Bogged Down Abroad

Black Friday in Britain.

It was that kind of day for Ford of Europe Chairman Nick Scheele, who had to deliver the tough news May 12 to British workers. Ford's Dagenham, U.K., body and assembly plant were to be closed and 1,400 jobs eliminated as part of a massive restructuring effort to trim $1 billion in operating costs.

"It was a tough day," Mr. Scheele, a German by descent, Brit by birth, tells WAW. "It was particularly tough for me, because I grew up next to Dagenham. I never thought I would see the day when Dagenham would not be building Ford cars. I would never have envisioned it."

Mr. Scheele, named president of Ford of Europe a year ago and chairman last January, is used to difficult jobs, having last led the No.2 automaker's turnaround effort at Jaguar Cars. However, this time he has been given his biggest mission yet: Rescue all of Ford of Europe.

But if Mr. Scheele is finding himself on the hot seat once again at Ford, at least he has plenty of company. Europe isn't the only place where the automaker is bogged down. It also is axle-deep in Brazil, where it is hoping its Amazon small-car project can provide a much-needed push for its lagging operations there. And, like a lot of other Western automakers, Ford still is trying to find its grip in Asia after several missteps and false starts.

Most of these problems have existed for years, masked by a nearly decade-long stratospheric performance in North America that in 1999 saw Ford net the largest profits of any car manufacturer ever and amass a $23 billion war chest. That cash horde has helped fund key acquisitions, an aggressive $10 billion payout to shareholders and even the purchase of home computers for some 350,000 employees worldwide.

But on some fronts, Ford hasn't been able to emerge from the weeds. Chief Executive Jacques Nasser, who has made "shareholder value" his mantra, has struggled to get Ford's stock moving on dot-com crazy Wall Street (see sidebar, p.42). And while demand for giant Expeditions and Navigators has flourished in North America, sales of the tiny Fiesta and Ka cars in Europe and Brazil have been stagnant. Ford has lost some $406 million outside North America in the last 15 months. A major downturn in the U.S. truck market, where Ford's financial fortunes now ride, would threaten to sink the automaker, some critics contend.

"That's true," Mr. Nasser, interviewed for this story, says of Ford's potential vulnerability. "But no one is making money in Japan. (And) Europe is an extremely difficult market - the best of the competitors in Europe are just making less than the cost of capital, for goodness sakes.

"If the U.S. industry goes down by a half percent, I don't think anyone (would be) really strong in terms of profit generation."

But that won't make it any easier for Ford executives and shareholders to take. And pressure to raise margins overseas is growing.

"It's a serious issue inside of Ford," David E. Cole, director of the University of Michigan's Office for the Study of Automotive Transportation, says of the need for an international operations turnaround. "Almost by definition, if Nasser is involved, there's a sense of urgency. That's his style."

Nowhere is the job bigger than in Europe, where Ford suffers from an aging product line, its smallest market share in more than two decades and highly underutilized manufacturing plants. The results have been staggering. Ford of Europe lost $3 million in first-quarter 2000. It earned a paltry $28 million all of last year, but only after a $165 million gain from selling its half ownership in the AutoEuropa minivan venture to partner Volkswagen AG.

Analysts say most of the blame for Ford's problems falls on the shoulders of one man: Alex Trotman. The former chairman's Ford 2000 plan, which sought platform synergies with North America, left Ford of Europe devoid of competitive products.

"And that's not going to work in the European market," says Karl Ludvigsen, head of a U.K.-based consulting firm. "Product is everything here. Competition is tough."

Ford of Europe also may have been distracted by efforts to integrate Jaguar, Volvo and Mazda into its marketing plan and distribution network, Mr. Ludvigsen adds. "They weren't paying attention to the core business," he says. "Believe me, the last thing Ford needs right now is to acquire BMW."

The game plan announced by Mr. Scheele last month calls for reducing Ford's overcapacity in Europe, shedding some assets and reinvigorating its product lineup.

