American Icon

by Bryce G. Hoffman

  “In most mergers, market cap is what counts,” one of the Ford men pointed out, noting that Ford was worth about $10 billion, while GM was only worth about $7 billion. GM also had far less cash and much greater liabilities.

  Wagoner suggested that they could work that out later. If not, GM would take its proposal to another automaker.

  Mulally did not think much of that threat, nor did he think much of Wagoner’s pitch. It did not take him long to conclude that a merger with General Motors would be a step back to where Ford had been, not a step forward to the leaner, more focused company he was striving to create. As he listened to Wagoner and the others describe the challenges facing GM and the ways they were trying to deal with them, he became more confident than ever that his plan was the right plan for Ford. He and his team just needed to stick to it, no matter how hard that became. Bill Ford agreed. He thought Wagoner was being incredibly arrogant, but that was GM’s way. But both Ford and Mulally were deeply distressed by what Wagoner’s proposal said about the state of his company.

  The next call was for Mulally. This time it was from Chrysler chairman and CEO Robert Nardelli.* The two men were both outsiders in Detroit and had developed a decent rapport over the past couple of years. Nardelli said he needed to talk to Mulally face-to-face, and soon. He brought Chrysler president Tom LaSorda to the Glass House. Mulally had Ford’s corporate counsel, David Leitch, at his side. Like Wagoner, Nardelli did not beat around the bush.

  “Why don’t the two of us—or all three of us—get together and keep our separate storefronts, but combine our back offices?” he asked. “We could get a lot of efficiency and reduce a lot of cost.”

  This was a more interesting idea, but as they talked through it Mulally realized that there was no way to do what Nardelli proposed and still maintain the clarity of brand focus that he was trying to achieve at Ford. It would certainly save money, but it would also make everything that much more complicated.

  Once again he decided to stay the course. But both meetings made Mulally a little nervous.

  Wow! he thought. If these guys are coming after us, it’s getting much worse than we realized.

  It was not just the American car companies that were suffering. In June, Toyota announced that it was slowing truck production and warned of lower-than-expected profits. Honda and Nissan also announced production cuts and profit warnings. As truck sales continued to plummet, GM and Chrysler began idling their pickup, SUV, and minivan plants. But Mulally did not believe demand for these vehicles was ever going to return to its previous highs. He had a far more radical solution in mind—one that would finally break Ford’s decades-long dependence on trucks.

  On the same day Ford reported its record second-quarter loss, the company announced that it would retool pickup and SUV factories in the United States and Mexico to produce small cars and crossovers from Europe.* Bringing these vehicles to North America had always been part of Mulally’s plan to create a global product lineup and achieve greater economies of scale. But with the price of gas pushing past $4 a gallon in the United States, it became more urgent than ever to get these fuel-efficient vehicles into U.S. showrooms. Importing them was not an option. With the United States now in the midst of a serious recession, exchange rates made that prohibitively expensive. However, just as Mulally had promised, the game-changing contract that Ford negotiated with United Auto Workers in 2007 now made it possible to build those cars in the United States profitably. Mulally acknowledged that this rapid retooling would be a challenge—particularly given the company’s dwindling cash reserves—but the alternative was to keep making the same old gas-guzzlers that consumers were abandoning in droves.

  “We’re doing it faster, which gets us to a profitably growing Ford even sooner,” he said optimistically. “It’s using proven products that we know and proven technology. It’s utilizing all the assets that Ford has—and that other people don’t have.”

  Ford’s Michigan Truck Plant, which produced the full-size Ford Expedition and Lincoln Navigator SUVs, would close in December and be retooled to produce the new global Ford Focus and other vehicles based on the same compact platform. Production of the big SUVs would be moved to Ford’s Kentucky Truck Plant in Louisville. Another Ford factory in Kentucky that was currently producing Ford Explorer SUVs, the Louisville Assembly Plant, would also be converted to manufacture additional models off the new platform. Finally, Ford’s Cuautitlán Assembly Plant near Mexico City, which produced F-Series pickups, would be converted to produce the new Ford Fiesta for the American market. Ford also announced that its Twin Cities Assembly Plant in St. Paul, Minnesota—scheduled to close in 2009—would remain open until at least 2011 to continue production of Ford’s aging but fuel-efficient Ranger compact pickup.

