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Ford Weathers Tumultuous 2008

Executive Summary

Ford vowed to return to profitability by 2009, but little did it know the perfect economic storm was brewing that would force it to seek billions in federal aid by year’s end.

Special Report

2008 Year in Review

Ford Motor Co. began 2008 with a rosy view of the future, despite a dismal 2007 that culminated in a 12.2% decline in U.S. vehicle sales.

Even a slight 4.1% decline in January demand did little to dampen the mood. Ford’s lineup of cross/utility vehicles and its Focus small car were outperforming the market, and it appeared the auto maker’s turnaround plan was beginning to take hold.

“We’re very pleased with the (sales) result,” Jim Farley, group vice president-marketing and communications, said at the time. “Our dealers really delivered this month, despite a challenging economic and competitive environment.”

Ford vowed to return to profitability by 2009, but little did it know the perfect economic storm was brewing that would force it to seek billions in federal aid by year’s end.

Early in 2008, CEO Alan Mulally sought to divest Ford of so-called “non-core” assets, including the auto maker’s Land Rover and Jaguar Cars subsidiaries.

The front-runner to purchase the two iconic British marques was India’s Tata Motors Ltd., which was seeking to establish itself as a global player in the automotive industry.

Others bidding for the two brands were Indian auto maker Mahindra & Mahindra Ltd. and U.S. private-equity firm One Equity Partners LLC.

Merrill Lynch estimated the two brands were worth $1.5 billion.

While negotiations for Jaguar and Land Rover continued, Ford began to craft a new powertrain strategy that was spearheaded by Derrick Kuzak, group vice president-global product development.

“We recognize the need to be part of the solution of global warming, part of the solution of addressing our global security,” Kuzak said. “We also recognize the problem is complex. It is not one single solution; solutions will develop over time. But for us, the one fundamental principle to the approach is (carbon-dioxide) solutions that are economical and efficient.”

Key to Ford’s powertrain strategy was its gasoline turbo direct-injection technology, dubbed EcoBoost, as well as widespread use of several weight-savings and high-efficiency technologies.

EcoBoost, originally badged TwinForce, enables the retention of fuel-efficient, lower-displacement engine architectures, while promising the performance associated with larger, thirstier mills. Overall, the technology was expected to deliver 20% better fuel economy and reduces emissions.

Ford’s plans called for some 500,000 vehicles powered by EcoBoost to be on North American roads by 2012. Additionally, Kuzak said more hybrid-electric vehicles and diesels would play roles in Ford’s efforts to increase fuel efficiency and slash emissions across its fleet.

Other existing technologies integral to Ford’s powertrain strategy included battery-management systems, aerodynamic improvements and electric-power assisted steering (EPAS).

Between 80%-90% of Ford, Lincoln and Mercury vehicles are to have EPAS by 2012, Ford says.

Long-term, which Ford describes as 2020 and beyond, its powertrain plans called for high volumes of hybrid-electric vehicles as the technology becomes more affordable. Clean electric, plug-in hybrids and hydrogen-fueled vehicles also are on the horizon, Kuzak said.

While Ford’s powertrain plans were being formed, so was its strategy to become a leader in in-vehicle technology.

At the heart of the strategy was a multi-media system developed with Microsoft Corp.

When Ford first began offering Sync in model year ’08, it vowed to keep improving the system. It lived up to that promise in January with the announcement new Sync software upgrades would be available, including “911 Assist” and “Vehicle Health Reports.”

Like General Motors Corp.’s OnStar in-vehicle communications system, 911 Assist alerts authorities in the event of airbag deployment. However, unlike OnStar, a subscriber-based service, there is no additional charge for 911 Assist.

Sync’s Vehicle Health Report also borrowed a cue from OnStar, which is capable of producing vehicle diagnostic reports to owners, but with one notable difference.

Whereas OnStar provides owners with monthly e-mails, Sync users are required to access a website, syncmyride.com, to get relevant diagnostic information.

Meanwhile, Ford’s future product onslaught began to take shape when the Verve small-car concept bowed at the 2008 North American International Auto Show in Detroit.

The Verve was to serve as the basis for a new small car to be sold beginning in 2008 in various global markets, before landing on U.S. shores in 2010.

The Verve benefited from Ford’s years of expertise building small cars for the European market, Kuzak said.

“We’re looking at every aspect of what has defined Ford as a small-car leader in Europe and (we’re) working to build on this expertise in driving dynamics and design across the global family of Ford cars that are as exciting to drive as they are to look at,” he said of the concept, which would be renamed Fiesta in production form.

The Fiesta was meant to appeal to two key buyers: those looking for a high-mileage vehicle due to escalating fuel prices and the so-called “Millennial Generation,” which Ford describes as 13- to 28-year-old consumers.

