Magazine

Ford: Why It's Worse Than You Think


Jacques A. Nasser was on top of the world. Striding the halls of the Detroit auto show in January, 1999, the freshly minted CEO of Ford Motor Co. (F) commanded attention. Just a few days into his new job, Nasser was being hailed as the industry's newest auto baron--who might at any moment pull off a huge merger with the likes of Honda (HMC), BMW, Volvo (VOLVY), or Nissan (NSANY). Indeed, Nasser seemed to revel in the speculation about how Ford would spend its $23 billion cash hoard, cracking jokes about the media frenzy. Outside, enormous snowdrifts paralyzed the city. But inside, as he contemplated Ford's future, Nasser's mood couldn't have been sunnier.

Last month, Nasser, 53, once again found himself the center of attention. But this time, as he stepped in front of the cameras, the mood was starkly different. Haunted by safety concerns about the popular Ford Explorer in the wake of last year's Bridgestone/Firestone Inc. (BRDCY) tire recall, a somber Nasser announced that Ford would replace an additional 13 million Firestone tires on its pickups and sport-utility vehicles. The cost: a staggering $3 billion.

Nasser's latest announcement makes the Firestone debacle the biggest product recall in automotive history and he'll be back in front of Congress on June 19 to explain. But as devastating as it has been, the tire scandal is only the most public of an array of crises confronting Nasser. The company, widely regarded as the strongest and best-run U.S. auto maker, is suddenly on the defensive. Ford is suffering from a series of self-inflicted wounds, from embarrassing quality glitches and costly product delays to declining productivity. Those mistakes couldn't come at a worse time: The economy is slowing, and Ford's share of the U.S. truck market--its main source of profits--is dwindling.

FLOORING IT. Certainly, Ford's problems aren't all Nasser's doing. Many are the result of industry trends that have been in the making for years. Yet underlying many of Ford's troubles are the wrenching cultural changes mapped out by Nasser as part of his bold attempt to transform an Old Economy auto manufacturer into a nimble, Net-savvy, consumer powerhouse. Nasser is driving fast--too fast, for many in the company. In his 33-year career at Ford, he has often shown quick reflexes and sharp instincts. This time, though, the stakes are higher than ever. "Would we like to do better?" he says of the company's current woes. "Of course. But we'll take our lumps. We've been through much worse and we'll come through strong." If he's right, Jacques Nasser will go down in history as the man who brought Ford into the 21st century. If he isn't, he risks becoming a management lesson in how not to remake a company.

Almost as soon as he ascended to the corner office, Nasser began overhauling Ford, unveiling one initiative after another. He signed agreements to partner with Microsoft Corp. (MSFT) and Yahoo! Inc. (YHOO) on the Web. He pushed out Ford's Old Guard and brought in talented young stars from the auto industry and beyond. He flattened Ford's bureaucracy, giving more autonomy to regional executives, and shook up senior managers by tying their bonuses to gains in customer service. Gone were the days of automatic promotions and seniority. "You've got to earn a promotion" he thundered at young execs shortly after becoming CEO. "The days of entitlement at Ford Motor Co. are gone forever."

He also changed the face of Ford. He added Volvo and Land Rover. Then, convinced that Ford's commitment to consumers shouldn't end when they drive off the dealer's lot, Nasser also bought repair shops, a driving school, the Hertz car-rental agency--even a junkyard. For Nasser, it wasn't enough to be one of the best global auto makers. His goal was to make Ford one of the best global companies, period. He wanted Ford--and himself--to one day be as revered as General Electric Co. (GE) and its much-admired CEO, Jack Welch.

But while Nasser has roared ahead, observers inside and outside Ford say the rest of the company hasn't always followed. As employees at all levels struggle to adapt to the host of sweeping changes Nasser has set in motion, many say Ford has lost of sight of its fundamental mission: building quality vehicles as efficiently and profitably as possible. "It's all these things being jammed down our throats," says John Wyrwas, 61, a power-train engineer who retired this month. "When we're working on all these things, who's working on the product?" It isn't just a rhetorical question. Harbour & Associates' annual ratings of auto-factory efficiency, released June 14, showed labor productivity at Ford falling 7% in 2000, while that of its rivals rose.

Now, there's a backlash against the pace and intensity of many Nasser initiatives. A new performance-review system for Ford's 18,000 managers has met with such hostility that 42 of them, including Wyrwas, have filed two class actions, charging that the system targets older workers and white males who are stereotyped as resistant to change. Nasser preaches relentlessly about the need to get closer to the Ford customer, but he has had to rebuild his marketing team after Vice-President James C. Schroer and other marketing execs fled to Chrysler in February. Nasser imported Six Sigma, the management technique popularized by Jack Welch, as a way to teach Ford managers to root out flaws, but in a ranking of quality among the seven largest carmakers this year, Ford came in last. With all the turmoil, it's no wonder Ford has given up 1.7 percentage points of market share in the first five months of the year.