  In addition to the six new models it promised to bring to the United States from Europe, Ford said it would double both hybrid production and the number of hybrid models it offered in 2009. The company would also double its North American four-cylinder engine capacity by 2011. All of this would go a long way toward making Ford’s lineup one of the most fuel-efficient in the industry. But the automaker had something even better in the works for consumers seeking relief from the prices at the pump.

  On a beautiful summer evening in August 2008, I was riding with Ford Americas president Mark Fields in a heavily modified Lincoln MKS sedan at a leisurely pace down a country road running alongside Lake Michigan.

  “People think environmentally friendly cars are boring,” he said, glancing over at me with a wicked grin. “Watch this.”

  He punched the accelerator and the Lincoln leapt forward with an explosive burst of power that threw me back against the passenger’s seat.

  “This will put a smile on your face,” Fields said, as the trees on either side of the road became a blur. “But you get twenty percent better fuel economy with fifteen percent less CO2. I call it the great taste, less filling school of powertrain technology.”

  Underneath the hood was Ford’s secret weapon in the war against rising fuel prices—a new engine technology called EcoBoost that combined turbocharging and direct fuel injection to produce more power from a smaller motor. It would not arrive in showrooms for another year, Fields explained, but the company was sending a message to worried consumers: Ford felt their pain. Help was on the way.

  Ford had begun work on EcoBoost more than seven years earlier. Neither of the underlying technologies was new. Turbochargers are centrifugal compressors driven by an engine’s exhaust gases that increase the pressure of the air entering the motor, resulting in more power. The French began using them on their fighter planes in World War I. GM first began using them in high-performance automobiles such as the Chevrolet Corvair in 1962. Direct fuel injection allows for better dispersion of gasoline inside the cylinder, which in turn allows for higher compression and more aggressive ignition timing, both of which translate into better performance. German automakers were already combining the two technologies in high-end sports cars to boost horsepower and torque. Kuzak and others at Ford recognized that, instead of making powerful engines more powerful, the same sort of system could be used to make smaller, more fuel-efficient motors as powerful as larger, thirstier ones. They began developing four-cylinder engines with the power of a V-6 and V-6 motors with the power of a V-8.

  By the end of 2005, Kuzak was pushing EcoBoost as a cheaper, better-performing alternative to hybrid powertrains. But it was a tough sell. Many Ford executives doubted that consumers would embrace the idea that smaller was better, particularly in the United States, where customers were conditioned to believe that more cylinders equaled better performance. Others thought Ford’s money would be better spent on more hybrids, pointing to the breakout success of Toyota’s Prius. But Kuzak had done the math. An EcoBoost engine would only add a few hundred dollars to the price of vehicle. Hybrids might boast better mileage numbers, but they also cost thousands of dollars more. Both technologies would raise the price of a vehicle, but custome
rs would recoup the added cost much more quickly with EcoBoost.* Moreover, Kuzak argued that Ford could actually do more to reduce greenhouse gas emissions and fuel consumption with the system because it would be accessible to many more motorists. That made a lot of sense to Bill Ford, who saw EcoBoost as a return to Ford’s roots as democratizer of technology. His great-grandfather had not invented the automobile, but he had made it available to the masses. EcoBoost was a way to do the same thing with green technology. He approved the EcoBoost program in early 2006.

  Marketing vice president Jim Farley had also become a big proponent. His research had identified fuel economy as Ford’s greatest opportunity. Despite the company’s impressive quality gains, consumers were still wary of the brand. However, if Ford could promise them unbeatable gas mileage, too, Farley was convinced they would be willing to give its cars another chance. As gasoline prices continued to rise, he pushed for an even more aggressive rollout of EcoBoost.

  A month after announcing its retooling plan, Ford declared that EcoBoost—slated to debut on the MKS in 2009—would be made available on 90 percent of Ford’s other cars and trucks by 2013. Mulally also authorized additional investment in new transmissions, including fuel-saving dual-clutch designs. He ordered a new push to accelerate the introduction of more hybrids, plug-in hybrids, and electric vehicles.

