Businessweek Archives

Ford


Cover Story

FORD

Waiting backstage at February's Chicago Auto Show to introduce the all-new Taurus station wagon, Ford Motor Co.'s dapper chairman, Alexander J. Trotman, reviewed the cue cards for his speech with the methodical discipline of a former RAF navigator, then set them aside. He waved off an aide who offered a copy of his speech to take onstage, saying: "I don't stick to the script, anyway."

He never has. Although Trotman, 61, has a master's degree in business, he skipped college. In 1969, when Ford senior management refused to transfer him from Britain, the English native bought his own ticket to the U.S. and talked his way into a job at Ford headquarters in Dearborn, Mich. (page 100). So a bit of skepticism was in order when, after Trotman was named chairman-to-be in October, 1993, he proclaimed: "The top priority is to keep doing what we've been doing."

Trotman has since not only torn up the script, he has rewritten the book. Three weeks after being named, the future chairman held a meeting of senior managers at Ford's London office. As they debated merging Ford's separate North American and European engine and transmission units, Trotman, unable to speak because of laryngitis, scribbled notes. Slowly he planted an idea: Why stop at engines and transmissions? Why not tear apart Ford's regional structure and combine auto operations into one single global company?

The performance was vintage Trotman. The no-nonsense manager clearly knew where he wanted to go but issued no top-down commands. Instead, Trotman prodded his managers to his point of view. But by day's end, the outcome he achieved was no less bold: The meeting marked the birth of Ford 2000, a sweeping remake of the world's No.2 auto maker that Trotman launched in January.

The pressures driving Trotman's effort to reshape Ford are painfully obvious: With completely independent auto units designing and selling their own vehicles on each side of the Atlantic, Ford has long paid a price in duplicated effort, waste, and high costs. Top-heavy and bureaucratic, Ford spends far too much time--and money--designing new cars.

By combining the North American and European units into a unified company, Trotman hopes to transform Ford into a far more nimble, efficient competitor. Global product teams will now design cars to be sold around the world. But Trotman's ambitions for Ford 2000 go well beyond cost-cutting. He's counting on the shift to a global organization to prime Ford for growth in emerging markets. Trotman's vision, in short, amounts to a massive overhaul that is shaking the 91-year-old company to its roots--and that has placed Ford at the forefront of moves by U.S. companies to boost performance by running far-flung worldwide operations in a far more coordinated manner. "In terms of global integration, this puts [Ford] among the leaders now," says George Yip, an associate professor at UCLA's Anderson Graduate School of Management.

Yet making Ford's two independent units operate as one will be no easy task. "Ford 2000, in a sense, is the largest merger in history," says Morgan Stanley & Co. analyst Scott F. Merlis. "Ford of Europe and Ford North America together [are] a $94 billion company, and RJR-Nabisco was only $24 billion in revenues." Like any merger, this one brings risks. Asking designers to take into account the needs of diverse markets may slow Ford's new-car development process rather than speed it up. And cars designed to satisfy drivers around the world may end up pleasing no one.

At the same time, a transformation of this scope poses huge management and morale challenges: Vast numbers of employees will find themselves in new jobs with new bosses. Any delays could be devastating--leading some to question Trotman's very premise. "Why on earth would you want to create these gigantic earth-spanning organizations?" asks a senior executive at one Detroit rival. He says the cumbersome decision-making in a big organization often wipes out savings created by global products.

While Ford frets about internal issues, problems loom. With the U.S. auto market showing signs of slowing, now is no time for navel-gazing. "The second we get our organization focused on how we organize ourselves instead of on our customers, we're in trouble," says G. Richard Wagoner Jr., head of General Motors Corp.'s North American automotive unit.

At first blush, Trotman seems to have chosen an odd time to fix Ford. The company reported record earnings of $5.3 billion in 1994, up 110%, on record revenues of $128 billion, an 18% gain (chart). With red-hot models such as the sporty Mustang, the midsize Taurus, and the four-wheel-drive Explorer fueling sales, Ford's 25.2% of the U.S. market is held back only by its capacity: Its plants, among the most efficient in the U.S., ran at 111% of straight-time capacity in 1994. Ford's European operations, excluding Jaguar Motors Inc., swung into the black last year with $388 million in profits on sales of $22 billion. Ford's Financial Services Group is also solidly profitable.

