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Ford Sought to Simplify in 2007

Executive Summary

Disaster struck in January, when Ford posted a $12.7 billion loss for 2006 – the worst in its 104-year history.

Special Report

2007 Year in Review

At the onset of 2007, Ford Motor Co. President and CEO Alan Mulally found himself five months into his tenure atop the troubled auto maker, and critics were calling for results.

Mulally responded by formulating a plan he called the “one-Ford” strategy.

The methodology was simple – change Ford from a global auto maker with insular regional units into a unified operation that would share components, platforms and engineering expertise worldwide.

The one-Ford strategy was inspired, in part, by Toyota Motor Corp. During his tenure as CEO of Boeing Commercial Airplanes, Mulally became enamored with the Japanese auto maker’s efficient manufacturing system.

Toyota also was the subject of rumor after Mulally’s January meeting with its chairman, Fujio Cho, in Tokyo. The official explanation from Ford was that the two executives discussed “a variety of topics of mutual interest.” A Toyota spokesman called it a “get-acquainted meeting.”

Before the dust settled, the wagging tongues of “sources close to the situation” filled media reports with speculation about partnership negotiations, particularly in the development of hybrid-electric vehicles and fuel-cell technologies.

Mulally eventually addressed the rumors directly, telling journalists at the 2007 North American International Auto Show in Detroit that he saw an opportunity for technology swapping between Ford and Toyota. By year’s end, however, nothing had culminated from the meeting.

During Mulally’s speech in Detroit, he also said Ford’s money-losing Jaguar Cars subsidiary was not for sale. As the year progressed, however, he had a change of heart, announcing July 26 the sale of Land Rover and Jaguar Cars was “probable.”

Pundits who speculated about a partnership between Ford and another giant corporation eventually were proven right when the auto maker used the Detroit auto show to unveil Sync, a new in-vehicle telecommunications system developed with Microsoft Corp.

Sync promised to change the way drivers interact with mobile electronic devices while driving. It provided hands-free operation of cell phones and MP3 players, such as Apple Corp.’s popular iPod. A brand-wide rollout of the device was ongoing as 2007 drew to a close.

Also during the Detroit show, Ford unveiled its Lincoln MKR concept, saying it represented a new design language that would be carried forth into the ’09 Lincoln MKS luxury sedan.

The concept borrowed cues from Lincoln’s past, including a double-wing grille, which was inspired by the ‘41 Lincoln Continental Cabriolet.

“This concept is the ultimate expression of elegant simplicity consistent with the world’s best Lincolns,” said Peter Horbury, executive director of design-The Americas. “And this new design language will lead us forward in the growing premium segment.”

Perhaps the most intriguing part of the MKR debut was its powerplant – a 3.5L gasoline twin-turbocharged, direct-injection V-6 called TwinForce.

Ford remained mum on the details surrounding TwinForce, but as the year wore on it became clear the auto maker had big plans for the technology. Ford confirmed the MKR-inspired ’09 MKS, which bowed in November at the Los Angeles auto show, would benefit from direct injection and turbocharging, as would the Ford Flex cross/utility vehicle, scheduled for launch in 2008.

Ford also was high on 6-speed gearboxes, distancing itself from the continuously variable transmission technology it had touted previously. Indeed, Ford pulled CVTs from its ’08 Taurus and Taurus X models.

In addition to engines and transmissions, the auto maker began concentrating on improving the noise, vibration and harshness levels of its vehicles. Development of the Ford Edge CUV (a North American Truck of the Year nominee) and its platform-mate, the Lincoln MKX, benchmarked NVH levels of competitors such as the Nissan Murano, Toyota Highlander and Lexus RX.

Going forward, Ford promised best-in-class NVH levels in all its vehicles.

Also at the Detroit auto show, Mark Fields, president-The Americas, said Ford was studying the feasibility of bringing a B-segment car to the U.S.

“If we do a B-car, it’s going to come off global architecture,” Fields said. “In terms of how it will look, sheet metal, etc., we have to conduct a good amount of research to see what would be a hit here in the U.S.”

As fuel prices rose, the urgency to introduce a B-car to Ford’s home market escalated, and Mulally told a New York auto show crowd the long-awaited small car would be unveiled at the 2008 Geneva motor show with the same underpinnings as the re-engineered Mazda2. Production of the Ford derivative, scheduled for sale around the world, was targeted for 2009 or 2010.

On the opposite end of the vehicular spectrum, Ford also revealed it was developing a premium gasoline engine for its large trucks that would likely find its way into the Mustang pony car.

Industry observers said the new mill would be an evolution of the so-called “Hurricane” engine program that was announced in 2005 as a so-called Hemi-fighter. Barb Samardzich, Ford vice president-powertrain product development even hinted the new engine might take on the storied “Boss” moniker.

However, as 2007 drew to a close, the so-called Hemi-fighter had yet to emerge.

Catering to growing consumer demand for better fuel economy, Ford unwrapped a hydrogen-powered, plug-in hybrid version of its Edge CUV at the Washington auto show. The new powertrain, dubbed HySeries, combined an onboard hydrogen fuel-cell generator with lithium-ion batteries to deliver more than 41 mpg (5.7L/100 km) with zero emissions.

