FORD MOTOR COMPANY: THE WAY FORWARD

In 2006, the Ford Motor Company confirmed plans to cut between 25,000 and 30,000

jobs in North America. The company announced that it would close 14 factories by

2012 to cut losses in North America, which reached $1.6bn (£900m) in 2005. The cuts

represented about 25% of staff in the region and were further bad news for the

American auto industry, which had been hit hard by foreign competition. The Ford

restructuring, named “Way Forward”, was the second large-scale retrenchment since

2002, when 35,000 jobs were cut. On 24 January 2006, Ford shares rose almost 9% to

$8.58 in early trading on Wall Street.

As well as Ford itself, the company's brands include North America's Lincoln and

Mercury, British marques Jaguar and Aston Martin, Sweden’s Volvo and Land Rover,

bought from BMW in 2000 and Japan’s Mazda (of which it has virtual control with a

33% stake).

Essence of Ford’s Vision, Mission and Values

Ford’s vision was to become the world’s leading consumer company for automotive

products and services. In mission terms, it regarded itself as a “global family with a

proud heritage passionately committed to providing personal mobility for people

around the world” (Company Report, 2004).

The company’s values are expressed through anticipating consumer needs and

delivering outstanding products and services that improve people’s lives, driven by a

customer focus, creativity, resourcefulness, and entrepreneurial spirit. Other values

comprise: respect and value of everyone's contribution; health and safety of employees;

leadership in environmental responsibility; positive contribution to society; superior

returns to our shareholders.

Background to the Restructuring

The North American operation had been struggling against fierce competition from

Asian manufacturers, high labour and raw material costs, and consumers’ shift from

high-margin sport-utility vehicles as oil prices soared.

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Ford’s rival General Motors indicated in 2005 that it would cut 30,000 jobs from its

north American workforce. Waves of job cuts had devastated cities built on industry.

As a result, Detroit - Ford and GM’s home town – was regarded as the poorest big US

city.

Bill Ford Jr., the chief executive, said: “These cuts are a painful last resort. In the long

run, we will create far more stable and secure jobs. We all have to change and we all

have to sacrifice. But I believe this is the path to winning.” Ford’s global auto business

lost $1bn, the massive losses in North America outweighing gains in Europe, Asia and

elsewhere. Ford Europe and the Premier Automotive Group, which includes Jaguar,

Volvo and Land Rover, reported a combined profit of $36m, after making a loss of

$626m in 2004. “Excluding North America, our automotive operations made great

progress in 2005” said Mr Ford. (David Teather, The Guardian, 23 January 2006)

In 2005, Ford made $2bn profit, down from $3.5bn in the previous year. Like GM,

Ford made most of its profit from its finance arm, which lends money to car buyers.

Ford’s market share in the US, its biggest market, fell for the 10th straight year in 2005

to 17.4%. The group had an 18.3% share in 2004 and a 24% share in 1990. US motor

vehicle sales (millions) for the period 1998 to 2004 were as follows:

U.S. Motor Vehicle Sales

1998 1999 2000 2001 2002 2003 2004

Cars 8.1 8.7 8.8 8.4 8.2 7.6 7.5

Light Trucks 7.4 8.2 8.5 8.7 8.7 9.0 9.3

Total LV 15.5 16.9 17.3 17.1 16.9 16.6 16.8

Med/Heavy Trucks

0.4 0.5 0.5 0.4 0.3 0.3 0.4

Total All 16.0 17.4 17.8 17.5 17.2 16.9 17.3

Source: Ward's Automotive Reports

Ford’s Globalisation Plan 2000

In April 1994, Englishman Alex Trotman, the first non-American to make it to the top

in Ford, announced that the company was to become a single global entity. He stated

“if we are going to go from second to first place, which I truly believe we can do, it

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will be because of this plan ... this is designed to ensure our success in the next 20

years.” (The Times -24 April, 1994).

As a first step, Ford planned to merge its North American and European vehicle

businesses into a single grouping, namely Ford Automotive Operations (FAO). This

was designed to unify product development, manufacturing and marketing and sales

operations, each under a single executive with the aim of eliminating costly duplication

of design, engineering and development of similar cars, engines and components in

America and Europe. The plan involved the formation of five “vehicle programme

centres” to control product development. One centre, located in Europe, would cover –

the Fiesta, Escort and Mondeo classes (small and medium sized cars) and the other four

would be located in America (see Appendix 3).

