Ford, Revving Forward

24/7 Wall Street sat down with Alan Mulally, who has been Ford's CEO for three years, on September 15. The interview covered Ford's major plans, the global car markets, and the effects of the recession. This is the first in a series of 24/7 Wall St. interview with large company CEOs to examine the future of business and industry as the world economy recovers. Excerpts:

24/7 Wall Street: We've talked to a lot of major corporations and we hear that this recession is so much different from previous ones, that there are some portions of their businesses that in a normal recession might come back. But the management at these companies say that there are some parts of their companies that will never return to what they were. These divisions will either eventually go away or are now so severely stunted that they will just barely survive as small operations. Are there parts of Ford that fall into that category?
Mulally: No, I think in Ford's case it's really more of what's kind of the inherent underlying demand for vehicles going forward.  Because as you well know we've incentivized people in the past to maybe turn their vehicles over, you know sooner rather than later. And I think in the United States—as you pointed out—with the squeeze on discretionary income and credit that even as the economy comes back there's probably more of a chance than not that it'll be a slower recovery on auto sales than we've seen in the past, which kind of gets at the heart of your question.

 

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Also, the quality of the vehicles is tremendously improving year after year but the underlying reasons that people are buying cars have really gotten focused. It's for high quality vehicles, reliable, fuel-efficient, and safe of course. And also, no matter what sized vehicle: is it smart, is it neat, is it useful, you know it is, "is it me?"  What we are thinking is that we are projecting a slower recovery than what we've seen in the past. And, of course, we've sized ourselves and we've increased our flexibility that we'll be able to move up in production, if it's warranted. But we clearly, with respect to history, have assumed a slower recovery in economic activity and a slower recovery in new car purchases.

Most people who run big companies don't want to say that there was one seminal decision that changed the fortunes of the company. But I think the impression is that your decision to take the $23 billion dollars was the critical decision that Ford made. Is that a fair assumption?
It's an important one. [But] I would really highlight five fundamental decisions. I think one key thing about the financial decision was also the timing. And when I first arrived three years ago this month, the U.S. economy was starting to slow down. We hadn't gotten to a recession yet, but it was really slowing down, and the rest of the world was starting to slow down. And then when we came together around what needed to be done to create a viable, exciting, profitably growing Ford it really had four elements that had to be done. One is we decided to focus on the Ford brand. And Ford really was a house of brands at the time. And that's one strategy. We weren't leaning on that. The customer wants brand clarity and everybody wants to know why they're coming to work. A decision we took is that we wanted to focus on the Ford brand. It was 85 percent of the business. We had operations all around the world. We started to divest Jaguar, Aston Martin, Land Rover, Mazda, Volvo, and really focus on Ford. And that takes time and takes money.

 

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The next thing we decided was that with this slowing down of the economy we had to restructure the business very quickly. And we were the first automobile company to actually take down the production of the current products to match this decreasing of fundamental demand because of the economy. That was a big decision. The car companies would tend to keep production up. They assumed the fixed costs were fixed, all of them. They would go for the incremental sale value. They would have to discount the vehicles and the dealers would discount the vehicles to sell them. The residual values would go down, and it would almost delay the economic recovery because you just have too much product out there. So we took a big decision to restructure the business. And that takes time and money to do that.

Then the next decision was that we wanted to accelerate the new products for Ford because in the United States we were always, for the last twenty years, known as a great SUV and truck company. But because of our cost structure we couldn't make cars in the United States and make them profitably. So we focused on cars outside the United States, and did very well. But we wanted to bring a full product line to the United States going forward because of our position that we thought our role was to deliver fuel efficient cars because energy would be more expensive going forward. We wanted to have a full product line from Ford: small, medium, and large.

And, the other key decision was that every new vehicle from Ford had to be best in class and quality. And best in fuel-efficiency, best in safety. And they will have really smart, neat design and neat features and be fun to drive. So you add all those things up, and that takes a financing plan. So that led us to "what does it take to finance this transformation"? I guess the backdrop of the economy slowing down. And so the most important thing we probably did, and I did at first was to make sure we had enough cushion and we raised enough money that we could [transform] Ford, and if it got worse we still had sufficient liquidity. So that led to the amount, and then of course at the time the credit markets were open, we had a great business case.

We had over 500 banks looking at our business plan and they're deciding whether they believe in you or not. We presented the case and we raised $23.5 billion. Now in hindsight, it looks brilliant. But really, I guess it is smart business, but looking back what we were really trying to do was to make sure we had a financing plan so we could continue this transformation of Ford. And that's what's being played out right now. We have the liquidity. We are restructured now. We're competitive. We have a new agreement with the UAW. We're bringing the new products on now; we didn't stop on the investment. And even with that full investment, we now are on a road to profitability in 2011, but we're there with all the products that people really do want.