its word. And that was something Alan Mulally had promised it would never do again.

  Mulally went on to announce even deeper production cuts in North America and said further downsizing moves would be necessary. But he said that the one thing Ford was not going to do was curtail its investment in new vehicles.

  “The most important thing we do for the long-term success of the Ford Motor Company is deal with this reality and structure ourselves to deliver the vehicles that the customers want, in the amount that they want, and also to absolutely continue to invest in the new, more fuel-efficient smaller and midsize cars and utilities that people really do want,” he said. “So as tough as this is, by taking these steps now and continuing the acceleration of our transformation, it’s exactly what we need to do to create an exciting and a viable, profitably growing Ford for the long term.”

  That evening, Mulally received the 2008 Manufacturing Achievement Award from the Society of Automotive Engineers at a banquet in Detroit. The day’s news cast a pall over the dinner. As Mulally accepted his award, his media handlers glanced warily at the throng of reporters waiting in the back of the room. There would be no softball questions tonight. To pass the time, the Ford PR people tried to tally all the promises the company had broken. They hoped this would be the last. When Mulally finished with his speech, he stepped off the stage and made his way through the still-admiring crowd of engineers with a smile on his face. But as the journalists leapt to their feet and readied their recorders, his smile began to fade. When a reporter asked Mulally if the decision to abandon his 2009 profitability pledge had damaged his credibility, the otherwise ebullient executive simply snapped, “No comment,” and turned away.

  It was a rare hint of frustration from a man who was so relentlessly upbeat. Just when it seemed like he had finally got Ford firing on all cylinders, the engine was running out of gas. But Mulally remained steadfastly optimistic. He was disappointed, but he refused to dwell on it. He knew that he and his team had done everything they could. The market was just deteriorating too fast for Ford to catch up.

  Our plan is working, Mulally reminded himself as he rode home to Dearborn that night, past the glowing smelters of the Rouge. It’s just that nothing else is.

  Though the cars and trucks in Ford’s showrooms were mostly the same vehicles that had been there when Mulally was hired back in 2006, their quality had improved dramatically. With Mulally’s backing, Bennie Fowler had taken his show on the road—preaching his gospel of quality across the United States and around the globe. He started with Ford’s existing quality procedures, personally traveling to each region to make sure they were being followed. If someone had a better idea about some aspect of the process, he incorporated that into his canon. But Fowler expected every Ford factory around the world to rigorously adhere to the same quality practices. Fowler began deploying a global computer system to track customer complaints worldwide and make sure they were routed to the appropriate facility.* The system allowed each plant manager to review warranty claims within forty-eight hours of a customer bringing a vehicle into a dealer. In most cases, these reports reached the factory that had made that car or truck in less than twenty-four hours. Once they did, a manager would go to the station on the assembly line responsible for that part of the vehicle and speak with the worker responsible for installing it. Whenever possible, fixes were made right there on the factory floor. The manager would also visit the final inspection area of the plant to figure out how the problem had been missed before the vehicle left the plant. A company-wide report was generated every day identifying the top quality issues around the world, allowing Fowler and his team to give these special attention. The system also tracked data from third-party sources like J.D. Power and Associates, as well as the warranty costs associated with each vehicle component. These were ranked to make it easy to identify problems with a particular part or supplier. It made a big difference. Each Thursday, there were fewer red boxes on Fowler’s BPR slides.

  As Ford’s quality improved, Fowler began publicly planting some very ambitious flags that raised more than a few eyebrows in the automobile industry. In 2007, he vowed that Ford would close the quality gap with its Japanese rivals by the end of 2008. That bold claim raised some eyebrows internally as well. But Fowler had the data to back up his boast. His team had done regression analysis to figure out where Toyota would be in 2008 and made certain Ford’s own quality gains were trending ahead of that mark. Some of Ford’s public relations staff worried that he was giving the press a bat to beat Ford with later, but Fowler was not doing it for the media—he was setting a goal to motivate his team.

  “We don’t play to be second place,” he reminded them.

  In June, J.D. Power announced that Ford’s Mercury brand now outperformed Honda in initial quality and was just a few points behind Toyota. It was the first time anyone could remember a nonluxury American brand beating one of the big Japanese automakers. And the Blue Oval itself was not far behind.

  “Ford has shown consistent improvement for the past five years, despite its restructuring,” said David Letson, the vice president in charge of automotive quality at the influential firm. “No other full-line manufacturer has done that.”