As if Nasser didn't have enough problems, rumors have surfaced of a rift between him and Ford family scion William Clay Ford Jr., the company's chairman. Nasser was forced to respond publicly in early June, declaring that he has the full backing of Ford's board of directors. Those directors aren't talking, but sources close to them confirm that the CEO's job is safe. However, the board does feel that Nasser--with 16 direct reports and no clear No. 2--is overextended and needs help managing the company's operations. One rumor has Ford bringing the chairman of its European operations, Nick Scheele, back to the U.S. as president of Ford Automotive Operations. Nasser says only, "I think I've got the best team in the business. However, if we can make it even stronger for our customers and shareholders, we will."

Nasser may still have the board's support, but he has lost the goodwill of some Ford employees, the trust of many consumers, and the confidence of Wall Street. The missteps at Ford may even force him to give up one of his greatest dreams--that the company would soon overtake General Motors Corp. as the world's largest auto maker. That seemed a foregone conclusion last year. Not anymore. Says Morgan Stanley Dean Witter & Co. analyst Stephen Girsky: "It's amazing to me how fast Ford has unraveled."

In Nasser's defense, many of the problems he's grappling with result from decisions made long before he took charge. "He gets nailed with the problems, but they're what he's trying to change," says Noel M. Tichy, a University of Michigan professor and close adviser to Nasser. Improving quality and business productivity across a $170 billion company takes time, argue Nasser's supporters, and initiatives begun two to three years ago, are just beginning to kick in. Nasser admits that Ford's record on quality has been spotty, but he points out that there are bright spots. Its Jaguar brand, for instance, was notorious for its lousy quality 10 years ago, and now is ranked second best in the industry. But Nasser emphatically rejects the notion that he's trying to force change too quickly on the carmaker. "If there are any regrets," he says, "it's that we're not moving fast enough."

Until recently, Ford was Detroit's Golden Child. When Nasser took over, archrival GM was a basket case, steadily losing market share even as industry sales soared. Chrysler (DCX) was still reeling from its 1998 takeover by Daimler Benz. And Japanese auto makers had only begun to attack the U.S. truck market. Ford, on the other hand, was in the fast lane. It dominated the enormously profitable market for pickups and sport-utility vehicles. Profits from North American truck sales made it easy for investors to overlook Ford's sagging car business, losses in Europe, and troubles in Ford's Asian and South American operations. Fueled by sales of its industry-leading trucks and SUVs, Ford's profits grew more than 60% to $7.2 billion from 1996 to 1999.

FULL TANKS. With a strong balance sheet, Ford was also able to keep shareholders happy with a variety of share buybacks and other maneuvers, such as the spin-off of parts maker Visteon Corp. (VC), that put more cash in investors' pockets. Ford was also busy cultivating a socially responsible image by promising to clean up the environment--a passion of Bill Ford's--with more fuel-efficient vehicles and by giving employees free personal computers and on-site child care.

So when industry pundits warned earlier this year that Detroit was going to get clobbered in an economic slowdown, Ford declared itself far better-positioned than its crosstown rivals to weather a slump. Even though profits in 2000 had dropped by more than half to $3.5 billion on sales of $170 billon, most Wall Street analysts agreed, recommending Ford's shares over GM's or DaimlerChrysler's.

Suddenly, Ford's outlook is much cloudier. Most analysts have downgraded the stock. It's clear that the financial hit from the Firestone crisis is brutal. Last year's tire recall cost Ford about $500 million. To pay for the latest recall, the company is suspending the remaining $2.8 billion of a $5 billion share buyback and will take a $2.1 billion aftertax charge in the second quarter. And that doesn't address Ford's potential liability from hundreds of pending lawsuits or lost sales as car buyers shun the troubled Explorer brand. So far this year, Explorer sales are down 21% despite an improved replacement model that debuted in February.

Even laying aside the costs of the Firestone mess, Ford told analysts recently that it will have difficulty meeting the profit targets it set at the beginning of the year. With competition intensifying, Ford's U.S. market share has fallen to 23.1% so far this year. Ford now says its goal of increasing revenues to $175 billion is a stretch. Net margins are getting squeezed, too. In the first quarter, they fell to 3.2% from 4.8% in 2000. And the pressure is only going to increase. GM, the sleeping giant, has come roaring back with a revamped truck lineup that includes the Chevrolet Tahoe and Silverado pickup and an aggressive pricing strategy that has already displaced Ford as the market leader in large pickups and SUVs. Japanese manufacturers, too, are going full throttle for the SUV market with new entrants such as Toyota Motor Corp.'s (TM) Highlander and Sequoia.

