Autos

The 24/7 Wall St. Interview With Ford CEO Alan Mulally

ford24/7 Wall St. sat down with Alan Mulally, who has been Ford’s (F) 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.

The Interview:

24/7: Business analysts are very interested in the effects of the recession on America’s largest companies.   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.

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.

24/7:  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?

Mulally: It’s an important one that, 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 now the US was starting to, the 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. But the way the world’s going, and information being ubiquitous and the customer wanting 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% of the business.  We had operations all around the world.  So really focus on that Ford brand. We started to divest Jaguar, Aston Martin, Land Rover, Mazda, Volvo, and really focus on Ford.   And that takes time and takes money.

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.  And 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 that takes 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 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. Cars, utilities and trucks.

And, the other key decision we decided was that when we bring out the new products that every new vehicle from Ford had to be best in class and quality, with the best in the world.  And best in fuel-efficiency, best in safety.  And they will have really smart, neat design and neat features and 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 do the transformation of Ford, and if it got worse we still had sufficient liquidity so we could continue the transformation to the new world.  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 your business plan and they’re deciding whether they believe in you or not.  So Ford had all the elements of that transformation, we presented the case, and then we raised $23.5 billion.   Now in hindsight, you know 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.

24/7:    Many analysts say that the number of months that people will keep a car is going to go up in the United States by 6 or 7 months for the average vehicle.  How much will that harm Ford since it must deal with the impact of this recession overall at the same time people hold vehicles longer?

Mulally:  We have assumed that the average age will go up a little bit because, that’s why we have a relatively slower recovery in the automobile market.   And it could be that there is less discretionary income right now; it could be unemployment.  You know as we go through this recovery, this is a very different kind of recovery because of the United States’ economic situation, and our deficit and our trade imbalances.  And so it’s just prudent for us to plan for a slower recovery than what we have seen historically.   So I’m not sure which one of the reasons will contribute to the slowness. And, the products also are most reliable.  I guess the big backdrop when you have a market of 12 to 15 million cars there are a lot of cars in the United States that really do need to be replaced.  But we have been conservative on that recovery.

24/7: In China, which obviously has a chance of becoming the world’s largest car market this year Ford sold 172,000 cars in the first half of the year.  Then there was an acceleration of cars sales in China in the third quarter for Ford and those sales numbers almost doubled over the same period last year.

Mulally:  We were bringing capability online.  We’re growing as fast as we can right now.

24/7: Ford is growing fast in China. However you are relatively smaller than some of the car companies that are the market share leaders there right now.  Since the Chinese market is likely to be the world’s largest car market, probably this year, can you increase market share there?

Mulally: Yes, absolutely. We started kind of relatively late with respect to some key competitors.  But now we are moving almost as aggressively as we can.  The Chinese love Ford product line, they love the quality, the fuel-efficiently, the safety, the brand.  We’re expanding our dealer network, we’re expanding our manufacturing capability, our R&D manufacture, and we’re linking development of the Chinese market to our one Ford plan where we use our resources worldwide across Europe, United States, and Asia-Pacific.  So we are going to accelerate our plans because we really believe we have a good foundation and I think we’re going to be one of the key vehicles of choice, or brands of choice, in China going forward.

24/7:  Investors and the public are confused about the US car market. It produced 16.4 million unit sales four years ago and then dropped to below 10 million this year.

Mulally:  It was even up to 18

24/7:  A run rate of 18?

Mulally: That’s right.

24/7:  Does Ford have to pick up a lot of market share the United States to be profitable based on how much you predict that the US market will grow?

Mulally:  No.  A key part of our plan was we restructured to get back to operating profitably at the current lower demand.   So you would imagine that when we can operate profitably now that everything when we move up just increases our profitability.   And in the United States, going back to the markets the way you described it, longer term. Different economic cycles play out differently around the world, but in general when you look at the inherent demand that goes with the population and the economic development and discretionary income about a third of the market, total worldwide market, will be the Americans.  About one third will be Europe and Russia and Africa, and about one third will be the Asia-Pacific region.   You have mature markets, like the United States and Europe, and then you have faster growing markets like the Asia-Pacific. But when you look at the total market its about one third, one third, one third.  Now the neatest thing about Ford is that Henry Ford originally set up Ford to operate in all the regions around the world.  Not only to make great cars for everybody, but also to provide great employment and opportunity.   And so the neatest thing we’re doing now is integrating those operations so we act more like one Ford, so we get the scale of operating around the world but also the customers get the uniqueness of what they want, and there are also the opportunities to participate in Ford.  So, we really are moving aggressively to operate as one global company but with significant operations in every country in which we do business.

24/7: In the event that you build market share from whatever your base was last year in the US, it’s a bonus from a profitability standpoint?

Mulally:  Absolutely.  And in Ford’s case our plan is to have this full product line, which we haven’t before.  So it gives Ford a tremendous opportunity to participate more broadly in every market segment.  You think about just the smaller cars in the B and the C segment, we’ve had the Focus.  We’re completing against some great companies that have 3, 4, or 5 models.  Well within two or three years we’re going to have the Fiesta, the Focus, the Fusion, the Taurus, smaller vans, all on these common platforms worldwide but tailored to the United States’ market.  So within two or three years we’re going to be as competitive, or more competitive than any of our global competition.  Plus we have the scale of Ford.

24/7:  Does the Eco-Boost engine, that initiative, actually give Ford the opportunity to compete in a market where people might buy a hybrid or they might buy an alternative energy car?   Can Ford sell them something today that has horsepower and much better mileage?  Does Ford have to wait to have a full line of five generations like the Toyota Prius or are you in that  low mileage market now?

Mulally:  Absolutely.  And that is a very key element of our Ford product strategy.  And it starts with improving the internal combustion engine.  There’s a tremendous opportunity of improving the internal combustion engine.   Direct fuel injection, turbo charging, all of the integrated electronics, taking the weight out of the vehicle.   We can make a significant improvement.  In just the case you mentioned, on eco-boost, that’s a 20% improvement in fuel efficiency and a 15% reduction in C02 right off the top.  In Ford’s case that technology goes into every vehicle.  Whether is a small, whether it’s a medium sized, whether it’s a truck.  All of them get that improvement.  Remember our commitment to the customer is every vehicle is best in class on fuel-efficiency, as well as quality and safety.  Now, you think about the technology road map.  There will be more and more hybrids but hybrids are, the issue is that do you get batteries that work, that are cost effective, get the weight down, get the cost down because you’re carrying two power trains.  Then you move to all electric vehicles.  The key there is the batteries, right? Then you move to maybe a hydrogen world.  It’s going to be every combination of that goes forward.  But the neat thing about the Ford plan is that the foundation is based on a proven internal combustion today. So right away you get the improvement today any sized vehicle you want, knowing that as we go forward that we’re going to continue to improve the fuel-efficiency on every vehicle year after year and forever using the enabling technology.   So that’s a real plus for Ford.

24/7: Mr. Mulally, thank you for your time.

Douglas A. McIntyre