“Millennials will be the defining group of customers in the future, driving all types of consumer trends,” Farley said of the 1.7 billion-strong consumer segment.

“Ford’s European-based cars are a great fit for this generation of drivers, who have grown up with the Internet and mobile phones as necessities, not luxuries – believing that bigger isn’t necessarily better, precision is everything and technology rules.”

The Fiesta was a sign of things to come, as later in the year Ford announced it would bring several European vehicles to North America, including the Ford Transit Connect compact commercial van, which is to make its way to North America in mid-2009.

While Ford was shoring up its core blue oval brand, dealers and workers, alike, were concerned the Mercury brand had a date with the chopping block, indicated by a lack of new product in the pipeline.

Farley attempted to quash rumors Ford would pull the plug on Mercury, pointing to powertrain upgrades in the Mariner CUV and upcoming Milan hybrid as evidence the auto maker was not abandoning the marque.

“I think you’re seeing a continuing investment in Mercury and Lincoln for both to grow,” he told reporters following Ford’s annual franchise meeting.

However, Ford executives left the door open for Mercury’s eventual demise.

Asked if he could positively say whether Mercury had a future, Mark Fields, president-The Americas, said, “Anything is possible.

“We’re very much focused on the assets we have today and how we leverage them for our mutual benefit, and that’s the focus of our discussions,” he said. “We can hypothesize about what can happen, but who knows what can happen?”

While Ford was preparing its product cadence and other strategies for the future, it worked to slim its workforce by offering its 54,000 hourly workers a number of early retirement and buyout packages to make way for new, lower-wage hires.

Under terms of the UAW contract inked in late 2007, Ford is allowed to pay entry-level hourly wages of about $14.20 to 20% of its union-represented workers. Current UAW employees earn about $30 an hour, excluding benefits.

Ford also attempted to rid itself of an estimated 5,000 Ford workers remaining at Automotive Components Holdings LLC plants.

ACH is composed of orphaned manufacturing plants and other facilities the auto maker acquired from former subsidiary Visteon Corp. in 2005.

Ford said it wanted to sell or shutter the 11 remaining ACH plants by year’s end.

In late March, Ford parted ways with its Jaguar Cars and Land Rover subsidiaries, selling the two iconic British luxury marques to India’s Tata for $2.3 billion.

Under terms of the agreement, Ford was to contribute about $600 million to the Jaguar and Land Rover pension funds at the deal’s closing, which occurred at the end of the second quarter.

Following the sale, Mulally said the brands have a bright future under Tata. “We are confident that they are leaving our fold with the products, plan and team to continue to thrive under Tata’s stewardship.

“Now, it is time for Ford to concentrate on integrating the Ford brand globally, as we implement our plan to create a strong Ford Motor Co. that delivers profitable growth for all.”

As the year progressed, Ford’s restructuring plan caught the attention of billionaire investor Kirk Kerkorian, who promptly began to gobble up shares of the auto maker’s common stock.

At one point, Kerkorian’s Tracinda Corp. investment firm held 140.8 million shares, representing a 6.49% stake in Ford. But as the year progressed and economic conditions worsened, Kerkorian began shedding his holdings in the auto maker.

Worsening economic conditions also forced Mulally to rescind the goal of reaching profitability in 2009.

“The challenge affecting the entire industry is the accelerating shift in consumer demand away from large trucks and SUVs to smaller cars and crossovers – combined with a steep rise in commodity prices and the weak U.S. economy,” he said.

In addition to scrapping its profitability target, Ford in May said it would slash its salaried workforce up to 12%. Since the end of 2005, Ford had cut its salaried workforce by 11,000 employees.

Toward year’s end, the auto industry took a turn for the worse, as sales began drying up amid a lack of credit for potential car buyers, Ford began to explore other alternatives to raise cash, including the possible sale of its Volvo Car subsidiary.

After posting a pre-tax third-quarter loss of $2.6 billion, Ford announced it was reducing its 33.4% stake in Mazda Motor Corp. to about 13%, a move that netted roughly $540 million.

Ford’s efforts to shore up its balance sheet, including securing a $23.4 billion line of credit in 2006, paid off.

As the year came to a close, Ford’s cross-town rivals GM and Chrysler LLC were running precariously low on cash, forcing all three auto makers to appeal to the federal government for billions in bridge-loans to continue operations into 2009.

Mulally joined the other two CEOs of the Detroit Three auto makers in Washington in an effort to secure $9 billion in loan guarantees it vowed not to tap unless economic conditions worsened. Ford’s situation appears not as dire as GM and Chrysler’s, as Mulally has said the auto maker has sufficient liquidity to last well into 2009.

Despite being in a better situation than its domestic competitors, there was no end in sight to the market downturn, which is casting a shadow over Ford’s future as it enters the New Year.


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