Ford Benefits from CEO’s Turn to Road Less Traveled

But he’s perfectly chipper, showing off a 1903 Indian head penny sent to him by a Ford dealer’s son. For luck.

“Isn’t that great?” he says, peeling it out of its protective wrapper. “I’m going to keep that in my pocket.” 

Compared with the other two domestic automakers, Ford looks like it’s already been blessed. The automaker has $18.9 billion in cash and $10.7 billion in untapped credit, which Mulally says has his company positioned to survive the market falloff. 

That’s in stark contrast to General Motors and Chrysler, which say they need billions by this month to avoid filing for bankruptcy court protection. 

Not that Ford isn’t hurting: It lost $129 million in the third quarter and says it won’t be profitable again until 2010 — at the earliest. 

But its cash position puts it in the enviable position of saying it doesn’t plan to tap government loans that may be offered. That’s not unless things get markedly worse for the overall economy, or if one of its Detroit competitors goes under, disrupting the entire supply system. 

Is it luck or good planning that got Ford here?

Jeffrey Sonnenfeld, an associate dean at the Yale School of Management, says Mulally’s ability to move quickly and not let ego get in the way have helped the company achieve much more than many expected. 

“He has surprised an awful lot of people,” Sonnenfeld says. “He’s had the courage to say he’s largely accelerating a given plan, and he’s fortified the top lieutenants around him. He’s done a great job working with people who know what he doesn’t know about the industry.”

Mulally has said his strategy since he left running Boeing to take over Ford two years ago was to speed up the three-step line of attack the company had in place: cut production to match demand; make cars people want; and focus on core brands.

It’s not complicated, but it has meant breaking with old Detroit ways of doing things, selling brands people admired and laying off tens of thousands. 

Plus, he made one key decision three months into his tenure that set up Ford’s cash cushion today. In December 2006, Mulally decided to mortgage all of Ford’s assets — plants, buildings, real estate, patents and trademarks, including the Blue Oval — for $23.4 billion in cash. 

In a recent speech to the Rotary Club in Seattle, Mulally’s hometown, he had the audience laughing when he walked them through the steps of his deceptively simple strategy.

“I know,” he said, pausing for dramatic effect. “This is revolutionary.”

New way to do business 

Sarcasm aside, in some ways that thinking is a big departure from how the Detroit 3 have operated.

For decades, the U.S. carmakers dealt with their high fixed labor and production costs by pumping out more cars, regardless of market conditions. That spruced up their balance sheets, because carmakers book the profit on a car when it leaves the plant and is shipped to a dealer.

At that point, a complicated financing dance begins, with the automaker giving the dealers loans to pay for the cars until they’re sold. Then the automakers cough up thousands per car in rebates to persuade consumers to buy the car — ideally, coaxed by interest rate incentives with money borrowed from the automakers’ finance arms. 

Until recently, the Detroit automakers often made more money in a quarter from their banking operations than from making cars.

Under Ford’s plan, revenue won’t look as rosy as in the past because demand-driven production totals will be lower. But if that means cars can be sold without costly sales incentives, profits should improve.

“This is a completely new business plan, where we take the hurt,” Mulally says. “We are going to be the leader in sizing our operations to the real demand out there. And we’ll keep doing it. … No matter when (the market) comes back, no matter what the industry is, we’ve sized our operations to the real demand.”

That’s meant fewer jobs at all levels of the company. On Ford headquarters’ 12th floor, several offices sit dark and empty following a trimming of upper management. Ford has eliminated 14,000 jobs across all pay levels in the last three years and closed 17 plants, cutting $5 billion in costs. 

But being smaller is the only thing that makes sense in this environment, Mulally says, admitting he was a little surprised that industry leaders hadn’t approached business this way in the past. 

“It was the only thing I knew as a business person,” he says. “Clearly, this is a new plan for Ford, and it’s working. … We got on this journey, and for the first quarter, before the credit and financial meltdown hit, it was working.” 

What Mulally says was lacking before he came was “a point of view of the world.” The economy was slowing, he says, and had the potential to slow further, making a cash cushion critical. The company view now also includes the assumption that gas prices will rise over the long term and that while consumers still will want a whole range of vehicle sizes, they’ll demand category-leading fuel efficiency. 

“We developed a point of view about that, and it seems to be working,” he says. 

Compensation brings criticism

Mulally hasn’t been able to avoid public criticism. His starting salary — he earned $28 million in his first four months on the job — raised eyebrows in 2007 as Ford pushed to cut its workforce. And his personal use of company aircraft cost Ford $792,000 in 2007, as he earned $22 million in salary and bonuses. 

This year, he’ll make a base salary of $2 million, and bonuses have been suspended for all senior managers. Mulally has agreed to take just $1 in salary if Ford taps government credit. But he says he wants to avoid federal loans.

“It’s taxpayer money, and we take that very seriously,” he says.

Mulally says he went to Washington, D.C., to testify with GM CEO Rick Wagoner and Chrysler CEO Bob Nardelli to show his support and help convince politicians that the industry is important enough to help save. In the process, Ford got lumped in with GM’s and Chrysler’s woes, sitting through a verbal assault from politicians intent on making the automakers answer for past mistakes. 

Even Mulally’s mom could see Ford was taking a bruising. Mulally says she watched every minute of the hearings on C-Span, and called him afterward to ask why no one seemed to be listening. 

An image at issue

In the long run, the congressional hearings could hurt Ford’s image.
Like GM and Chrysler, the automaker has been battling an image problem with consumers. While overall quality has gone up, bringing Ford’s quality in line with Toyota’s according to one recent study, and fuel efficiency is improving, there’s a gap between consumer perception and reality. 

“In the court of public opinion, they are all one in the same,” says Leslie Gaines-Ross, chief reputation strategist for public relations firm Weber Shandwick. “They’re all looking for help. If anything happens to any of those companies, it’s going to impact every situation. I think that’s how the average consumer looks at it. 

“There is so much distrust of companies today that it’s very hard to distinguish one company from another,” Gaines-Ross says. “But it’s certainly possible to change perceptions. … It’s just going to be crucial to get the message across.”

Jim Farley, group vice president of marketing and communications for Ford, says he’s been frustrated by some of the debate in the media about the bailout. “It’s one thing for the consumers, but for the mass media and our real thought leaders in the country to literally have a five- to 10-year-old image about where Ford Motor Co. is, it’s mind boggling.” 

Still, he’s never seen so much interest in the auto industry. And Farley says he thinks the conversation will change as soon as people delve more into the details about each company. 

“It’s raising the awareness to a level that we couldn’t do with all the marketing money in the world,” Farley says. “If GM, Chrysler and Ford joined up tomorrow, we could not get the American public to be as interested in the car companies’ health as it is right now.” 

Farley, who was lured to Ford from Toyota a year ago by Mulally, says he’s excited about the future of Ford: Working there is a lot like working at Toyota in the 1980s, when they were working to build their market and persuade people to buy their products. 

Farley says Mulally has had a laser focus on his plan, and managed to rally people around his vision.