However, the lack of a hydrogen-fueling infrastructure and fuel-cell durability issues relegated HySeries to the test track.

While Ford’s drawing board showed promise in 2007, its books told a disturbing story. The auto maker began the year under the dark cloud of a $12.7 billion full-year 2006 loss, the worst financial performance in its 104-year history.

Despite the doom-and-gloom headlines that blasted the company from coast to coast, Mulally maintained a stiff upper lip, vowing the auto maker was on track to cut $5 billion in costs by 2008.

Lessening the impact of the loss was Ford’s $33.9 billion in cash, most of which came from the $23.5 billion it borrowed to pay for restructuring costs.

In another move to raise cash, Ford continued to seek buyers for its Aston Martin Lagonda Ltd. subsidiary. Rumors circulated about prospective buyers, with private equity groups named as front-runners.

Ford, in March, sold its majority stake in Aston Martin for $925 million to a consortium led by Prodrive Ltd., a motorsport company headed by racer and businessman Dave Richards. The consortium also included Aston Martin racing booster and collector John Sinders.

Meanwhile, Kuwait investment firms Investment Dar and Adeem Investment Co. Ford retained a share of Aston Martin valued at $77 million.

In an effort to jumpstart sales of its slow-selling Ford Five Hundred and Mercury Montego sedans and Freestyle CUVs, the auto maker announced the vehicles would be refreshened and rebadged as Ford Taurus, Mercury Sable and Ford Taurus X.

While Mulally was heralded for departing from Ford’s naming strategy of having all cars begin with an “F” and all utility vehicles begin with an “E,” the name change did little to spur sales.

At the same time, the one-Ford strategy began to resonate in Europe.

“Maybe we’ve been looking at markets in a too-fragmented way,” Lewis Booth, executive vice president-Ford of Europe and Premier Automotive Group, told Ward’s in August. “This is what North America needs; this is what Europe needs; this is what Asia/Pacific needs.

“But in truth, we’re competing with the same competitors. So if Toyota (Motor Corp.) can have one car that works well in each region of the world, with some local tailoring, then we should be able to do the same.”

The Russian market responded to Ford in 2007, prompting the auto maker to boost production at its St. Petersburg assembly plant – home to the Ford Focus. Ford also announced plans to add the Ford Mondeo to the assembly line.

While concentrating on leveraging Ford’s global assets, product guru Derrick Kuzak also set out to change negative consumer perceptions of the auto maker.

Throughout the year, Ford had garnered top marks in several quality studies, yet it did little to bring consumers back to the Blue Oval. To drive the quality message home, Kuzak and his team adopted a technique to educate consumers on Ford’s quality improvements in a timely manner, rather than waiting for the public to gradually take notice.

“We recognize it’s going to take time to become known for (quality improvements) across the entire customer base,” Kuzak said. “So in our vehicles, we’ve spent a lot of time and effort on what we call “perceived quality,” because that’s a way you can change customers’ perception very quickly.”

Against the backdrop of quality improvements and the one-Ford strategy, the auto maker worked to right-size itself, vowing to reduce its hourly and salaried headcount through a series of early retirements and buyout packages.

Mulally was forced to quash rumors he was unhappy with his global leadership team, particularly Fields. Despite these assurances, Mulally pared back executive numbers.

Gone by November was Francisco Codina, group vice president, North American marketing, sales and service. Meanwhile, Richard Parry-Jones, group vice president and chief technical officer, retired.

Codina’s departure opened the door for the hiring of Jim Farley as Ford’s new chief marketing officer. Luring Farley from Toyota, where he served as group vice president of the Lexus Div., was seen as a major coup for Ford.

Ford also made a concerted effort to reduce its U.S. dealership count in 2007, especially in large metropolitan areas. The auto maker said it wouldn’t offer buyouts to dealers. Rather, it would rely on attrition to trim its dealer ranks.

The auto maker surprised analysts by posting a better-than-expected first-quarter net loss of $282 million, a significant improvement compared with the $1.4 billion loss in like-2006. Mulally said the results showed his plan was working and reiterated his vow to return the firm to profitability by 2009.

Ford once again beat Wall Street predictions in the second quarter, by posting a profit of $750 million. However, the auto maker took a minor step back in the third-quarter with a $380 million loss, mostly due to a poor performance in its home North American market.

Still, Mulally’s plan was gaining traction. Only one significant obstacle remained in the waning months of 2007 – a new 4-year labor agreement with the United Auto Workers union.

A contract reached in November offloaded health-care benefit costs to an independent, UAW-administered fund and established a lower wage tier for new hires whose jobs were not directly connected with vehicle assembly.

The deal covered about 54,000 Ford employees, 94,000 retirees and 28,000 surviving spouses. Production workers voted 81% in favor, while the approval margin for skilled-trades personnel was 79%.

The contract came close to narrowing Ford’s hourly cost disadvantage of $31 per worker, compared with foreign competitors such as Toyota’s U.S. operations.


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