Mulally Plans to Stay the Course

Looking Out Over Southeast Michigan from atop Ford Motor Co.'s headquarters in Dearborn, MI, CEO Alan Mulally keeps a laser-like focus on the plan he has laid out to turn around the ailing auto maker.

Nothing will veer Ford off course, not even an economic tsunami that has tightened credit and driven down auto sales to levels not seen in decades — a downturn that forced Mulally and the other leaders of the Detroit Three auto makers to seek financial assistance in Washington.

The hearings did not go well, as Congress pressed for restructuring plans the auto makers failed to provide. Further hurting Detroit's image at the hearing was Mulally's refusing to accept a pay cut, in response to a congressman's question.

“I think I'm OK where I am,” Mulally told Congress. Last year he made $21.7 million. Since joining Ford in 2006, his compensation totals $49.9 million.

At presstime, the three auto makers were developing proposals for submission to Congress, as well as a timeline for repaying the loans.

True, Ford's situation is not as dire as its two crosstown rivals, but Mulally says Ford shares many of the same suppliers as General Motors Corp. and Chrysler LLC. If one of those auto makers cannot pay its suppliers, Ford's supply chain would be interrupted.

Mulally insists Ford is in far better shape than its rivals due to a $23.4 billion line of credit the auto maker secured in 2006, which Mulally lightheartedly refers to as a “small, home-improvement loan.”

While Mulally has that ace up his sleeve, he played all of Ford's cards to secure the cash, mortgaging factories, brand names and even the famed Blue Oval trademark.

Ford ended the third quarter with $18.9 billion in cash, down from $26.6 billion at the end of the second quarter. However, its overall liquidity totaled $29.6 billion, a much greater financial cushion than that of its domestic counterparts.

Prior to testifying in Washington, Mulally told Ward's the decision to acquire the $23.4 billion before the credit markets dried up wasn't due to some uncanny ability to read the future, although he maintains there was more than luck involved.

“I wouldn't say (I was being) conservative, but I think I'm known for looking at the world the way it really is and having a robust plan for dealing with it,” he says. “The U.S. was slowing down; and when you look at how interdependent we are with other economies and how funds flow around the world, there was more risk than not a year and a half ago that everything would continue to slow down.

“The key for us was going to the markets early and building up sufficient liquidity, so we could not only restructure, but also keep investing in new products,” he says, noting Ford is managing its cash reserves very carefully.

Despite the uncertainty surrounding the finances of the Detroit Three, Mulally maintains bankruptcy is not an option, although he admits contemplating what would happen if either General Motors or Chrysler should file.

“You have to step back and ask yourself if it (bankruptcy) is really a viable option,” he says. “It gets back to selling cars. Are consumers going to buy from a company that went into bankruptcy with the promise they may come out some day? I can't speak for my colleagues, but clearly none of us think that is the right way to go.”

Mulally says it's difficult to determine whether the economy and the industry have hit rock bottom, but insists only the return of consumer confidence will lead a recovery.

Like its two crosstown rivals, Ford was stuck with too many trucks and SUVs this year when consumers, alarmed by skyrocketing fuel prices, demanded more fuel-efficient cars.

Today, Ford's long-term plan calls for a growing number of smaller vehicles. The first wave is set to hit U.S. shores in 2010, when the European-inspired Fiesta B-car and Focus C-car arrive.

Mulally predicts that 2009 could be worse than 2008, with a slight recovery coming in 2010, a timeline that plays out well for Ford.

“We're in very good shape from a product strategy point of view,” he says. “We're positioned very well through next year, and (we will) get a chance to grow going forward because of the new products.”

But fuel prices have begun to subside, causing some observers to question whether Ford's shift to smaller cars was a knee-jerk reaction that will come back to haunt the auto maker.

If Mulally is second-guessing his decision, he isn't letting on. An unbridled optimist, he insists Ford is on the right track and that smaller, high-mileage vehicles are the way of the future.

“We believe longer term we're all going to deal with the real cost of energy,” he says. “The demand is going to exceed the production capability for energy.”

