Ford 1997 will be a hard act to follow

A year of record profits at Ford Motor Co., a war chest of $19.3 billion in cash to protect against a recession and the hottest offerings in the jumbo sport/utility segment would provide reason for most CEOs to celebrate, but the mood emanating from Dearborn is downright grim.

"We are very hard on ourselves," says Chairman and CEO Alex Trotman. "Anyone who thinks you can sit on today's performance in this industry is misguided."

Indeed, there are problems that the strong U.S. economy and consumers' lust for high-profit trucks and sport/utility vehicles sometimes disguise:

The No. 2 automaker is losing money on most of its passenger cars sold in the U.S. other than the large rear-wheel-drive models (Lincoln Town Car, Ford Crown Victoria and Mercury Grand Marquis). Its product development process is not as lean as it should be.

Attempts to acquire and restructure dealerships in the Indianapolis and Salt Lake City areas never got off the ground.

For the first time in five years, the Ford Taurus will not be the best-selling passenger car in the U.S. There's even scuttlebutt among suppliers that there will not be a next-generation Ford Contour and Mercury Mystique unless there's convincing evidence they can sell in substantially higher volumes.

Ford will barely break even in Europe, which is an improvement after losing $1.8 billion there between 1990 and 1996. But the November appointment of new Ford of Europe management, led by James Donaldson as president and Henry Wallace (late of Mazda turnaround fame), as chief financial officer, sends a strong signal that breaking even isn't good enough.

Efforts to re-establish its presence in Brazil and Argentina start to pay off, but the crisis in Asia has triggered repercussions in Latin America. Still, Ford has plans for a $1 billion Brazilian assembly and parts-making venture that will produce up to 100,000 units of a yet-unnamed vehicle by 2001.

Mr. Trotman spoke with Executive Editor Drew Winter and Senior Editor Greg Gardner to discuss his view of Ford's competitive position going into 1998.

"There will be a larger optimization of skills and facilities between Ford and Mazda in the next 10 years than was true over the last 10 years."

Improvement Slow in Europe

After losing money in Europe for four of the last seven years, Ford may break even in that region for 1997, but Mr. Trotman isn't sure the worst is over, either for Ford or the industry as a whole.

"It's a very tough environment to make money in," he says. "There's a lot of capacity. We have to continue to drive hard on efficiencies and costs. I don't see the likelihood at the moment that we will do anything to reduce capacity, other than small tactical things."

Global Warming Solution:

Expand Industry-Government Research

No one has been as outspoken as Mr. Trotman about the risks of moving too quickly to reduce CO2 emissions, the most significant contributing factor to global warming.

While Ford has aggressively developed alternative fuel vehicles, its highly successful tandem of gas-gulping large SUVs, Expedition and Lincoln Navigator, have made it something of a lightning rod for environmentalists.

Similar to his counterparts at General Motors Corp. and Chrysler Corp., Mr. Trotman adamantly insists that developing countries such as China, Brazil and Indonesia be included in any binding resolutions to cut CO2 emissions. Forcing American consumers out of large vehicles they do want, the argument goes, into smaller vehicles they don't want won't have any positive impact on global warming, he contends, as long as China's fleet of trucks, taxis and limousines continue spewing exhausts of unleaded gasoline across the planet's most populous country.

During a recent meeting with President Clinton at the White House, Mr. Trotman touted the idea of expanding the concept of the Partnership for a New Generation of Vehicles to other energy-intensive industries.

"With the involvement of federal laboratories, it could be a major national drive to develop clean, green technology and to share that technology worldwide," Mr. Trotman says. "Like with lightweight materials, fuel cells, more efficient drivelines for vehicles, what is the equivalent of those things in the utility industry or in steelmaking or cement or paper?"

The underlying suspicion among industry leaders is that even if there is an international consensus on global warming, American consumers don't want to give up their large, gas slurping and - to the automakers - extremely profitable vehicles.

"If CO2 is a major global problem, an enormous number of behavioral changes have to occur," Mr. Trotman says. "I don't know what temperature you run yourhouse at night, but if you turn the thermostat down five degrees that saves a lot of CO2.

"I would like to see some flexibility of thinking in the U.S. about small diesel engines and some pragmatic review of the tradeoffs between the cleanest small diesel engines that we can make and emission standards. You can always write an emission standard that a diesel can't meet."

Ford likely will exhibit some of its newest direct-injection diesel technology at the 1998 North American International Auto Show in Detroit. But don't hold your breath waiting for an optional diesel engine on an Expedition or Navigator.

Kia Investment at Risk

As the Asia currency crisis continues to ripple through world financial markets, Ford's biggest risk is in its 9.4% stake in Kia Motors, which the Korean government placed into court receivership in October (see World Wrapup, p.14).

"Our exposure there is pretty small, $100 million to $150 million, but we don't expect to incur that kind of hit," he says. "While the Asia situation is in a condition of turmoil right now, the impact on Ford as a corporation would be quite small."

Meanwhile, in Thailand, where Ford has put the finishing touches on its new truck assembly plant near Bangkok, production begins next May. Eventually it hopes to build 130,000 pickup trucks annually, mostly for export elsewhere in Asia.