Ford’s European operations had incurred losses of $291 million in 1996, despite

increased sales in most European markets, where Ford was the best-selling single

brand. The company’s chairman Alex Trotman, pointed to the intensely competitive

European market and the shift to cars at the lower end of the market. Company total

profits rose to $4.4 billion from $4.1 billion in 1995, in a year that included the launch

of a number of new vehicle models, among which was the successful Jaguar XK8.

There were two sets of targets in Ford 2000. The first was financial, while other targets

concerned communication and creativity. Whereas previously strict and precise

financial controls were in place, most managers had the sums they could spend on their

own authority increased fivefold. Decisions that used to mean committees deliberating

for weeks could be taken by individuals. Most important, the company was

encouraging designers, engineers and production people to work in teams on new

product development. The aim was to avoid one group designing parts that could not be

manufactured or marketed.

On the financial side, the company estimated that globalisation would produce savings

of around $3 billion a year. These savings would come from lower-product engineering

and development costs, from the more rapid spread of best practice and from pruning

the company’s suppliers. The company hoped that eventually, 250 firms would account

for 80% of its purchases world-wide.

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By mid 1998 Ford had made substantial progress on restructuring, redesigning and/or

reducing costs in certain processes, reflected in improved profitability (see Table 1).

All of the new processes that the company had adopted were seen to be driven by two

critical elements – lowering costs and creating greater value. These were aimed at

making Ford the best automotive company in the world, as defined by its employees,

customers, and shareholders. In respect of the latter, Ford paid particular attention to

dividend yield and the price of Ford shares.

Table 1 Profitability 1994-97 ($m)

1997 1996 1995 1994AutomotiveSales 122,935 118,023 110,496 107,137Net income 4,714 1,655 2,056 3,913

In April 1999 Ford unveiled a £1 billion agreed bid for UK based Kwik-Fit, Europe’s

top car-repair chain. The announcement followed the company’s entry into insurance,

retailing and body shops, in addition to launching a bid for the Royal Automobile Club

(RAC) roadside recovery business. In October 1998, Ford went into insurance by

forming a joint venture with Norwich Union and it was hoped that the venture,

FordInsure, would insure 25% of the 5m Ford vehicles on Britain’s roads by 2002. In

November of that year, Ford joined the Keswick family’s Jardine Motors Group in a

joint-venture retailing business. These activities came close on the heels of completing

a $6.45 billion acquisition of Volvo’s car business.

Jac Nasser, who succeeded Sir Alex Trotman as chief executive of Ford at the start of

1999, was the architect of Ford’s expansion into services. He considered that Ford

could not produce the best value cars if it was not prepared to get more involved in

servicing and repairing them after their warranties expired. Ford was conscious of what

it considered to be the tremendous amount of downstream revenue and profit

opportunity that it was missing. Also, this type of business required substantially less

capital commitment than say, building a new assembly plant. The object was to capture

more of the value chain for the whole life of the vehicle. Ford’s main existing

non-manufacturing businesses were F-Credit, traditionally the lender of last resort to

car buyers during a recession, and Hertz, its quoted rental-company offshoot.

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Since taking over, Mr Nasser hired outsiders for top posts in design, manufacturing,

engineering and marketing – passing over many long serving managers. He also tied

executive compensation to share performance for the first time since Ford went public

in the 1950s. One new manager was Michael Lombardi, the former head of British

Petroleum service stations. He was charged with Ford Quality Care, a programme

designed to improve and standardise dealer repairs in America. Another new

appointment was Wolfgang Reitzle, who joined Ford after leaving German based

BMW, following a boardroom power-struggle. Reitzle headed up Ford’s new Premier

Automotive Group, which brought together the company's four luxury brands (Jaguar,

Aston Martin, Volvo and Lincoln) into a single organisation.

The Picture in 2000

In 2000 Ford’s total company sales revenue established a company record of $170

billion, a 6% increase over 1999. Worldwide vehicle unit sales were up 3% from 1999

and topped 7 million units for the second time in company history, setting a new sales

record. During the year the company purchased the Land Rover business from the

BMW Group and AB Volvo’s worldwide passenger car business (Volvo Car).

In 2000, approximately 17.8 million new cars and trucks were sold in Ford’s nineteen

primary European markets, down from 18.2 million units in 1999. The company was

ranked second in the U.S. market with a combined car and truck market share of 23.7%,

down slightly from 1999. It was also ranked fifth in the European market with a

combined car and truck market share of 10%, down slightly from 1999.

