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In the News Family Matters —Ford Motor Co.

By Mark Emond Executive Editor
Start Magazine, March 2002

A family comes together in troubling times, and Ford Motor Co. is certainly currently seeing its share of trouble. But Ford founder Henry Ford’s great-grandson is now in the proverbial driver’s seat-the first time a Ford has been there in more than 20 years-and already has made some hard deci- sions to bring the No. 2 auto manufacturer back to profitability.

Automotive manufacturer Ford Motor Co. ranked fourth on Start’s list of 1,000 admired manufacturers last year, with revenues of $170 billion in 2000. That was in CEO and President Jacques Nasser’s era. Ford, however, suffered major setbacks in 2001 as Nasser was ousted, and the company was facing its first annual loss since 1992.

Ford reported on January 17 a net loss of $5.45 billion, or $3.02 per share, for full-year 2001, compared with net income of $3.47 billion, or $2.30 per diluted share, in 2000. Revenues for 2001 were $162.4 billion, down 5% from $170.1 billion a year earlier. Vehicle unit sales were 6,991,000, a 6% decline from 7,424,000.

Ford, Dearborn, Mich., founded in 1903 by the now historically famous Henry Ford, built the first automobile for the masses in 1908, the Model T, which came only in black, but was affordable. It was an immediate success. Of course, Ford is much more complex than that now.

Everybody knows Ford is also Lincoln and Mercury, but not too many know it is also Volvo, Mazda, Jaguar, Aston Martin, Land Rover, Hertz, and Kwik-Fit, a chain of automotive repair shops in the United Kingdom.

Everybody in the United States knows that the Ford Explorer, the best-selling of the very popular sports utility vehicles (SUVs), had Firestone tires, many of which failed on 1999, 2000, and 2001 models.

The government hasn’t blamed the Explorer for the 271 deaths and 800 injuries attributed to tire-related rollover deaths in Explorers, but Ford has paid out millions to settle lawsuits and spent about $3.5 billion replacing 13 million Firestone tires last year.

That was only part of the problem as Ford began to suffer financial losses. Ford has terminated ownership it acquired in U.S. auto dealers and certain electronic-commerce ventures, including a stake in Internet Capital Group Inc. Wayne, Pa., on which it lost nearly $50 million. Loan losses by Ford Motor Credit have been rising dangerously.

All of this occurred despite the fact that U.S. auto sales in 2001 were the second highest ever, 17.2 million vehicles compared with a record of 17.4 million in 2000. Each of the big-three U.S. automakers reported sales gains in December, with Ford selling 281,158 cars and trucks, a 2% increase. The gains were substantially due to post-September 11 offerings of 0% financing that knocked thousands of dollars off the price of a vehicle.

Nasser set out as chief executive officer in 1999 to transform Ford from the ground up. Deeply committed to change, he said, “Five years from now we will be a different company, and five years from then we’ll be another different company.”

Ford did become different, and in the process, executives, employees, dealers, and suppliers anguished, resulting in serious morale problems and even lawsuits filed by employees who challenged as discriminatory Nasser’s review policy for employees.

Ford’s board of directors and key members of the Ford family, which owns 40% of the company’s voting stock, decided in October to let Nasser go, and Henry Ford’s 44-year-old great-grandson William Clay Ford Jr. took over the helm.

He’s the first Ford to take over the company since his uncle Henry Ford II retired in 1979, and only the fourth Ford to do so, preceded by Edsel, 1919-1943, and Henry Ford II, 1945-1980. The founding Henry died in 1974 at age 83.

Nasser, of Lebanese descent, started with Ford 33 years ago at Ford of Australia, gaining a reputation during the 1990s as a stern cost-cutter and masterful judge of product strategy. But his policy of overhauling Ford’s bureaucracy and trying to get everybody in manufacturing and distribution to reshape their thinking to nonautomotive ways was upsetting.

In less than 15 months, Ford was transformed from a company with abundant cash surpluses to one with a serious cash-flow problem. In an effort to increase available cash, Ford recently made a Securities and Exchange Commission (SEC) filing for clearance to sell as much as $10 billion through debt securities, preferred stock, common stock, and other securities.

Ford cut its dividend in half last October and was preparing to eliminate thousands of jobs, 5,000 of them salaried, and get rid of some manufacturing operations as part of a broad restructuring plan led by Nick Scheele, 58, named chief operation officer and president of Ford’s global auto operation.

When Bill Ford, who unlike Nasser enjoys a plenitude of good will within the company, took the stage at an employee gathering at the company’s headquarters to formally announce Nasser’s departure, he was given a standing ovation.

Ford said in an interview that he and Nasser had come to the same conclusion: “We were passing the point of distraction and entering into paralysis.” He told employees it was back to basics for Ford, with “everything up for review.”