In November, Ford began building Transit vans in Vietnam while its joint venture with Jiangling Motors in Nanchang, China, which also will produce Transit vans, just geared up in early December.

Asked how long before Southeast Asian economies recover, Mr. Trotman shrugs.

"My personal feeling is we'll see a settling down, and when that takes place Southeast Asia will be a much more competitive place to manufacture things than it is today," he says. "The currencies are going to be much weaker vis-a-vis the dollar, Deutschmark and pound. And maybe, here's one of the major maybes, what are they going to be like against the yen?"

If the yen strengthens, then Japanese consumers, if they ever start spending again, can help stimulate demand for vehicles built elsewhere in Asia. If the yen remains weak, then Japanese automakers will be under pressure to export cars and trucks built in Japan, thus competing with the newly added capacity and perhaps prolonging the agony in Thailand, Indonesia and Malaysia.

Emerging Market Vehicle

Even though 1998 could be a lean year in Asia, Ford continues work on a no-frills midsize vehicle aimed at emerging markets and priced at well below $10,000.

The project, which involves a significantly larger vehicle than Chrysler Corp.'s CCV, may be more than a year away from production, although Mr. Trotman declines to talk about the vehicle they will build in Ford's new $1 billion assembly and parts-making plant in Rio Grande du Sul, Brazil.

"To me an ideal low-investment vehicle would be anything you'd want it to be," he says. "A pickup, a box van, a passenger car, a four-wheel drive, all from the same platform. Brazil's a possible market for this vehicle. So are China or India. If and when we do this vehicle it will have global applications."

Ac knowledge of design from other companies," says Mr. Trotman of Mr. Mays. "He's a very talented individual. One of his strengths is the breadth of his experience outside."

For all the second-guessing, fine tuning and direct criticism of Mr. Trotman's Ford 2000 reorganization, the changes, particularly the reduction in platforms and drivetrain configurations, are yielding huge savings. Early in the year, the goal was to slash $1 billion from costs in 1997. By the end of the year the actual savings should be at least triple that.

In the event that Asia's currency woes infect the North American economy, Ford's $19.3 billion of cash should enable it to sustain the dividend and keep new product programs on schedule even if U.S. car and truck sales show signs of stalling.

With that much money, one might look to bolster market share in Europe or South America by acquiring another automaker. PSA and Renault both may need more capital than they now have to become global players. But Mr. Trotman rules out that type of acquisition.

"Definitely not," he says. "We firmly believe we have the resources to achieve our ambitions inside Ford."

Despite widely varying tastes from North America to Europe to Latin America and Asia, Mr. Trotman has lost none of his zeal for global vehicle development. Ford's Mondeo has been far more successful in Europe than sister cars Contour and Mystique have been in North America.

"The economies of scale that come from purchasing materials from a simplified buying list, the single manufacturing system, the benefits of using best practices worldwide, all of those things hold," he says. "The cost of whether a car looks different on one continent from the way it looks on another continent is not that big. What is a big issue is the number of platforms you have, how many drivelines and how many people you have designing those products."

While cars like Mondeo and the new Escort, coming next year in Europe, are developed through Ford's small-car vehicle center in Merkenich, Germany; Ford's partnership with Mazda will be more involved in some future vehicles, including a small sport/utility vehicle (SUV) codenamed U204, scheduled for introduction in about two years.

"We now have a combined Mazda cycle plan for the first time," Mr. Trotman says.

Q; Why can't Ford make a profit on its passenger cars other than the large rear-wheel drive models?

A: I don't accept that we can't. The ones that aren't making a profit are getting an awful lot of attention. Some are more difficult than others. It's no secret at all that to make money on the smallest cars in the United States is one very big challenge. The revenue for a small car in this country is lean. It's a small market segment and it's a weak market segment. You have a lot of capacity, a lot of competition and low revenue.

Q: How much longer can you ride this wave of large sport/utility vehicles that generate profits of $10,000 or more per vehicle?

A: The wave isn't something that just popped up in the last year or so. The F-Series truck has been our best selling vehicle for the last 20 years. The trend, which is the word I'd rather use, will continue to strengthen for sport/utilities for the foreseeable future. Probably there will be a number of different flavors ... We have several different varieties in the development stage.

Q: If you're not making money on many passenger cars and the trend toward sport/utilities continues, do you need as many passenger car models as you have now?

A: Maybe not. We're flexible on that. As you will have noticed we dropped five lines in 1997. So I think we demonstrated by taking those actions that we are not wedded to life as it is. We're going to be a continuously changing company. The products we offer, what they're called, and how they are aligned, will be subject to continuous change.

Q: Given the wide differences in consumers' tastes, gasoline prices and regulations, do you still believe global cars are the way to go?

A: I think even more so today the tenets of Ford 2000 are appropriate for our company, Nothing about the currency instabilities would change that. Major benefits are going to come from a halving of the platforms; halving of our powertrains is appropriate today. The economies of scale that come from purchasing materials from a simplified buying list, those all work. The single manufacturing and product-development systems, all of those things hold.

"As you noticed we dropped five product lines in 1997. We demonstrated by taking those actions that we are not wedded to life as it is... The products we offer, what they're called and how they are aligned will be subject to continuous change."