High fuel prices would accelerate implementation of Ford's product plan by causing a fundamental shift in U.S. buying habits. Gradually, most American vehicles will resemble those in Europe, where the culture embraces small vehicles because of narrow streets and expensive fuel.

Still, Mulally says the U.S. truck market will remain viable for years to come, and that Ford will defend its truck leadership at all costs.

“The U.S. is still very unique,” he says. “It's large and construction is a big deal, as (are) outdoor lifestyles. It's just a different environment.”

The differences between the U.S. and Europe are among the reasons Ford will keep its Mercury brand, which many observers have said should be killed off due to a weak product lineup and slumping sales. Instead, Mulally says there are plans for Mercury and the Lincoln luxury division.

“We're going to position Mercury to be more (focused) on the smaller-sized vehicles, while Lincoln will be more of a volume brand with larger vehicles,” he says.

Mulally balks at suggestions Ford should merge with another auto maker, a move many pundits say would place it on stronger footing. Unlike some of its competitors, he says Ford is a truly global company, operating in nearly every region of the world.

“Do we need to merge with someone? Yes, we have to merge with Ford,” he says, referring to his “One-Ford” strategy, which calls for leveraging the auto maker's global resources and aligning production capacity with actual demand for its products.

“Our single most important strategy is to continue to integrate Ford around the world,” Mulally says.

Although a partnership is not in Ford's game plan, he admits the auto industry — from OEMs to suppliers to dealers — must be right-sized for the current market conditions.

Overcapacity is causing all players to reevaluate their businesses.

He credits suppliers with “doing a good job” in downsizing their operations and says Ford must continue adjusting production to meet current demand. “We've been at this for a few years and so have suppliers,” Mulally says.

Dealer consolidation is on track, too, he says, noting Ford continues to work with dealers individually to draw down the number of U.S. showrooms.

“They're our partners, so we work with them and make sure they have knowledge on the dealers that are close to them and where there are opportunities to consolidate,” he says. “We use our knowledge of the industry and the (dealer) network to help facilitate that.”

As the domestic auto makers lost share in the U.S. over the past decade, they also have seen gains in emerging markets, especially Brazil, Russia, India and China, referred to as the “BRIC” countries.

But since the economic turmoil engulfing the U.S. has spread around the globe, the BRIC nations now are experiencing declines in automotive sales, as well.

When asked if Ford is reevaluating its investment in the BRICs, Mulally answers with a resounding “No.”

“They're just slowing down,” he says. “We're well positioned in those markets, and they're going to be a clear part of our plan going forward.”

Also key to Ford's future are alternative powertrains, although Mulally is skeptical of plans by some rivals to bring next-generation hybrids and pure electric-vehicles to market in the future.

Mulally and his top engineer, Derrick Kuzak, are looking toward Ford's upcoming line of EcoBoost engines as a way to bring fuel-efficient, clean vehicles to the masses.

EcoBoost combines turbocharging with direct-injection gasoline, delivering the power and performance of a larger engine with up to a 20% increase in fuel economy and a 15% reduction in carbon-dioxide emissions, they say.

The first application of EcoBoost — paired with Ford's Duratec 3.5L V-6 — is set to debut next year on the Lincoln MKS flagship sedan, after which 4-cyl. and other 6-cyl. versions will be available in nearly every model in Ford's lineup.

EcoBoost “is not just a one-off technology demonstrator,” Mulally says, adding that EcoBoost represents “a tremendous improvement in fuel efficiency.”

Longer term, Ford intends to create more hybrids, as well as more advanced technologies, such as plug-in hybrids and hydrogen fuel-cell vehicles, as battery technology advances, a strategy Mulally refers to as a “road map to the electrification” of vehicles.

Despite Ford's problems and those of the industry at large, Mulally remains confident his plan is the right one and that he has the full support of employees.

“(Employees) think we're going in the right direction, and we're not sacrificing the long term for the short term. They feel we're working together, and they're respected and needed,” he says. “The emotional resilience of Ford and the love of the Blue Oval is incredible.”

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