  Derrick Kuzak had not been idle, either. Under his leadership, Ford’s Global Product Development System had been improved and expanded. New and better digital design processes had been rolled out worldwide, further reducing development times and engineering costs. By 2008, the ninety-seven different nameplates that Ford and its affiliated brands offered when Mulally joined the company in 2006 had been reduced to just fifty-nine. Ford was on track to reduce the number of vehicle platforms it used worldwide by 40 percent over the next five years, with more than two-thirds of Ford’s entire lineup built off just ten platforms. Then the real economies of scale would kick in.

  Mulally’s team approach to product development was a key enabler of all these gains. The internal realignment that began with matched pairs in 2007 had evolved into matched quints. In addition to a representative from product development and a representative from purchasing, these teams now included representatives from Joe Hinrichs’ new global manufacturing organization, Bennie Fowler’s global quality team, and Jim Farley’s global marketing, sales, and service organization. This structure cascaded down Ford’s organizational chart. At the highest level, the heads of each of these global functions formed the ultimate matched quint. Below them, teams were formed around each major vehicle system. For example, Barb Samardzich, the vice president in charge of global powertrain
engineering, was teamed with her counterparts in global powertrain purchasing, manufacturing, quality, and marketing. Teams were also formed to manage each vehicle segment, from small cars to pickups. Beneath these, other teams were formed for each individual vehicle program and for key components such as four-cylinder engines and automatic transmissions.

  All of these teams had global responsibility. For example, the manual transmission team was based in Europe but was responsible for all of the manual transmissions used by Ford worldwide, while a different team based in the United States was responsible for all hybrid powertrains. Europe was responsible for small cars, even the ones sold in North America. The United States was responsible for pickup trucks, even those sold in South America. Every member of every team had a voice in every decision, but ultimate authority and responsibility resided with Kuzak as head of product development because it was product that would save Ford Motor Company and ensure its future success. All of the other departments understood that their role was to support that effort. These teams also played an important in role in Ford’s continued quality improvement. Thanks to Fowler’s tracking system, they were able to review the quality data for their particular product, vehicle system, or vehicle segment every day and were required to do so. Each team was in constant contact with a representative from each relevant supplier, too, so that any problems with that company’s parts could be addressed quickly.

  In October, Consumer Reports declared that Ford was now equal to both Toyota and Honda in quality. The magazine also rated the Ford Fusion and Mercury Milan the best-made nonhybrid family sedans in America.

  By then Fowler had moved the flag forward once again. At a high-profile industry conference in August, he declared that Ford would not rest until it had snatched the quality crown from Toyota. And he promised to do it by the end of 2010.

  “That’s right, I said it. Ford Motor Company will be the quality leader,” Fowler promised, drawing audible gasps from some of the industry veterans in the audience. “This time, we’re playing for all the marbles—and we aim to win.”

  However, just figuring out how to survive until 2010 was becoming a real challenge.

  In May, the Detroit Three were outsold by their Asian rivals for the first time ever. Ford’s F-Series pickup, long the bestselling vehicle in America, was unseated by the Honda Civic. Ford’s bread-and-butter truck was not even number two, three, or four. Sales of the pickup plunged nearly 31 percent. Overall Ford sales fell more than 15 percent. Those numbers were bad, but the results were far worse at General Motors and Chrysler. GM’s sales were down nearly 28 percent. Chrysler’s were down more than 25 percent. The industry as a whole dropped almost 11 percent. Even Toyota was down more than 4 percent.

  By June, oil was nearing $150 a barrel and the average price of gasoline in the United States was over $4 a gallon. On June 20, Ford issued a formal warning to Wall Street that its financial results for the second quarter and the remainder of 2008 would be significantly worse than expected. Ford Credit was also losing money as the declining value of used pickups and SUVs ate away at its lease portfolio. That was particularly troubling, because the automaker had usually been able to rely on its lending subsidiary to provide some black ink even when the rest of the company was in the red. Ford responded with additional production cuts at its truck plants. It also delayed the launch of the new version of its F-150 pickup by two months because there were so many of the current model still sitting on dealer lots.

  That afternoon, Mulally was asked when he expected the slide in U.S. sales to bottom out.

  “It’s too early to say,” he said, explaining that the entire external environment seemed to be conspiring against Ford. “It’s the economy, it’s fuel prices, it’s consumer confidence—it’s everything.”

  Ford was still on track to meet Mulally’s goal of reducing annual operating costs by $5 billion in 2008, thanks in part to another 15 percent reduction in its North American salaried payroll that had been announced two weeks earlier and the lower labor costs it wrested from the UAW in the new contract. But Mulally acknowledged that these gains were dwarfed by declining sales and rising raw materials costs.