On the capacity front, where Ford is utilizing a paltry 71% of its build potential, the automaker will shut down its Dagenham Fiesta plant, moving all product ion of that car's replacement to Cologne, Germany, in first-quarter 2002. It also will exit its Escort/Transit assembly venture in Belarus, and follow through on previously announced plans to shut down assembly plants in Plonsk, Poland, (Escort, Transit) and Azambuja, Portugal (Transit). Coupled with the shuffle of its Halewood, U.K., facility this July to Jaguar for the assembly of the new Mondeo-based "Baby Jag," Ford will have reduced its capacity from 2.2 million units annually to about 1.7 million. If Mr. Scheele hits his medium-term market share target of 11% (it's 9% now), Ford would be pushing capacity levels in a typical 16 million-unit market.

Shutting down the 68-year-old Dagenham plant - an icon in Britain - was no easy decision for the automaker, heavily reliant on the U.K. for much of its sales.

"Dagenham to the British workforce and to Britain is much more significant than even the Rouge is to the UAW (United Auto Workers union) or to the States," Mr. Scheele says. "Dagenham almost defines the British motor industry."

But its long history also is why Dagenham proved to be the odd plant out. Among facilities in the Ford of Europe chain - Dagenham; Cologne; Genk, Belgium; Saarlouis, Germany; and Valencia, Spain; - Dagenham is least equipped for flexible production, and building both B (Fiesta) and C (Mondeo) cars on a single line is a centerpiece of the automaker's recovery plan.

Another key to recovery in Europe will be to improve productivity at surviving plants. Ford will take eight to 10 hours out of the build time for a Fiesta - now some 22 hours in the making - with the next-generation model, relying more heavily on suppliers for modular parts. And it will follow that strategy with other products as future renditions are rolled out, Mr. Scheele says.

To get more of its manufacturing capital off the books, Ford transmission plants in Bordeaux, France; Halewood, U.K.; and Cologne, plus a transmission engineering center in Germany, will be turned over to a joint venture with Getrag Getriebe-und Zahnradfabrik. Ford hopes to do the same with forging and die-casting operations in Cologne, but hasn't yet identified a JV partner.

Mr. Scheele is targeting a 25% reduction in European assets, from $8 billion today to $6 billion, and these moves will accomplish half of that. Additional asset shedding will occur, Mr. Scheele says. But part of the additional $1 billion in cuts will be a result of lower investment in fixed tooling.

"We want to reduce our spending from $1.8 billion to $1.9 billion, down to our depreciation level of $1.2 billion - while increasing the number of new models," Mr. Scheele says.

Although not part of the restructuring plan, Ford could improve its capacity utilization further by building Mazdas and Volvos. Mazda wants additional European capacity to produce midsize cars, and Volvo needs to find a site for its S40/V40 line, now that it will be exiting its Netherlands joint venture with Mitsubishi Motors Corp. Word is Ford may share the Mondeo platform with Mazda and Volvo beginning in 2002, possibly with all three brands pumped out of the Genk or Cologne plants, where Ford still will have excess capacity.

"The preferred route to go would be to have four plants and have them all running three shifts to really make your assets work," Mr. Scheele says.

But the product-development front is where most attention needs to be focused. Ford's small Fiesta - which occupies one of the most hotly contested market segments in Europe - hasn't undergone a major redo in 11 years.

"I would say that (Ford 2000) was a factor," Mr. Nasser says of Europe's lagging product cycles. "For a very short period there, we probably took our eyes off the ball in Europe. Our issue in Europe was too much capacity, underestimating competitive activity and not moving quickly enough on new product cycles."

But analysts also say the cars Ford has developed have been bland, unimaginative - reactive instead of proactive.

That clearly was the case with the botched development of a Focus-based microvan originally slated for late 1999. That model, badly needed to compete in Europe's fastest-growing segment, was scrapped because it was designed to carry only five passengers. Ford product planners were caught flat-footed when Adam Opel AG unveiled its 7-seat Zafira in 1997.

Now Ford is targeting a new, more innovative microvan off the next-generation Focus platform for 2003. It will be part of a product offensive that Mr. Scheele promises to include - on average - nine new models every year for the next five years. Among those are the facelifted Galaxy minivan and new Mondeo due this year, 2001 Fiesta and convertible and 2-door versions of the Focus set for 2003.

New diesel engines also will be a big part of the recovery plan. Ford has been woefully behind the diesel curve and is scrambling to close the gap via several joint ventures underway with Peugeot SA. Those engines will begin to roll out in 2001-2002.