With so many new competitors gunning for Ford's rich truck franchise, the auto maker's margins will come under increasing assault. As rivals jack up discounts and incentives to woo buyers, Ford has been forced to match them. Both Ford and GM are spending roughly $2,300 per vehicle to sell their large pickups and SUVs. Those incentives will further depress profits. Ford has warned analysts that even without the Firestone recall, it might not meet its 4% net-margin target for North America this year. Deutsche Bank analyst Rod Lache sees a repeat of what happened to Detroit auto makers in the car business back in the 1980s: Profits vanished amid increased competition and overcapacity. "It's very possible that trucks will be just as unprofitable as cars in three to four years," warns Lache.

The threats to Ford don't all come from the outside. After all, it's not outsiders who have caused its embarrassing quality slipups. In a recent survey by J.D. Power & Associates Inc., Ford ranked worst of the top seven global auto companies in quality. The No. 2 auto maker had 162 problems per 100 vehicles, compared with just 115 for Toyota. Such glitches led to a string of recalls. The Focus compact car, which debuted in 1999, had six recalls, and the Escape, a small SUV introduced a year later, had five. Even the 2002 Explorer, which was closely scrutinized by Ford engineers, was recalled twice--once to fix a loose bracket that could allow the rear window to shatter and again to check for gashes on the tires caused by Ford's own assembly line. In another humiliating blunder, Ford was forced to cancel the entire 2000 model year for its souped-up Mustang Cobra muscle car because the 1999 model's engine couldn't generate the 320 horsepower advertised. It took the company a year to fix the problem and get the Cobra back to dealer showrooms for 2001.

QUALITY'S COST. Shoddy vehicles have hurt Ford's bottom line in several ways. Quality problems and related production delays cost the company more than $1 billion in lost profits last year alone, according to Nasser. Obviously, sales suffer for a vehicle that is perceived as a lemon. But lousy quality also means higher warranty costs. Deutsche Bank estimates Ford's average warranty cost per vehicle at $650, vs. $550 at GM and only $400 for Toyota. That puts Ford's annual warranty costs at about $2.6 billion. A car of mediocre quality also yields less at resale time, which affects lease-payment calculations. In order to keep the payments low, the auto maker must subsidize the car's trade-in value. That helps explain why Ford's average incentive per vehicle is $2,122, on a par with GM's, while Toyota's, whose cars fetch more at trade-in time, is just $1,150, according to Deutsche Bank.

Add it all up and Ford has a huge cost disadvantage compared with the Japanese. A study by Deutsche Bank concludes that Toyota has an $1,800 per vehicle advantage over Ford because of its greater efficiency and ability to command higher prices. So to match Toyota on price and remain profitable, Ford has to find a way to cut annual costs by more than the $1 billion it had planned. As the company tightens its belt, it is also pushing back car launches. A new version of the F-Series pickup--its best-selling vehicle--has been delayed a year, while an updated Ranger pickup has been postponed indefinitely, say dealers and suppliers, allowing Ford to put off billions in capital spending.

GM has a similar cost disadvantage. But as the Harbour Report showed, GM has made big leaps in productivity, which means it's on a faster cost-cutting track than Ford. GM's productivity, as measured by the number of worker-hours needed to make a vehicle, increased 8%, while Ford's fell 7%. Ford maintains a slight edge overall, but GM has just about closed the gap. Nasser points out that Ford's productivity is excellent in plants where new lean manufacturing processes are taking root. Still, he vows improvement and says, "I take full responsibility. I don't walk away from anything."

So why can't Ford--a company that has been in the business of launching cars for nearly 100 years--get it right? Distractions caused by Nasser's cultural revolution, coupled with dramatic changes in how the industry operates, simply left too much room for error. Like other auto makers, Ford is pressuring suppliers to take on more of the engineering while demanding ever-increasing price cuts. Some suppliers say the added pressure can lead to defects down the line. Speed is also a factor. A new car now takes about 28 months from drawing board to showroom, nearly half as long as it took a decade ago. In the rush to bring vehicles to market faster, Ford sometimes turns over its plans to suppliers before all the engineering and testing are completed, says the CEO of a major supplier. Last-minute design changes, he says, then put added pressure on suppliers, which can result in production screwups.

But Ford's internal strife is just as much to blame. "There has been so much emphasis on cost reductions, on task forces and new teams, that they lose sight of what's really important," says David E. Cole, director of the Center for Automotive Research in Ann Arbor, Mich. Over the past several years, Ford has lost many of its most experienced workers through buyouts and early retirements. That brain drain and the pressure to cut costs and move faster may explain errors like the one that caused the most recent Explorer recall. Despite extra quality checks to make sure the redesigned Explorer was free of defects, no one remembered during the planning stage to relocate a conveyor belt guide post on the assembly line to accommodate the 2.5-inch wider body. The result was a recall of 53,000 brand-new SUVs to check for gashes up to nine inches long in their tires.

