Ford Struggles With Massive Upheaval in 2006

Special Report

2006 Year in Review

Tumultuous best described Ford Motor Co.’s year in 2006.

Defections in its executive ranks and drastic cutbacks, including the closing of plants and a reduction of the salaried and hourly workforce, were part of the massive upheaval in the year for the 103-year-old company.

The most momentous event was the Sept. 5 appointment of Alan Mulally as company chairman and CEO, succeeding Bill Ford, who seemed visibly relieved to relinquish his post after nearly five stressful years, while vowing he would remain a player in day-to-day operations in his new role as executive chairman.

Mulally, a 37-year veteran of The Boeing Co., largely was credited with turning around the aerospace company’s Commercial Airplanes division following the Sept. 11, 2001, terrorist attacks in the U.S., which frightened people away from airlines.

By the time of his arrival at Ford, conditions were deteriorating rapidly, despite the year starting out on a relatively bright note, with the auto maker inking a pact with the United Auto Workers union that would save it millions.

However, analysts were not impressed with the deal, in which Ford would save some $650 million by having retirees pay a larger share of their medical expenses and existing workers give up about $1 an hour in future wage increases.

Wall Street already was pummeling Ford for a lackluster portfolio and a less-than-exciting product pipeline.

“We have been pleasantly surprised with Ford’s recent success in sedans and think the Edge (cross/utility vehicle) could be successful. However, our sense is that these are less-profitable product offerings for the company,” Bear Stearns analyst Peter Nesvold said at the time.

Unfortunately for Ford, Nesvold’s predictions would prove alarmingly accurate.

Barely into the first month, Ford’s Premier Automotive Group of European luxury marques, particularly Jaguar Cars, began to drag on the auto maker’s bottom line, despite the company’s 2003 forecast that PAG would contribute up to one-third of its overall future profits.

Ford quickly sunk $2.1 billion into Jaguar, marking the second time it had to prop up the U.K. subsidiary since buying the auto maker in 1989 for $2.3 billion. But this was just a hint of things to come.

In the U.S., Ford was preparing the biggest reorganization in the company’s history. At the Los Angeles auto show in early January, Ford North American chief Mark Fields hinted at the direction of the far-reaching plan, dubbed “Way Forward.”

During his speech, he said he was telling his team to “cast off the notion of the Big Three” and took jabs at archrival Toyota Motor Corp., saying it was “desperately trying to cast itself as an American brand. But that doesn’t make it an American brand. It’s time to go on (the) offense.”

An integral part of Ford’s plan was the upcoming Ford Edge CUV and sister Lincoln MKX. To prepare for production of the new “game-changing” CUVs, Ford said it would invest $820 million to combine its Oakville, Ont., Canada, plant, which made minivans, and the shuttered Ontario Truck plant that earlier built F-150 pickups, into a single, flexible campus.

Ford also said it was renewing its emphasis on B-segment cars. To gauge consumer interest, the auto maker unveiled the Reflex concept car at the 2006 North American International Auto Show in Detroit. Freeman Thomas, who headed Ford North American strategic design, said B cars were a “territory we are starting to mine.”

Although the year brought increasingly escalating gasoline prices that drove many SUV buyers out of the segment, Ford’s pledge to enter the B-car market went largely unfilled.

The auto maker did unveil a new 3.5L V-6 called the Duratec 35. Ford said the mill, which produced 263 hp and 249 lb.-ft. (338 Nm) of torque, would power a wide range of vehicles, including the Lincoln Zephyr, MKZ and Ford Edge. To accommodate the new engine, Ford spent $335 million to overhaul its Lima, OH, engine plant.

Prodded by the media, the auto maker finally announced the details of its ballyhooed North American restructuring plan, calling for sweeping changes in the way Ford traditionally operated in its home market.

Under the terms of Way Forward, Ford said it would shutter 14 manufacturing plants; eliminate 25,000-30,000 hourly positions; cut its salaried workforce 10%; reduce officer ranks 12%; and build a low-cost manufacturing site in the near future.

After announcing the plan, Bill Ford said, “We will be making painful sacrifices to protect Ford’s heritage and secure our future.”

But many analysts panned Way Forward, saying it was a rehash of a similar plan carried out in 2002. Nevertheless, Ford’s stock shot up 5.3% following the announcement.

Soon after began the exodus of top Ford executives, starting with the departure of Stephen Lyons, group vice president-North America sales and service, and Vice Chairman Greg Smith.

At the same time, Ford began cutting its workforce through a deal with the UAW that provided a package of payouts and perks to workers soon to be idled as part of the company’s downsizing. Employees at the Ford Ranger plant in Edison, NJ, were the first to be offered the incentive packages, with a 33% take rate.

But Way Forward still was vague, with only three of the planned 14 assembly plants set for closure announced. Anne Stevens, chief operating officer-the Americas, said the auto maker purposely was playing it close to the vest, recalling in 2000 Bill Ford outlined nearly full details of a similar plan that later had to be altered due to changing business conditions.

“You need to allow room to adjust to unknown factors that come up,” she said at the time. “We didn’t want to release too many specifics this time and have that happen again.”

In early spring, another longtime Ford executive, President and Chief Operating Officer Jim Padilla, called it quits. Bill Ford, his hands already full with Way Forward and his duties as chairman and CEO, stepped up to the plate and took over Padilla’s duties, as well.

More details of the company’s restructuring plan began to dribble out with the April announcement that assembly plants in Norfolk, VA, and Minneapolis-St. Paul, MN, would be idled by 2008. They joined sites in Atlanta; St. Louis; and Wixom, MI, which previously had been identified for closure.

With Way Forward approaching mid-year at a snail’s pace, Fields insisted he was “pleased with the progress,” emphasizing a company can’t cost-cut its way to prosperity and that Way Forward was product-driven, not just a massive downsizing.

But Wall Street sighed with impatience. “Implementation (of Way Forward) has been slow, and it could be some time before benefits are realized,” John Murphy of Merrill Lynch wrote in a research note.

Stalled at home, Ford quietly began making headway in China, one of the world’s fastest-growing automotive markets, announcing plans to boost its China production capacity with the construction of a new plant in Nanjing.

Once completed in 2007, the new facility would have an initial capacity of 160,000 units annually, bringing the auto maker’s production in China to 360,000 units annually, Ford said.

In the U.S., the auto maker unveiled a new marketing campaign, dubbed “Bold Moves.” The campaign’s tagline quickly took on a life of its own, with Ford executives using “bold” to describe nearly every action the auto maker took.

“We intend on living with this for a long time,” said Al Giombetti, president-Ford and Lincoln Mercury sales and marketing. “Bold Moves is much bigger than a tagline; much bigger than a series of ad spots. It is a marketing platform that will allow us to market cars, trucks and SUVs under a common theme.”

Nevertheless, Bill Ford continued to take heat for the auto maker’s under-whelming performance. During a shareholders’ meeting in Wilmington, DE, several shareholders publicly belittled him, with one proclaiming that “(Bill Ford) is a wealth destroyer” and the “poorest chairman and CEO to ever lead Ford Motor Co.”

The chairman took the criticism in stride, but the pressure of his position was taking its toll.

On the product side, Ford brass decided to take the reins off the designer corps, which long had argued current bland designs were the product of “design by committee.”

Ford also began working to differentiate its brand portfolio, most notably the Ford, Mercury and Lincoln brands, which had been criticized as weakly modified versions of one another.

Additionally, Ford announced its intention to increase the availability of all-wheel drive across its product lineup, with a goal to sell 500,000 vehicles equipped with fulltime AWD systems annually in the U.S. by 2007.

Speculation continued to build that Ford was planning on scrapping its poor-selling minivan lineup in favor of a production version of the Fairlane concept that bowed at the 2005 North American International Auto Show.

Although the auto maker initially denied the rumors, it eventually announced the Mercury Monterrey and Ford Freestar minivans both would be dropped and a production Fairlane would hit the market in 2008.

To hasten product development, Ford placed renewed emphasis on its Global Product Development System (GPDS), first implemented by former product-creation chief Phil Martens in 2005.

GPDS, derived from the system used by subsidiary Mazda Motor Corp., was designed to leverage Ford’s worldwide resources to bring vehicles to market quicker.

To aid in its turnaround, Ford also enlisted Wall Street guru Kenneth Leet, which fueled speculation the auto maker was seeking to sell off one of its PAG brands, most likely Jaguar. Ford eventually revealed its Aston Martin Lagonda Ltd. subsidiary was up for grabs, but there was no deal before year’s end.

As the year rolled into the fourth quarter, Ford’s sense of urgency rose. The auto maker announced it would slash production 21%, or 168,000 units, through December.

And shortly after Mulally’s arrival in September came an accelerated version of Way Forward.

The new plan called for reducing operating costs another $5 billion by the end of 2008. To accomplish that, Ford said it would have to cut 10,000 more salaried positions and move up its previously announced goal to shed 25,000 to 30,000 hourly jobs to 2008, instead of 2012.

Ford hoped to have all salaried workforce reductions completed by 2008, as well, noting that failing to meet the targeted quota would make involuntary layoffs necessary.

Meanwhile, some 38,000 UAW workers agreed to accept buyout packages and leave the company at the start of the new year.

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