But the glitter of those figures obscures some real problems. Ford, Trotman knows, could do better. Rivals are more efficient at getting new models to market faster. The Taurus, for example, took five years to redesign, while Japanese competitors redid competing models in four. And Chrysler gave birth to the Neon subcompact in just 31 months. Chrysler is also far more profitable, earning a sparkling $2,110 operating profit on every vehicle it sold last year; Ford made $877. Chrysler's pretax profit margin on autos, at 11.6%, was twice Ford's 5.4%. And Toyota is far more efficient, churning out 37 vehicles per worker to Ford's 20.

Better to fix those problems now, Trotman figures, than during the next downturn. He has some breathing space--most forecasters see car sales up modestly this year, with no drop until 1996. But the inevitable slump will magnify Ford's big weakness: poor white-collar productivity, mostly caused by high new-car development costs.

TOP HEAVY. Much of the problem stems from the increased overhead costs of separate units in North America and Europe. A top-heavy bureaucracy that forced designers to seek endless approvals for new projects has also hampered Ford's efforts to get cars out faster. And Ford has lagged behind Chrysler and Japanese makers in money- and time-saving innovations such as having designers, engineers, and marketers work on teams together.

But the biggest problem is that Ford simply spends too much developing new cars. Having delayed spending on new engines and transmissions in the early 1980s, Ford is now playing catch-up. Since 1987, Ford's annual capital spending has risen 126%, to $8.3 billion, while Chrysler's has gone up just 98%, to $3.8 billion, even as Chrysler launched an aggressive array of new cars and trucks. And needless duplication of design efforts between the U.S. and Europe added more costs: Ford currently has six different four-cylinder engines in Europe and North America, although Ford admits two would suffice. The cost of developing a typical engine: $1 billion. Moreover, developing separate cars for both major markets adds to purchasing costs. By ending redundant design efforts and reaping the economies of scale inherent in buying from a smaller number of global suppliers, Trotman claims that Ford will slash $2 billion to $3 billion from costs by decade's end.

Besides saving time and money, Trotman is also counting on the global remake to help Ford push more aggressively into emerging markets. In the past, the needs of those markets have been overlooked. But with most of the world's auto sales growth expected to occur in emerging markets in the coming decade, Ford is speeding efforts abroad. In the 16 months since Trotman became chairman, Ford has set up three auto-parts plants in China, negotiated a sales office and an assembly plant in Vietnam, built an assembly plant in Poland, and taken an equity stake in an Indian carmaker. In February, Trotman made his second trip to China. As the only one of the Big Three not building vehicles there, Ford badly wants a deal now being negotiated to build 150,000 midsize sedans annually. "You'd better get your passports up to date if you want to keep up with us," crows Edward E. Hagenlocker, president of Ford's automotive operations.

Still, those markets are incredibly competitive. GM is also in the running for the sedan plant, and all the world's major auto makers are angling for a stake in Chinese plans to develop affordable "family" cars. And already, Japanese carmakers have stolen a march on Ford in Southeast Asia, while both GM and Italy's Fiat are in high gear in Latin America. If Ford stumbles in those markets, it risks losing its status as the world's No.2 carmaker.

Not that Trotman is content to be No.2. At an October meeting in Orlando, Trotman told Ford's top 2,000 managers that it could snare 30% of the North American vehicle market and 15% of the European market "if we have the will to do it." He even says he wants Ford to land 5% to 10% of the Japanese market. Add it all up, and it's clear that Ford is striving to replace GM as the world's biggest carmaker.