Nasser believes that Six Sigma, the system for continuous improvement in quality and efficiency, will help Ford avoid similar mistakes in the future. Six Sigma relies on statistical analysis to get to the root of intractable problems. Ford began training managers in the technique a year ago and says the system has already produced results. Last year, for instance, one group tackled a nagging problem on the newly introduced Lincoln LS sedan: Why wouldn't the engine always start on the first try? Using Six Sigma, they reverse-engineered the vehicle and traced the problem to a screw that wasn't fully tightened. The true culprit? Workers were using the wrong power tool. Ford says Six Sigma saved it $52 million last year, and it expects to save another $300 million this year.

But if Six Sigma is so great, why isn't Ford's quality improving? Ford officials insist that it is--it just takes a while for the improvements to show up, they say. "We've had some very good results from Six Sigma projects so far, but there just aren't enough of them yet to affect broad-based results," says Richard Parry-Jones, group vice-president for global product development and quality.

Like quality, employee morale could also use a lift. Many Ford workers are upset that in a bid to shake up the culture, Nasser chose outsiders rather than Ford veterans for powerful management posts. He recruited J Mays, the hotshot designer of the redesigned Volkswagen Beetle, to head Ford's design studio, and plucked BMW's former president, Wolfgang Reitzle, to run Ford's beefed-up luxury-car business. Tichy sees the backlash as the predictable response to change and the inevitable resistance of entrenched managers. "You need to bring in new blood. It's how you change your DNA," he says. "The Old Guard gets threatened and upset."

Perhaps nothing has been more upsetting to Ford's middle managers, however, than the employee-evaluation system introduced last year. The new policy requires supervisors to rank employees from best to worst along a curve: 10% get As, 80% get Bs, and 10% get Cs. Getting a C means no bonus; two C's in a row is grounds for demotion or dismissal. Instead of measuring an employee's performance against a set of objectives, the employee is measured against others with similar jobs--a radical change for a traditionally paternalistic company. The policy was intended to weed out underperformers and build a sense of teamwork. But employees say it has had the opposite effect. "If anything, this has caused extensive navel-gazing rather than staring out at the horizon at the consumer and the competition," says Pam Tucker, 48, a Ford manager and plaintiff in one of the class-action suits. "People are constantly looking over their shoulder."

Nasser says the new job-review process is fair. "This is a company that has always had a policy of inclusion, going all the way back to Henry Ford." But he adds that it's important for management to be candid with employees about their performance. "A system that doesn't encourage that dialog in a positive way is a very cruel system, because you end up with employees who are not motivated, and maybe in the wrong positions. Then, when reality dawns, it may be too late." Still, Nasser has heard the complaints and backed off some. Now only the bottom 5% of performers will get C grades.

Can Ford become the next GE? It's way too early to say. After all, Jack Welch spent the first decade of his tenure absorbing criticism for his relentless cost-cutting and layoffs. But Cole says the blueprint that eventually brought Welch great success may just be wrong for a company like Ford. With GE's diversified portfolio of businesses, it's easy to sell off the dogs. But a carmaker can't dump an underperforming marketing or design unit. "What Jac has tried to do is force-fit Ford into the GE model in a fashion that may not work," says Cole.

The uproar over Nasser's initiatives underscores the difficulty and risks of trying to remake a company's basic values in a relatively short time. Convinced that successful companies in the Internet Age must move at Net speed, Nasser plunged headlong into a dizzying array of initiatives designed to reshape the century-old auto maker. CEOs at plenty of other Old Economy companies, from Procter & Gamble (PG) to Gillette (G) to Xerox (XRX), were trying to do exactly the same thing when Nasser took the wheel at Ford: shake up the status quo and return their companies to their former greatness. But overhauling an entrenched culture is exceedingly difficult. Companies that have succeeded, such as Fannie Mae (FNM) and Wells Fargo & Co. (WFC), did so one step at a time, without making a lot of bold promises, says Jim Collins, author of the upcoming book, Good to Great: Why Some Companies Make the Leap...And Others Don't, due in October. "They weren't focused on changing the culture," he says. "They were focused on changing the results." He says that getting the rest of the company on board is the hardest challenge. "You have to focus on getting the right people on the bus and the wrong people off the bus, and the right people in the right seats." Nasser is trying to do just that. But with so much at stake, it's turning into a white-knuckle ride. By Joann Muller

With Kathleen Kerwin and David Welch in Detroit, Pamela L. Moore and Diane Brady in New York


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus