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Ford's Gamble: Will It Backfire?


The stakes don't get any higher than this. When Ford CEO Jacques A. Nasser dropped his bombshell that Ford Motor Corp. (F) will recall some 13 million Firestone tires on May 22, he may have succeeded in deflecting attention from his beleaguered Ford Explorers for a time. But in the process Nasser made a dangerous enemy out of Bridgestone/Firestone Inc. chief and former business partner John T. Lampe, who seems intent to prove the Explorer unsafe.

What a mess. And what an end to a nearly century-old relationship. For months, it appeared that Firestone and Ford were working together to sort out the cause of the high number of tire failures and subsequent accidents that had roiled both their companies last summer. But with Ford's decision to replace all Firestone tires at a cost of $3 billion, Nasser has instead taken a huge financial and public relations risk.

The controversy hits at a time when Ford can ill afford missteps. Though it had largely been outperforming its Detroit rivals, its outlook has grown dimmer in recent months. The rollout of the redesigned Explorer has been hurt by recalls, and sales are below expectations. Ford's market share is shrinking, and inventories are bloated. Behind the scenes, Nasser's effort to push through sweeping cultural changes left morale low. Says Lehman Brothers Inc. analyst Nicholas Lobaccaro: "Every event like an Explorer recall, or another Firestone recall, is only going to make their stance more wobbly."

Why did Ford act now? After being harshly criticized last year for not detecting a pattern of deadly rollover accidents involving Firestone failures on Ford Explorers, Nasser vowed to begin an "early warning system" to ensure such tragedies never recur. In the past, Ford didn't have tire warranties, so it had no access to claims data. But beginning this year, tires were included under its vehicle warranties, so it began to build its own database.

Clearly, it didn't like what it saw. Using statistical analysis of data culled from Firestone, government accident records, and its own laboratory tests, Ford concluded that some Firestone Wilderness tires that were not recalled last year "will probably experience elevated failure rates at some time in the future." While the potential failure rates are much lower than those that led to last year's recall, they are higher than the average tire, Ford says. "We simply do not have enough confidence in the performance of these tires keeping our customers safe," said Nasser in a May 22 press conference.

Ford's attack left Firestone scrambling to go on the offensive. Upon learning of Ford's huge recall plans, Lampe told the auto maker it would no longer serve as its supplier. The move freed the tiremaker to attack the Explorer far more directly, and Lampe wasted no time. "Our analysis suggests that there are significant safety issues with a substantial segment of Ford Explorers," says Lampe. In a letter to Nasser, he added: "We believe you are attempting to divert scrutiny of your vehicle by casting doubt on the quality of Firestone tires."

As the attacks mount, both companies are in danger of further damaging already smashed-up images. For Firestone, the risk is grave: If questions about the overall safety of its tires stick, its brand could melt down entirely. For Ford, renewed questions over the stability and safety of the Explorer--one of the company's best selling and most profitable vehicles--could drive consumers into the showrooms of its SUV rivals, of which there are plenty. "The only winners in this are going to be their competitors," says James R. Gregory, CEO of Corporate Branding LLC in Stamford, Conn. "When you start the blame game, it creates a vacuum in the mind of consumers. Only negative issues are going to fill up that space," he says.

Even without Lampe impugning the Ford Explorer's roadworthiness, there's no disputing that Ford has plenty of quality issues of its own. The launch of the redesigned Explorer has been vexed. On sale only since March, the new Explorer has already been recalled twice. Though the recalls aren't safety related, they are nonetheless enormously embarrassing to Ford, which took extra care to ensure the 2002 Explorer would be free of defects.

And the Explorer isn't the only Ford vehicle with initial quality problems. Ford's Focus compact was recalled four times in its first year, and its new small-sized Escape SUV was recalled five times. Last year, those defects and resulting production delays cost Ford more than $1 billion in lost profits. In a new survey from J.D. Power & Associates Inc., Ford's quality ranked below average--and behind both General Motors Corp. (GM) and DaimlerChrysler (DCX). "It's not the scorecard I would like," I. Martin Inglis, vice-president of Fords North America, told analysts.

JAPANESE EDGE. Even without the recalls, Ford's market position has taken a beating. Its North American truck profits, which propped up its performance for much of the 1990s, are slipping amid a slowing industry and tougher competition. Worse, Ford is losing market share in trucks to GM, which has a strong new lineup of trucks and SUVs. And Japan's carmakers are challenging the segment for the first time with car-based SUVs such as the Toyota Highlander and Acura MDX. The Japanese have an added edge: A weak yen lets them keep their SUV prices down, putting pricing pressure on Ford and other U.S. carmakers.

That's pressure Ford doesn't need. To pay for the replacement campaign, Ford is taking a $2.1 billion aftertax charge against its second-quarter profits and canceling plans for a massive stock buyback. And, amid such deteriorating market conditions, Ford's inventories are beginning to pile up on dealer lots again, despite a 15% production cut in the first quarter. In April, Ford's truck inventories ballooned to 85 days' supply. That's about 20% above normal and has prompted analysts to predict further factory cutbacks.

It's all a colossal headache for Nasser, who has bet his career on transforming Ford from a mere manufacturer to a purveyor of automotive products and services that puts customers first. Firestone's charge that Ford is trying to hide its own safety problems behind the tire accusations could threaten all the work Nasser has done to enhance Ford's consumer image. But if Firestone can prove that charge, he's going to be looking at much more than a $3 billion tire recall. By Joann Muller, with David Welch and Jeff Green in Detroit and Nicole St. Pierre in Washington


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