WASTED CHASE? Such goals may be good for revving up the troops, but rivals dismiss them as unrealistic. "Those figures are easy to talk about but hard to deliver," says GM President John F. Smith Jr. For Ford to reach 30% in the U.S., GM would have to lose 1% every year for the rest of the decade, and Ford would have to snap up all of it, with none going to Chrysler or the Japanese. As for Europe, Ford lost the No.3 spot to GM in 1990, and Ford's share has remained roughly flat, at below 12%, ever since. It's an even taller order in Japan, where all imports combined total just 4.6%.

Rivals ask whether it's a goal even worth pursuing. "Why? What's the value of being big?" asks Chrysler President Robert A. Lutz. He argues that chasing market-share targets just leads to "buying" sales with excessive incentives.

To some extent, Ford is already doing that. Although its Taurus was the best-selling car in the U.S. in 1994, Ford grabbed that slot in part by offering sweet leases in December to guarantee it wasn't beaten by Honda Motor Co.'s Accord. And it recently offered incentives to keep sales of its Windstar and Aerostar minivans cooking. But Ford can't afford to buy its way to a 30% share: The auto maker's fourth-quarter incentives came to a steep $860 per car, well above GM's $738--let alone Chrysler's $410.

Trotman asserts that Ford's future gains will come from churning out better cars at lower costs thanks to the restructuring. And he has balanced his call for growth with tough financial targets: He wants Ford's automotive operations to achieve an average 5% aftertax return on sales--across the entire boom-and-bust cycle. That would be no mean feat: Even amid 1994's record profits, Ford's aftertax return was only 3.6%, although Ford North America hit 4.2%. Says John M. Devine, Ford's chief financial officer: "The acid test for Ford 2000 is real simple. We have to improve our financial results, and we have to improve our competitive results."

How to get to Ford 2000 from Ford 1995? The restructuring has begun with the merger of the U.S. and European product-development operations. Ford has created five new "Vehicle Centers"--four in the U.S., one in Europe--each responsible for designing a different type of vehicle worldwide. Roughly 500 Americans have moved overseas to join the new European team overseeing small-car development globally. Meanwhile, an equal number of Europeans have come to Dearborn to design all of Ford's rear-wheel-drive cars and commercial trucks. Still, Ford will have to prove it can do better at merging product-development across the Atlantic than it has across the English Channel; it has yet to combine its car development centers in Britain and Germany.

It will take some time to see the impact of those new teams; new models designed by the vehicle-center teams won't hit the market until late 1997. But as those models arrive, the use of common parts and global suppliers will grow. That's where Trotman is counting on big savings. Currently, European and American cars have no parts in common. Trotman expects to win better deals as Ford buys larger numbers of parts from fewer global suppliers. Ford estimates that by cutting suppliers of goods other than auto parts--everything from machine tools to office supplies--from 50,000 today to 5,000 by 1997, for example, it will save $1 billion.

Trotman is also counting on a shift to product-oriented teams to improve productivity. He has jettisoned Ford's functional product-development structure, in which a brake engineer might temporarily be assigned to work on a new Taurus. Now, engineers are assigned permanently to one of the vehicle centers and will work closely in teams with designers and marketers to build products for individual countries.

To ease the transition, managers from both sides of the Atlantic also engaged in a massive reengineering project. Aiming to cut costs and to minimize cultural disputes over doing things "their" way or "our" way, some 500 Ford employees from different countries spent nine months last year at Dearborn examining and rewriting the manuals on every job they did. In search of the most efficient practices, they compared how jobs were done in North America and Europe against benchmarks from outside Ford. One result: By breaking down the task of machining a new engine prototype into several stages that can be done simultaneously, Ford cut the time to get an engine from design to testing from 24 months to 100 days.

It was all part of a hierarchy-busting exercise Trotman launched to cut Ford's "coefficient of bureaucratic drag." Ford has long been a rigid organization, where managers could calculate their status by the size of their desks. Upon joining the ranks of the top 8,000 executives, they qualified for "a door, a rug, and a jug"--a private, carpeted office with a water pitcher on the desk. At ritualized meetings, managers pored over three-ring binders full of data.