"Our diesel penetration is about 24% of sales, compared to about 30% for the market on average," says Mr. Scheele, who forecasts demand will climb to 45%-plus penetration industry-wide. That sharp growth "has happened at a pace that has astonished most (carmakers), and now we're desperately trying to catch up," he adds.

A key part of the process will be polishing up the Ford brand in Europe, which Mr. Scheele says he'll do by cutting capacity and reducing the supply to major daily rental fleets - boosting vehicle residuals as a result. Ford currently sells about 300,000 cars - about 15% to 18% of its total - to rental companies annually.

"It compromises their desirability on the private side," Ian Robertson, analyst for the Economist Intelligence Unit, says of Ford's heavy reliance on fleet sales.

Exiting Formula One racing - that program was turned over to Jaguar - won't make the task of polishing up the Blue Oval any easier, according to Mr. Ludvigsen. "That was a big mistake," he says.

The product assault will be necessary if Ford is to achieve Mr. Scheele's aggressive targets, which include an increase in profit margins from less than 0.1% today to 5%. But he admits turning around Europe, which has suffered many of these same problems through several management regimes, won't happen over night. "The timeline is not tomorrow morning, but it is not five years out," Mr. Scheele says. "We're talking three years or so to see the full benefits of actions taken."

Should Ford have moved more quickly? Perhaps, says Mr. Nasser. "You could argue that we could have moved earlier," he says. "But I think we know what to do and are on our way now."

It's a similar story in Brazil, where Ford has failed to climb out of a huge hole made bigger by the dissolution of Autolatina. The joint venture, owned 49% by Ford and 51% by Volkswagen AG, was severed abruptly in 1994, and Ford was left without competitive products in the pipeline.

"It was a fairly dramatic split between Ford and Volkswagen," Mr. Nasser says. "And we weren't prepared for it because we had concluded that it was a partnership that was going to last for some time.

"Maybe we could have moved faster in certain areas, but I don't think the bottom-line results would have been dramatically different."

Other automakers are struggling, as well, due to economic conditions in Brazil. But Ford has watched as its combined car and truck market share has plummeted from 22% in 1985 to just 9% in first-quarter 2000. And although its first-quarter loss of $82 million in Latin America marked an improvement from the $141 million deficit of a year ago, black ink isn't expected in Brazil for another two or three years - after Ford's Amazon project car factory comes on stream.

To set the stage for that, Ford announced plans to close its 47-year-old Ipiranga truck plant later this year, and it has further slashed overhead by increasing local parts sourcing.

"By the end of this year, we will have taken about 30% of the variable cost out of our cars," Ford South America President Terry M. de Jonckheere says.

But Ford still is lacking in the critical B-car segment, which, backed by government incentives, has grown to about 60% of industry sales. The automaker first tried to sell a stripped-down Escort. But that left buyers cold. Efforts since then to fill the gap with Fiesta and Ka also have fallen short of expectations.

"Ford has treated Brazil as a place to sell cars that don't sell anywhere else. They need to have modern, up-to-date, 21st century cars," says Miguel Zweig, an industry consultant with Florida-based Zweig International.

Plans to bring in more models were dashed last year when a 40% devaluation of the Brazilian real made imports prohibitively expensive.

"Over time, we've been trying to build our volume, but it's been difficult," says Mr. de Jonckheere. "Our recovery plan is based on getting into some new product to improve our stance in that segment."

That, in a nutshell, is the Amazon project, which after some starts and stops Ford will launch in late 2001. The Amazon plant - designed around a modular assembly philosophy and high degree of supplier involvement - originally was to be built in Rio Grande, but a change in political leadership scuttled the state's offer of incentives and forced Ford to move the project to government-subsidized greener pastures in Bahia.

Although that switch is saving Ford money, it has added two years to the project, putting it some 15 months behind rival General Motors Corp.'s very similar Blue Macaw program.

"We lost a bit of time," Mr. de Jonckheere admits. "It would have been nice to have our product here, but that doesn't deter us from our plan. Our presence in South America is for the long haul. So you can't look at these things in the minutia of what happens this year versus next year."