  All of this would require massive investment at a time when other automakers were cutting their product development budgets to offset the dramatic decline in sales. Ford would have done the same thing a few years before. Mulally knew that he could probably still make good on his promise to return Ford to profitability in 2009 if he curtailed investment in new vehicles, as GM and Chrysler were doing. But he had not come to Dearborn to keep Ford on life support. If Ford kept its foot on the gas while everyone else slammed on the brakes, it could leap ahead of the competition and emerge from this economic crisis with one of the strongest product lineups in the industry.

  “That is the plan,” Mulally reminded everyone who questioned his strategy. “Long-term profitable growth.”

  Accelerating Kuzak’s product time line would require a heroic effort on the part of Ford’s designers and engineers. It would also require other departments to cut deeper. It was a testament to how much Mulally had changed the culture inside the Glass House that they were willing to do so. Fields expressed this new spirit in a speech to his troops that summer.

  “I know this is really a kick in the teeth, but this is not Ford Motor Company not delivering—this is the external environment. This is an egalitarian knock to the industry, and what’s going to separate the winners from the losers is how those companies approach this setback,” he said. “It’s easy to be a victim. It’s harder to say we’re going to take this and we’re going to make lemonade out of lemons.”

  *Ford Chief Financial Officer Don Leclair was also on this call.

  †This was actually Mulally’s second call to Secretary Paulson. The first had been on January 11, 2008. In that conversation, Mulally had warned that the tightening credit supply could trigger a recession.

  *It would take until 2010 to roll out Fowler’s tracking system worldwide, with the Asia-Pacific region being the last one to come online.

  *Unlike his counterparts at Ford, Wagoner did not say when GM would accomplish this feat.

  *Robert “Bob” Nardelli, a General Electric alum and former head of Home Depot, was appointed chairman and CEO of Chrysler by Cerberus in August 2007. Tom LaSorda was demoted to co-chairman and president. Nardelli, who had left Home Depot in disgrace, would later be named one of the “Worst American CEOs of All Time” by Portfolio magazine.

  *Ford’s retooling plan was finalized in June. The Detroit News had actually broken the story on June 11.

  *In December 2007, Ford estimated that it would take the typical motorist two and a half years to recoup his or her investment in an EcoBoost engine, compared to eleven years for a hybrid.

  CHAPTER 15

  The Sum of All Fears

  Bankers play far too great a part in the conduct of industry

  —HENRY FORD

  Just when it seemed as though Ford Motor Company had figured out a way to stay on course and ride out the downturn, the economic crisis in the United States turned into a global financial meltdown.

  On September 15, 2008, Lehman Brothers—America’s fourth-largest investment bank—filed for Chapter 11 protection. It was the biggest bankruptcy in U.S. history, and it pushed the world’s economy over the edge. Already-tight credit markets froze, making it nearly impossible for customers to get car loans. Not that many were interested in making big purchases with unemployment skyrocketing and no sign of relief in sight. In May, Ford had worried that demand for cars and trucks in the United States would fall from the 16.1 million units sold in 2007 to less than 15 million in 2008. A week after Lehman collapsed, Jim Farley warned that number could fall to 13 million—a level not seen since 1992.*

  After returning to Alan Mulally’s regular weekly meeting cadence that summer, Ford was now back in crisis mode. The entire leadership team convened at least once a day, either in Mulally’s office or in the Thunderbird Room. Much of the attention was focused on sales, which continued to plummet. Fewer than 1 million cars and trucks were sold in the United States in September. That had not happened since 1993. Ford’s own sales plunged by more than a third, falling nearly 35 percent from a year before. By October, even the daily meetings were not enough. Mulally’s team began huddling several times a day. They worked through lunch, taking quick bites of Caesar salad as they struggled to find a way through the worst financial crisis since the Great Depression.

  Ford was running out of money, and it was consuming cash at alarming rate—$7.7 billion in the third quarter alone. That translated into more than $83 million a day. At that rate, Ford would be broke in a year.* But unless something changed soon, it would not even survive that long. Ford needed between $8 billion and $10 billion just to keep the lights on and the factories humming.† At its current burn rate, the automaker would fall below that critical level before summer. And sales were still declining—not just in the United States, but now in Europe and Asia as well.

  Chief Financial Officer Don Leclair began planning for bankruptcy, despite the Ford family’s adamant insistence that it would never allow that to happen. But Ford’s board of directors insisted on preparing for the worst. Mulally’s turnaround plan seemed to be working, but several of the directors now feared that the gains he had made would be unsustainable in the face of the global financial cataclysm.

  “Alan may have gotten here too late,” one director whispered during a break in the October meeting. The others said nothing, but they were all thinking the same thing.

  With the credit markets now frozen shut, Ford’s treasury staff struggled to keep Ford Credit funded. When Mulally took over, the automaker’s lending arm was in surprisingly good shape—especially considering the state the rest of the company was in. Ford Credit had a good balance of secured and unsecured funding from both public and private sources. And because Ford’s sales were in a perpetual nosedive, its loan and lease portfolios were shrinking, meaning it needed less cash to keep up with demand. But it still needed some. By early 2008, borrowing had become prohibitively expensive. Now it was becoming impossible. Getting rid of Aston Martin, Jaguar, and Land Rover reduced Ford Credit’s capital needs, but by October the situation was becoming critical.

  For years, Ford Credit had pursued an aggressive expansion policy, aiming to build a brick-and-mortar presence in every market where Ford’s cars and trucks were sold worldwide. As cash became tight, those expansion plans were reevaluated and, in many cases, abandoned. Leclair wanted to preserve that money for the parent company.

  Initially, Ford Credit CEO Mike Bannister agreed. He shuttered Ford Credit’s offices in Chile, closed up shop in Venezuela, and transferred the retail lending business in Brazil to Banco Bradesco. He unwound the Ford Credit’s Mexican operations, to
o. Bannister focused his support on critical products and critical areas like Ford’s home market in the United States. The second priority was Europe, but Bannister and his team decided that they would fall back to the five most important markets there if necessary—France, Germany, Spain, Italy, and Great Britain. The third priority was protecting Ford’s growing business in China. It was still small, but it was vital to the company’s future. Ford had been late to the game in Asia and could not afford to pull back now.

  “That’s not enough,” Leclair told him. “We have to cut more.”

  Bannister shook his head. Additional cuts would cost Ford sales it could not afford to lose. Soon it might have no choice. Until then, he wanted to keep moving as much metal as possible. But Leclair kept pushing. He wanted to get rid of more international operations and even cut back on domestic lending. Bannister warned they were already in danger of losing critical scale.

  “You’ve got to deal with the fundamental issues that are causing the automotive company not to be profitable,” he told Leclair.

  Leclair also wanted to sell the company’s controlling stake in Mazda, despite the fact that Ford was still working closely with the Japanese carmaker on several key projects—including the new compact car platform that would provide the underlying architecture for the global version of the Ford Focus and other key products. Now it was Derrick Kuzak’s turn to push back.

  “We can’t do that,” he told Leclair. “We still need Mazda.”

  “There’s no other way!” the CFO insisted.

  As that crisis deepened, Leclair even began calling for cuts to the product plan that Mulally had insisted on protecting. Given the dramatic drop in demand for pickups, Leclair argued that Ford should curtail future investment in its F-Series trucks. GM had announced that it was halting work on its next-generation pickups and Chrysler was cutting back on all product spending, so Ford had little to lose by doing the same. Leclair also wanted to scrap Mulally’s costly retooling plan. The small cars and crossovers he wanted to bring over from Europe might be far superior to the vehicles Ford was currently peddling in North America, but with few buyers for cars of any kind, Leclair argued that that no longer mattered. These European models were far more fuel-efficient than the ones currently in Ford’s U.S. showrooms, but as economies around the world ground to a halt, demand for oil was falling. So were prices at the pump. In the past Americans had always demonstrated an almost insane eagerness to jump back into big cars and trucks as soon as gasoline prices retreated to a level they could tolerate. Why should this time be any different? But Mulally would not pull back on his product plan.