Trotman has banned the binders and instituted "no-fault" meetings where managers can fess up to problems knowing that the problem, not the message-bearer, will be attacked. The changes seem to be taking hold: Just getting approval for a new-car project used to take up to 22 meetings over two months, says Jacques A. Nassar, Ford's head of new-vehicle development. Now, the O.K. comes in less than a month. "There absolutely is less bureaucracy," says Allan R. Kammerer, the newly named head of Ford's Escort vehicle line. "We are getting a lot of things done more quickly now." To trim management ranks, Trotman also got some 400 out of 2,000 top managers to take early retirement.

CAR FREAK. That sort of streamlining looks easy next to the challenges posed by globalizing product development. Consider the hurdles facing Kammerer as he develops the 1999 Ford Escort to be sold worldwide. The Escort nameplate is currently used for two completely different high-volume vehicles in Europe and the U.S. In Europe, it's a midrange family car, typically purchased with a spate of options for over $14,000. In the U.S., it's basic transportation, with most sold for under $14,000. The five-door hatchback is the most popular model in Europe, and the least in the U.S.

Kammerer, a confessed car freak from California, arrived at Ford's offices in Dunton, England, last November to supervise, among other things, the development of the new global Escort. Now assembling his team of engineers and marketing and manufacturing experts--roughly 85% Europeans and 15% Americans--he's grappling with designing a car for efficient production in many markets. For example, fabrics come in different-size bolts in various countries. That makes it hard to engineer components, such as seats, which are designed around bolt size to trim scrap.

It may seem an engineering Tower of Babel, but Kammerer regularly finds savings by plucking the best methods from each organization. The U.S. system for coordinating the redesign of prototype parts was better, allowing parts to be redesigned faster and with less waste than in Europe. And Europe's practice of monitoring the engineering work that arises from warranty claims at the factory made more sense than North America's do-it-at-headquarters procedure. Now, Kammerer's team is poring over 150 manufacturing and tooling procedures--everything from installing windshields to assembling engines and transmissions--to determine the best practices for the Escort redesign.

In Trotman's judgment, the merger is moving smoothly--so much so that he announced he will move up plans to extend it to Latin America and Asia-Pacific by the end of 1995, 12 months early. Kammerer is looking for recruits for his London shop. He's also arranging test drives of rivals' cars for his team in Brazil, India, and Taiwan, so that the Britain-based designers will know what they're up against.

But though the early signs are good, Ford 2000 is still a question mark. In its quest for a "world car," Ford's biggest risk is that it will end up producing a blandmobile that hits the lowest common denominator of taste in differing markets. Instead, Ford engineers have to produce a model that can be finessed to meet the differing needs of consumers around the world. Can they design a small car to which a heater can be added for Scandinavia and an air-conditioner for Singapore, without extra engineering costs to both? Ford's product-development czar, Nassar, says that Ford has tweaked cars to meet differing European tastes for decades. "I don't stay awake at night worrying about it," he says.

NEW TACK. Outsiders can only guess whether he should: The first cars developed under Ford 2000 won't hit showrooms until late 1997. But doubters such as automotive manufacturing consultant James Harbour remain unconvinced. "I don't see how you develop an Escort for five different continents and keep the cost low," he says.

GM, meanwhile, has taken a different tack. It retains strong regional operations that develop distinctly different vehicles for their own markets. Then, if a vehicle has crossover potential, engineers and marketers cross the Atlantic to suggest customization. Cadillac will get an Americanized version of the Opel Omega small luxury sedan developed by GM's Opel unit in Germany, while Opel will get a minivan designed mainly in the U.S. GM managers contend such ad hoc efforts are cheaper and more flexible. "If I were at Ford, I'd worry about disempowering your European organization by having too much decision-making in Dearborn," says Louis R. Hughes, head of GM's international operations.

Ford does have one prototype of a global vehicle--the midsize car known as the Mondeo in Europe and the Ford Contour and Mercury Mystique in America. It's hardly an auspicious example. The widely criticized car cost $6 billion and took six years to develop, yet it has been only moderately successful. Introduced in Europe in 1993, the Mondeo was a hit, selling 642,000 in its first two years. But in the U.S., the cars have sold poorly since last fall's launch. Buyers suffer sticker shock when they compare prices with those of the car's predecessors, the Ford Tempo and Mercury Topaz. The most common model of the Contour goes for $14,665 vs. the average $10,800 paid for the smaller Tempo in 1994.