In addition to Amazon, Ford-Brazil is turning its attention to shoring up an ailing dealer network, weeding out the weak and supporting the strong with extensive training programs for sales and service people. And it also is looking to improve its brand image, in part through a broadened, more competitive lineup that will include peppier engines for the Fiesta and Ka and the addition of the Focus later this year.

"Our whole brand process is to take what we have and add things to it, improve engines and powertrains and get some more exciting models in place," Mr. de Jonckheere says. "And then, as the Amazon program comes on, it will be another increment of excitement that we can put in the marketplace and reinforce the Ford brand here."

Mr. Nasser says Ford's performance in Brazil is troublesome but not overwhelming. "We have a good team there, a good plan," he says. "We have some of our own unique problems, but in the big scheme of things, it isn't a huge problem for us."

Mr. Cole says Ford's future will ride on whether it can strike a chord with consumers. "Amazon is a step forward in manufacturing," he says. "But ultimately (success) will depend on the products - if they're what consumers want."

In Asia, where the long-term view is de rigueur, Ford may have the luxury of time. Despite falling victim to 1997's Asian flu, the automaker has enjoyed some success.

Its new Thailand plant, launched amid the region's economic turmoil, appears to be turning the corner. The 1.6L Ikon, the first car designed specifically for India by a major multinational, has been an out-of-the-box hit. And Ford may finally be making some headway in China, where it is negotiating to build a small car that could allow it to close the gap with rivals GM, Toyota Motor Corp. and Volkswagen.

"Fundamentally, if you look at what we've done in Asia, I think we're pretty pleased with where we are," says Ford Asia Pacific Operations President Vaughn A. Koshkarian.

But like other automakers, Ford knows much of its longer-term growth is going to hinge on bigger success in the Asia/Pacific. And the company has double-clutched in several attempts to get out of the blocks.

In Japan, Ford's relationship with Mazda Motor Corp. appears to have iced up under the strains of recent restructuring efforts (see sidebar, p.45). And Ford, itself, is undertaking yet another re-tooling, this time casting an eye toward selling cars to more American product-friendly 26- to 31-year olds, rather than taking on Toyota and Honda in more mainstream segments as in the past. "We made a conscious decision to quit being things we're not," says a spokesman. "What we are is an American company."

Even in Australia, long a stronghold for the automaker in the region, Ford lost traction with a $469 million redo of its Falcon flagship car in 1998, a slip it is now trying to recover from with a hastily produced new model. Buyers were turned off by the '98 car's radical styling and dated powertrains. And Falcon has been outsold by the Holden Commodore ever since.

"We developed a car the market didn't want," Ford Australia President Geoff Polites admits. "We were happy with it, but the public wasn't. We did 32 research groups on the product, but not one on the customer."

Elsewhere in Asia, Ford still is in need of a 1L car to keep pace with emerging market models on the way from GM-Suzuki and DaimlerChrysler-Mitsubishi. That's where a win later this year over GM in the duke-out over ownership of Korea's Daewoo Motors Ltd. may be critical.

"(Ford) is soft on small cars in Asia," points out the U of M's Mr. Cole. "They could use Daewoo more than GM."

Mr. Koshkarian admits there is some pressure from the top to succeed in the region. But he adds "Jac (Nasser) has got tremendous global perspective. And he recognizes that (Asia's) a tough place."

In the end, Mr. Nasser says he's confident this time that the plans are in place that will ensure Ford's overseas operations emerge from the mire. But he cautions against expecting too much too fast.

"It is one of our top priorities, but it is not going to happen overnight," he says. "It is going to be difficult. But we know what to do and we have the right strategy. It is just going to take a little time to do it." - with Said Deep, Andrea Wielgat and Katherine Zachary

Nick Scheele was named president of Ford of Europe in 1999 and chairman of the operation last January. That followed a 7-year stint as chief executive of Jaguar Cars. Following is an excerpt of an interview he did with WAW's David E. Zoia and Andrea Wielgat just days after announcing restructuring plans.

Q - Did anything surprise you about the shape Ford of Europe was in when you took this job about a year ago?