Revitalization announced
Ford formally announced its revitalization plans January 11, cutting 22,000 jobs in North America, closing five plants, and reducing production runs by 16%-all taking place between 2001 and mid-decade. Other actions planned by Ford during this period include:

• Introduce 20 new or freshened products in the U.S. annually.
• Of the job cuts, 3,500 salaried workers were dropped in 2001 and another 1,500 are planned to go in the next year or two.
• Globally, about 35,000 employees will be or already have been terminated.
• Cost-reduction efforts expected to improve ongoing annual profits before taxes of $3 billion.
• Discontinue low-margin models: Mercury Cougar, Mercury Villager, Lincoln Continental, and the Escort.
• Sale of noncore assets and businesses to recover $1 billion in 2002.
• Reduce stock dividend to 40 cents from 60 cents.

These actions and those already taken are expected to improve pretax operating results to $7 billion annually, an improvement of $9 billion by the middle of the decade. As part of the restructuring, the company will take an aftertax charge to fourth-quarter earnings of $4.1 billion.

Ford CEO William Ford Jr. said if the company goals aren’t met, “I won’t get paid.”

Automotive goals
Ford Motor Co. has long been environmentally oriented, and William Clay Ford Jr. is outspokenly devoted to the subject. Ford was instrumental in the formation of the Partnership for a New Generation of Vehicles (PNGV) in 1993, representing a historic and unprecedented collaboration among the U.S. auto industry, the federal government, and academia.

The goals of the partnership include improving America’s manufacturing expertise, developing technologies for high fuel economy and low emissions, and eventually demonstrating a preproduction midsize sedan capable of up to 80 miles per gallon with no sacrifice in performance, safety, or affordability.

Under PNGV, Ford, DaimlerChrysler, and General Motors have been working with teams of scientists and engineers from 19 federal government labs, automotive suppliers, and universities to develop a portfolio of research projects in four key areas: hybrid electric vehicle (HEV), direct-injection engines, fuel cells, and lightweight materials.

Hybrid electric vehicles have internal-combustion engines and electric motors able to run side-by-side on and off as selected.

PNGV researchers believe direct-injection engines are highly fuel-efficient, particularly useful in a hybrid vehicle, increasing mileage and reducing emissions.

Hydrogen fuel cells in the future could offer the auto industry near-zero-emission vehicles.

Researchers are working with lightweight materials to achieve up to 80 miles per gallon, reducing vehicle weight 40% to 2,000 pounds. In 1998 Ford delivered a lightweight prototype vehicle, the P2000, weighing in at only 2,000 pounds. It achieved 63 miles per gallon when coupled with a direct-injection, aluminum, through-bolt-assembly diesel engine, and manual transmission.

Environmental goals
Ford’s environmental achievements are too numerous to detail here, but they include fundamentally refurbishing factories to minimize any adverse environmental conditions and actually contribute to environmental improvement.

For example, in 1999 Bill Ford Jr., then Ford board chairman, proposed to overhaul the entire revolutionary manufacturing complex on Rouge River, Dearborn, Mich., re-establishing the environmental spirit his great-grandfather Henry had instilled in the company.

His goal was to “lay the groundwork to transform a 20th-century industrial icon into a model of 21st-century sustainable manufacturing.”

Construction on the $2 billion project began in November 2000 and is scheduled for completion in 2004. A similar program is underway at Ford’s Dagenham complex in England.

Assembling a dream team of environmental, development, and manufacturing specialists and recruiting notable sustainability architect William McDonough, the redevelopment plan includes a number of lean manufacturing and environmental features to make Rouge a healthy, productive, supportive work environment.

The new assembly plant features world-class flexibility, with assembly lines capable of handling three different vehicle platforms and nine different models. Finished vehicle storage space will be reduced by 50% inside and outside the plant, and 90% of the vehicles produced will be shipped the same day.

Advanced environmental concepts applied and tested at the complex include:

• The world’s largest ecologically inspired living, planted roof (about 500,000 square feet), that will dramatically affect the Rouge area watershed by holding several inches of rainfall in its soil.
• Phytoremediation-the use of natural plants throughout the grounds that rid soil of contaminants.
• Swales-shallow green ditches seeded with indigenous plants that will improve storm-water management.
• Porous paving that filters water through retention beds with two to three feet of compacted stones, helping manage storm-water runoff.
• Trellises for flowering vines and other plants to shade and help cool the Rouge office building and the new assembly plant.
• Renewable energy sources such as solar cells and fuel cells.
• Planting more than 1,500 trees and thousands of other plantings to attract songbirds and create habitats.

The everyday life of employees will be enhanced with overhead safety walkways, natural lighting throughout the facility, team rooms, and relaxing places to congregate.

Bill Ford Jr. said, “This is not environmental philanthropy; it is sound business which for the first time balances the business needs of auto manufacturing with ecological and social concerns in the redesign of a brownfield site.

“While most companies would rather move than invest in a 83-year-old site, we view this as an important reinvestment in our employees, our hometown, and an American icon of the 20th century.”

Partnerships, alliances
Ford is dedicated to customers and is constantly seeking better connections with them. To this end, it forges partnerships and alliances to offer digitally a broad range of innovative products and services. Here are some alliance offerings:

Percepta-A partnership with TeleTech, this alliance develops individualized relationships with Ford customers through worldwide customer-relationship centers.

Based in Englewood, Colo., Percepta manages new-product launch communications, customer-satisfaction analysis, concern resolution, dealer assistance, customer-relationship management (CRM) programs, and Web-based sales on behalf of various automotive clients.

CarPoint-Microsoft Corp., Redmond, Wash., and Ford Motor Co. created the world’s first online built-to-order system for buying cars.

Wingcast-Partnering with Qualcomm, San Diego, Calif., Ford is devoting itself to the convergence of wireless mobility and information services that bring voice, entertainment, Internet access, and safety services into cars and trucks.

Ford partnered with Maytag, Newton, Iowa, in this venture, providing convenience and time-saving appliances for on-the-go customers and incorporating technology that links consumers and incorporates technology that links consumers to their homes via “Home Connection.”

This endeavor contains many features that won’t be described here, except to say it offers safety and security, “infotainment,” phone features, and future Telematics services.

TopDriver-Not only does Ford build safer vehicles, it educates drivers for greater safety. Its equity stake in this driver-education company furthers its commitment to safety.

Proud Partners of America’s National Parks-This partnership uses the resources of Ford Motor Co. to help Americans learn about, experience, and connect to America’s National Parks.

In addition, Ford collaborates with others to revolutionize its core business processes and to stay ahead of its rapidly changing industry. Here are some:

Covisint-A partnership with four other auto manufacturers-DaimlerChrysler, General Motors, Nissan, Renault, and later PSA Peugeot Citroen-Covisint maintains an online global supply-chain network. It is also a partnership with technology providers Commerce One, Pleasanton, Calif., and Oracle, Redwood Shores, Calif.

ZoneTrader-Under this partnership, ZoneTrader manages the auditing of Ford Motor Co. surplus goods, then tests, refurbishes, and auctions them online.

UPS Logistics-Joining forces with a division of UPS Inc., Atlanta, Ga., Ford Motor Co. can greatly reduce the time required to deliver vehicles from plant to dealer to customer.

e-Steel-Ford chose e-Steel (renamed Newview Technologies, New York, N.Y.) to help launch a steel-e-commerce procurement system that maximizes efficiency and operational savings.

The Beanstalk Group-By partnering with The Beanstalk Group, New York, N.Y., for management of its trademark licensing programs, Ford is maximizing the value of its brands worldwide while offering Beanstalk access to its worldwide network of offices and relationships.

On top of all that, Ford has a marketing alliance with Yahoo! Autos, a groundbreaking site developed by Yahoo! Inc., Sunnyvale, Calif., and Ford Motor Co. designed to move the entire vehicle-ownership experience online.

About Covisint
Covisint, Southfield, Mich., with offices in Amsterdam and Tokyo, is the central hub where original-equipment manufacturers (OEMs) and suppliers of all sizes come together to do business in a single business environment using the same tools and user interface, plus one user ID and password.

Covisint has been designed with an emphasis on making information accessible and visible in a secure online environment. Information is secure within Covisint, and members remain in control of who sees and accesses the information.

Covisint’s online tools enable companies to compress planning cycles and enhance supply-chain planning. In doing this, it allows companies to directly increase efficiency and asset utilization while ultimately realizing greater profits and shareholder valuations.

Last June Covisint selected webMethods Inc., Fairfax, Va., as a provider of the integration framework for the automotive exchange and integration platform for its customers. Under terms of the agreement, webMethods is providing software licensing and professional services to Covisint.

Last September Covisint selected MatrixOne, Westford, Mass., for its family of best-of-breed technology providers. Covisint’s collaboration platform, Covisint Virtual Project Workspace (VPW) v3.0, as well as extended future offerings, will feature MarixOne Value Chain Portfolio of applications for collaborative commerce.

MatrixOne was chosen for its significant penetration in the automotive industry and its broad solutions for each stage of the collaborative process.

In July, Ford said it had already recouped its initial investment in Covisint through savings made by online tendering. Though Ford has never disclosed how much cash it invested in Covisint, it estimated it made $70 million worth of savings from using it in 2000, which it said “easily” covers its investments.

Ford then estimated it would make a further $350 million in savings in 2001 by using the exchange.

Savings came from lowered process costs and supplier prices rather than by reducing the number of purchasing teams Ford employs or the number of its suppliers.

Ford’s fate
Nasser is gone now, so part of Ford’s cash problem is no more. At the outset of 1999, when Nasser took over, Ford had $14 billion in net cash. At the end of the third quarter 2001, it had just $915 million.

How did that happen? Nasser, with board approval, made big acquisitions-Volvo Cars and Land Rover, to name two. Ford also made rich recapitalization payouts to shareholders-$5.7 billion in shares or cash to stockholders. It also bought $2 billion of its stock since late 2000.

The other big three U.S. auto manufacturers, DaimlerChrysler and General Motors, are also having cash problems, but not in the range of Ford’s. High operating costs and sales incentives to maintain marketshare are big cost items, and they’re for the most part continuing for now.

Ford’s powerful cutbacks in employees and plants have been announced, and if they are achieved in the next few years, Ford will return to its cushy past. Obviously, it remains to be seen, but the new dies are being cast.