Trotman defends Mondeo's prodigious startup costs, arguing that for its money, Ford completely refurbished seven plants and developed a new family of V-6 engines. It also installed a Cray supercomputer and transatlantic communication networks, which can be used for future new-car programs. Still, analysts say it will be at least three years before Ford sells the 3 million units necessary to recover its high costs. And they point to the Mondeo as evidence of what could go wrong with Ford 2000. Ford added extra features that Americans were less willing to pay for in a smaller car--such as a high-tech engine that can go 100,000 miles between tune-ups--in order to appeal to European customers. John Lawson, European research director for DRI/McGraw-Hill, points to the Mondeo's cramped rear seat as evidence that it is too European--"more of a driver's car than a passenger's car."

Moreover, Trotman's record as a cost-cutter is not encouraging. By his own admission, he didn't pare enough during his five-year stint as head of Ford of Europe in the late 1980s, leaving the unit poorly prepared for the recession. And it remains unclear whether Ford's organizational reshuffle will solve the cost problems without further white-collar cuts.

BREATHTAKING. Costs are becoming an even bigger concern, as rising prices start to drive shoppers out of the new-car market. Ford has raised prices on key models such as the Explorer. Its new Continental luxury sedan sells for a breathtaking $7,000 more than the old model. Ford's Windstar minivan is priced above Chrysler's Dodge Caravan. And analysts expect the new Taurus to arrive with a price increase. Yet Trotman dismisses the problem summarily: "How can you have an affordability crisis when you're selling 15.5 million units? There is no crisis." But others in the industry are more cautious. "Car prices can rise faster than incomes, and that's not good," says GM's Jack Smith. "We have to be very careful."

If Trotman can achieve the savings he wants, he may be able to keep his cars affordable. And if Ford can achieve robust growth in developing markets, Ford 2000 could prove to be a winner. Trotman is confident in his vision. "Ford 2000 ain't gonna fail," he states. It had better not: It's the script he plans to follow for the rest of this century.

TROTMAN HAS BIG GOALS FOR FORD 2000...

GLOBALIZATION In January, Trotman merged Ford's European and American auto operations; next year, South America and Asia join in. By decade's end, the global remake could slash $3 billion from Ford's annual costs by eliminating duplication in product development and letting Ford turn to fewer, global suppliers.

CUTTING BUREAUCRACY By eliminating 20% of top managers, instituting "no-fault" meetings, and creating multifunction teams to design and market cars, Trotman is breaking Ford's once-rigid bureaucracy. New car projects are now O.K.'d in less than a month.

LOOKING TO NEW MARKETS With new ventures under way in China, Vietnam, India, and Poland, and a restructuring in South America, Trotman is counting on Ford's global approach to fuel sales in fast-growing emerging markets.

...BUT PLENTY OF CHALLENGES REMAIN

AVOIDING INFIGHTING Europeans and Americans must now share power and learn to work more closely together. With a slew of model redesigns coming out and signs of a market slowdown, Ford can't afford paralyzing internal power struggles.

MAKING IT WORK Ford's first try at a global car took 6 years and $6 billion to build. Trotman must prove that working globally will speed up--not slow down--product development and won't produce a bland "world-mobile" that pleases no one.

PRICING RIGHT Ford has continued to raise prices, leaving it more dependent on rebates and leasing deals. If a slowdown comes, Ford risks pricing itself out of the market.

CATCHING UP Ford may be speeding efforts in developing markets, but it trails Japanese rivals in Asia and others in South America. With all major carmakers eyeing growth in those markets, it's in for a tough fight.By James B. Treece, with Kathleen Kerwin, in Dearborn, Mich., Heidi Dawley in Dunton, England, and bureau reports


Race, Class, and the Future of Ferguson
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus