Staying the Course

Scorched by Standard & Poor's and singed by sagging car sales, Ford Motor Co. is feeling some heat. Nevertheless, Jim Padilla feels right at home.

“Padilla means ‘cook’ in Spanish,” says Ford's executive vice president and president-North America.

And as the auto maker's revitalization plan enters its third year, Padilla prepares to dish up some crow for the auto maker's critics.

“In '03, we made a lot of progress in North America,” Padilla tells Ward's in an exclusive interview. “We said our top priority was quality. And we've made tremendous improvement…as measured by our own internal data, as measured by a billion-dollar savings in warranty cost.”

Consider also the recent accolades bestowed on the Ford Focus, he notes. Once viewed as a lemon, Consumer Reports ranks it first among small cars in the publication's 2004 new-model preview.

Meanwhile, a solid showing in this year's J.D. Power and Associates' Initial Quality Study helps erase the bitter taste of 2001 and 2000, which were rife with recalls, Padilla says. What's his recipe for 2004, a year he expects to track 2003 with a market approaching 17 million units?

“We're going to stay the course. We're going to continue to drive quality improvements. We know how to do that.”

Perhaps, but Standard & Poor's — not unlike Moody's and Fitch — is unmoved.

Despite declaring Ford's outlook to be stable — which compares favorably with the negative tag hung on General Motors Corp. and DaimlerChrysler AG — the rating service downgrades the No. 2 auto maker's long-term credit rating to BBB-minus. And this invites the undesirable description: one step up from junk status.

“Several years of deep discounts have likely exhausted any pent-up demand for new vehicles among American consumers,” S&P Analyst Scott Sprinzen writes, while predicting industry sales likely will increase next year, inching over 2003's anticipated volume of 16.4 million to 16.7 million units toward 2000's all-time record of 17.4 million.

But Ford's product lineup, he suggests, is leveraged heavily against cars. Indeed, sales of Ford-brand cars were down 7.6% through the first 10 months of this year, compared with a 1.6% decline for light truck sales.

Sales of Mercury cars and light trucks were off by nearly equal proportions, but the disparity at Lincoln was wide enough to drive a Navigator through. Prior to Nov. 1, Lincoln car deliveries were down 21.2% compared with a 97.9% increase on the brand's truck side.

“Within their global operations, Ford and (General Motors) have little to mitigate the risks of their North American operations,” Sprinzen adds. “Both — especially Ford — are still struggling in Europe. GM does have a good position in the highly promising Chinese market; not so, Ford. DaimlerChrysler is considerably more diversified than GM or Ford, owing to its global luxury vehicles and truck operations, as well as its various other businesses.”

Ford does a slow boil, even though the neutral outlook pronouncement immediately pushes its stock price up nearly 6.1%. In an e-mail to employees, Chairman and CEO Bill Ford Jr. writes: “Given our steady progress and increasingly promising future, we believe this rating does not accurately reflect the state of our business.”

Publicly, the auto maker serves up a statement by Chief Financial Officer Don Leclair. “We do not agree with Standard & Poor's conclusion,” LeClair says. “The facts speak for themselves.”

Among them:

Padilla puts some meat on these bones by way of explanation. Ford has more than 120 teams tasked with identifying areas where cost reductions might be realized.

“Uniforms in our plants,” he says, illustrating just how far down the food chain Ford's efforts extend. “We defined some best practices, and we saved $3 million on coveralls. Can you believe it? Three million bucks!”

Then comes the entrée. For Wall Street skeptics and product-starved dealers, Ford rewrites its menu for '04.

“We're going to go after cars,” Padilla says. “We've got the Ford Five Hundred coming. We've got our first crossover with the Freestyle. Then we've got the Mustang.”

And the special? Ford GT.

On the side, there's Mercury, Padilla adds. In addition to the Monterey minivan, the storied brand will benefit from late-year introductions of the Mariner — which shares a platform with Ford Escape — and the Montego, fraternal twin of the Five Hundred sedan.

However, Padilla well knows that product is only the icing on the cake. Relationships are what sustain a successful auto maker, he suggests.

He notes with pride Ford's efforts to restore what had become a rocky rapport with dealers as the Jacques Nasser era came to a close in 2001.

“I think we've moved a lot closer,” Padilla says. “We certainly have made sure that we (appointed) strong people who understand the distribution system and understand (being in) leadership positions.”

He lists Jim O'Connor, group vice president-North America marketing, sales and service; Steve Lyons, president-Ford division; Darryl Hazel, president-Lincoln Mercury; and Francisco “Cisco” Codina, vice president-customer service division.

The latter replaced rising star Kathleen Ligocki, who left Ford mid-year to become president and CEO at auto supplier Tower Automotive.

All together, the 4-member team represents “probably 120-some years of seasoned experience.”

Of dealers, Padilla says: “We need to respect them and, frankly, value them as tremendous contributors. That's my view.”

Careful to keep optimism within the bounds of reality, he adds: “We're not perfect. We're not going to jump to the top of the page on the NADA (National Auto Dealers Assn.) survey.”

Then there are suppliers.

“Our suppliers have done a very good job in my view, of stepping up in many ways,” he says, crediting Ford's parts and component makers with ensuring smooth launches, such as the F-150 program — the company's bread and butter.

“We work very closely with them on cost improvements. We've made substantial, record-setting cost improvements this year. But by the way, we're going to need another record next year because that's the way the business is going.”

How does an auto maker improve on a performance that saw its full-year cost reduction goal — $500 million — surpassed in six months? In part, through Team Value Management (TVM), a collaborative attack plan pioneered at Ford of Europe.

Currently, Padilla says, Ford has deployed more than 60 teams to “find where suppliers stand” and ask three key questions: “What is the gap between them and the best? What is the plan to close the gap? How can we do that together?”

Ford benefited from a unique display of togetherness engendered by the successful conclusion of contract talks with the United Auto Workers union.

The two sides settled their differences without a work stoppage, and Ford came away with agreements to allow the closure of two assembly plants — one each in Edison, NJ, and Lorain, OH.

“I think the new agreement offers us more flexibility,” Padilla says, uttering Ford's buzzword for the 21st century.

By the end of 2004, the auto maker will have five assembly sites featuring flexible manufacturing capability, he promises. They are: Kansas City; Chicago; Dearborn; Norfolk, VA; and AutoAlliance International Inc.'s plant in Flat Rock, MI.

“As we bring new products in, we will be introducing flexible manufacturing. Hermosillo (Mexico) will be flexible in ‘05,” Padilla adds, referring to the home of Futura, vanguard of an '06 wave of all-new Ford cars.

Will incentives still be on the bill of fare when the C/D-sized Futura bows with its Mercury and Lincoln iterations? Perhaps.

But Padilla is certain they'll still be around in 2004.

“I think that the nature of competition is going to continue,” he says. “Yes, incentives are expensive. We spend incentive money where we need to spend it (and) we don't spend as much as the other guy (GM). From a marketplace standpoint, we've improved our revenue per unit. You look at third quarter this year vs. third quarter last year; we're up by about $930. What that means is it goes right to the bottom line.”

Such performance has not gone unnoticed. Says John Casesa of Merrill Lynch: “We continue to believe that Ford is in a tough spot between (GM) and the Japanese, but management is doing an impressive job of limiting the damage.”

Proof that too many cooks don't always spoil the broth.