  Many analysts thought Mulally was being overly pessimistic—perhaps even underpromising so that he could overdeliver when Ford reported its second-quarter financial results, which were due out in a month. The consensus on Wall Street was that Ford would lose 27 cents a share. The consensus was wrong.

  On July 24, Ford posted a staggering loss of $8.7 billion for the second three months of 2008. It was the company’s largest quarterly loss ever and amounted to a whopping $3.88-per-share hit. The magnitude of the automaker’s loss was primarily due to one-time charges and the write-offs associated with Ford Credit, but the tectonic shift away from trucks and SUVs to more fuel-efficient cars had not helped, either. Ford’s core automotive operations in North America lost $1.3 billion, compared to just $270 million a year before. Though this was partly offset by the still-impressive numbers Ford was able to post from Europe and South America, it meant Mulally’s push to fix the company’s car and truck business in the United States was faltering. And Volkswagen was about to pass Ford to become the third-largest automaker in the world.

  Thanks to the massive financing package Leclair and his team had worked so hard to secure before the gates of the global credit market slammed shut, Ford was no longer the subject of bankruptcy speculation. That had shifted to General Motors and Chrysler. But analysts were still worried about Ford’s ability to withstand a serious industry downturn.

  “Ford’s liquidity remains adequate despite the prospective cash use and despite ongoing restructuring efforts,” the ratings agency Standard & Poor’s stated in a May report. “But if lower-than-expected U.S. light-vehicle sales persist through 2009 or higher fuel prices cause an even more dramatic shift away from light trucks, Ford’s liquidity could reach undesirable levels by late 2009.”

  If things were bad at Ford, they were worse at GM and Chrysler. After insisting for years that they were far ahead of the Dearborn automaker in their own restructuring, the truth was finally coming out. They had just done a better job of hiding the magnitude of their woes—from Wall Street as well as from themselves.

  General Motors would soon post a second-quarter loss of $15.5 billion. Three years earlier, CEO Rick Wagoner had assumed personal responsibility for GM’s struggling North American car and truck business, promising a sweeping restructuring that would return it and the entire company to profitability.* Since then, America’s largest automaker had lost more than $70 billion. And GM had less cash than Ford. In May, GM’s share of the U.S. market fell below 20 percent. It had started the year at 24 percent. In June, Chrysler’s market share fell below 10 percent and now lagged behind both Toyota’s and Honda’s. Because it was now privately held, Chrysler did not have to report its financial results, but they were presumed to be grim.

  Any doubts about the depth of GM’s distress were dispelled in July when Bill Ford’s secretary appeared in his doorway to announce an unexpected phone call.

  “It’s Rick Wagoner,” she said. “He wants to talk to you.”

  Bill Ford was surprised. He nodded, hit the remote control he carried in his pocket that closed the door, and picked up the telephone. GM’s CEO got right to the point.

  “You know, I think it’s really time we put our companies together. We should talk,” Wagoner said. “We could come over there.”

  Ford was stunned. He asked Wagoner to repeat what he had just said.

  A few days later, Wagoner arrived at the Glass House with GM president Fritz Henderson and Chief Financial Officer Ray Young. They were whisked up the executive elevator to Bill Ford’s personal conference room on the twelfth floor. The executive chairman was waiting there, along with Alan Mulally, Controller Peter Daniel, and Deputy Counsel Peter Sherry. Once again Wagoner got right to the point. He wanted to know if Ford would consider a merger. Together, he said, they could create an American a
utomotive powerhouse strong enough to withstand the crisis that now threatened to take down the entire industry. Wagoner and the other GM executives were clearly worried. They were running out of money. They did not come right out and say it, but it was there between the lines.

  Mulally had no desire to marry Ford to another struggling automaker. When he took the job, he had told Bill Ford that he was only coming to Dearborn to fix his company—not sell it, dismantle it, or merge it. That was still his intention. Moreover, his plan was all about narrowing Ford’s focus, not expanding it. But the world was changing. With the entire automotive industry falling apart, Mulally knew that he had to seriously consider every option. So he listened to what GM had to say and asked a lot of questions.

  What would they do about all the overlapping brands?

  Where were the synergies? What could they combine, consolidate, and eliminate?

  How would the new company be governed?

  Wagoner’s answer to that one made it clear that, although General Motors was the one coming to Ford, its old arrogance remained intact. He said that, since GM was the larger of the two—both domestically and internationally—it would obviously be in charge.