A - I don't know if I was surprised. It seems daft, but I don't know to be perfectly honest. I think the depth of the problem in terms of profitability and its impact on the future was something that did surprise me. Clearly we'd been losing market share, and the extent of the capacity problem was only going to get worse unless we did something on the product side. And even if we did do something on the product side, we would still have a capacity imbalance situation, so clearly something needed to be done.

Q - What's been the reaction from labor unions about the closing of Dagenham?

A - The unions naturally are concerned with whether this is a walk-away from Dagenham, a walk-away from Ford manufacturing in Britain. And they have a degree of cynicism. And I can't blame them for that. They have a right to be questioning what we really are saying. Are we saying the other shoe is getting ready to drop, or is there an end? That is something I understand and will undoubtedly meet with them on that.

Q - Is sharing a platform for a midsize car with Mazda and Volvo something that is being looked at?

A - Yes, there are discussions. It's tough to say how far that is going to get, because you've got to get your cycles right as well. One of the huge problems to coming to a common agreement on how to develop a new product is making sure your timelines are in sync.

Q - Will you do a car in the Executive (Scorpio) class again?

A - No, I don't think so. The D/E segment within Europe is 80% premium brand. For us to be in it is not sensible.

Q - What is happening to your venture in Russia to build 30,000 Focus cars annually? Does that stay?

A - Yes, that stays. We did look at it actually and said, 'Should we (drop it)?' And we concluded that Russia is a strategic issue for us.

Q - Eastern Europe is expected to be a growth area for Ford. But do you need a 1L car to really be effective there?

A - I think you have to decide for Eastern Europe what are you trying to be. If you're going to go with a 1L car, you're really saying you're going to compete on price. I don't think, with our manufacturing facilities located where they are and with the product virtues we have engineered into our cars, we can compete on price. We've got to compete on brand.

Q - Now if a partnership with Daewoo ...

A - Ah, that's different, because then you've got a different brand.

Q - So your preference would be to keep the Ford brand on a higher plain?

A - Yes, I think in Russia and in Eastern Europe, as we have in Turkey. I think where you have that, I certainly would be the last person in the world to say let's position ourselves as a cheaper brand.

Q - When will Ford of Europe be in the black?

A - We're not setting a target for when we'll get into the black. I think that would be seen as either hubris or folly.

Terry de Jonckeere, named president of Ford South America earlier this year, is leading Ford's latest effort to steady the automaker's stance in the key markets of Brazil and Argentina. Following is an excerpt of an interview he did with WAW's Andrea Wielgat.

Q - How committed is Ford and Chief Executive Jac Nasser to South America?

A - Our commitment to South America in a nutshell is very strong and very significant.

Q - What is the timeframe you've been given for recovery?

A - We're going to take our loss position from last year, cut it in half this year, cut it again next year and expect to be running in the black by the year 2002. It is a tough process. We've got to build a dealer network, we've got to put in product and build our share. We've got to obviously control our costs and get them down to a level where all that comes together in a positive position. The results so far this year are on the track that we set for ourselves.

Q - Is the Amazon small car project the key to the recovery or just another step?

A - It's pretty much a significant key to our profitability because of the anticipated volumes and cost structure and profitability that's going to come out of that program. It's also going to be key in terms of our brand stance because of the content. It has some significant content that should give us a very strong position in the B-segment (subcompact).

Q - Brazilian sales are up. Is this a good sign or misleading because last year was just so bad?

A - Any up is a good sign. Last year, industry sales in Brazil were 1.258 million. This year we anticipate the sales to go up to 1.4 million. And our projection is that by the year 2003 the industry will grow up over 2 million units. We think that's on track. In Argentina, actually we're hitting kind of a low point. The industry's running at around 370,000, and next year we expect that to grow up over 400,000. I think we're seeing the bottom in Argentina this year, and we expect that everything will go forward from there.

Q - What kind of sales would Ford like to see in Brazil and Argentina this year?

A - Out of the 1.4 million (unit sales expected) this year in Brazil, our share objective is actually about 11%. In Argentina our objective is 16% out of the 370,000 units. We're running on track with Argentina right now. We're running a point behind or so in Brazil right now. We anticipate, though, that some of this new product, the Focus, for example, and the things we are doing with Fiesta will get us to our share objectives.