The resulting net income/(loss) from continuing operations ($millions) was as follows:

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2000 1999 1998North American Auto 4,886 5,418 3,997Auto Outside North America- Europe (1,130) 50 151- South America (240) (444) (278)- Rest of World 108 87 179Total Automotive OutsideNorth America (1,262) (307) 52Visteon-related postretirementadjustment – (125) –Total Automotive Sector 3,624 4,986 4,049U.S. Market Share 23.7% 23.8% 24.6%European Market Share 10.0% 10.2% 10.0%

Financial Services 1,786 1,516 1,187

Automotive Sector “Unusual items” accounted for more than $2 billion in costs over

the period 1998-2000. These included: structuring costs in Europe; inventory-related

profit reduction for Volvo and Land Rover; write-down of assets associated with joint

venture; write-offs in Kia Motors Company; employee separation costs, lump-sum

payments and contracts; transfer of transmission plant. The yearly costs are broken

down as follows:

2000 1999 1998 Unusual Items $1,258m $265m $600m41In spite of this, Ford achieved an additional $500 million in total cost reductions in

worldwide Automotive operation for the Year 2000, making a total reduction of $3.7

billion in the 3-year period. Ford’s financial targets for 2001 were as follows:

Total Company- Total Shareholder Returns Top quartile of S&P 500 over time- Revenue to Grow $5 billionAutomotive- North America Achieve 4%+ return on sales- Europe Achieve 1%+ return on salesFinancial Services- Ford Credit Improve returns andgrow earnings 10%

Beyond 2000

In April 2001, Ford reported a 41 per cent slump in first-quarter profits, caused partly

by concerns in America over the safety of its Explorer “sports utility vehicle”. The

company was forced to spend $500 million recalling some of the Firestone tyres fitted

as standard to the Explorer after they were linked to more than 170 deaths and 500

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injuries in the USA. The company has not disclosed how much it has spent settling

lawsuits related to the accidents. Ford’s worldwide vehicle sales fell 6 per cent to 1.8

million, while revenues fell 1 per cent to $42.4 billion. The US company also lost

market share during the first quarter (Chris Ayres, The Times, 20 April 2001).

Although Ford’s profits of $1.13 billion, or 60 cents a share, were disappointing, they

beat the forecasts of many Wall Street analysts. Ford’s poor results came despite a

strong performance in Europe. Buoyant sales of the Mondeo family car and Transit van

helped to generate European profits of $88 million, compared with a $3 million loss in

the same period the previous year. Sales for the region rose 22 per cent to $8.7 billion.

In the same period, Ford’s major US competitor, General Motors, saw its car market

share has plunge to 28% (48% in 1978) and both companies were under pressure from

increased competition and rising unemployment. GM is responded to by slashing

15,000 jobs, phasing out its Oldsmobile brand and reducing European capacity by

400,000 units a year. Also, both companies had spun off their parts divisions, but GM’s

Delphi was a much bigger business than Ford’s Visteon.

However, Ford’s better performance over its main rival was attributed to its acquisition

of a series of Aston Martin, Jaguar and Volvo. The addition of these companies enabled

Ford to maintain its American market share at a steady 23%, even though its native

brands had been suffering. GM’s foreign acquisitions had been in the form of minority

stakes in companies such as Fiat, Fuji Heavy Industries (maker of Subaru), Isuzu and

Suzuki, so they add nothing to GM’s sales figures. (Garth Alexander The Sunday

Times, 13 May 2001).

In January 2002, Ford announced a new series of incentives in response to the move by

GM to offer $2,002 rebates on virtually all its models. The high costs of incentives was

blamed for much of the company’s loss in the fourth quarter. Ford’s response was to

offer $2,500 on the top selling sport/utility vehicle Explorer on most versions of the F-

150 pickup, the nation’s best selling vehicle, and a $2,000 incentive on many other

models. The company also announced that the Ford Escort and Mercury Cougar

compact cars, Mercury Villager minivan and the Lincoln Continental would be phased

out by the end of 2002.

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In addition Ford was looking to sell a number of what it termed non-core assets,

eliminating some operations such as forging parts. It expected this to raise $1 billion

while other cost-cutting measures include everything from the sale of some of its

corporate jets to eliminating food and beverages at many internal company meetings.

Despite all the cuts, Ford executives insisted the cost-cutting measures were only a

small part of their turnaround plans for the company. They said that they are

maintaining investment in research and development in order to meet goals of an

average of 20 new models a year for the next several years (Chris Isadore, Cable News

Network, 11 January, 2002).

In 2003, Ford, which owned one-third of Mazda, decided to base its Futura and nine

other forthcoming Ford, Mercury and Lincoln models on the Mazda 6. The Futura

would be launched in 2005 to replace the fading Taurus in Ford’s continuing effort to

overtake the Honda Accord and Toyota Camry, the leading midsize family sedans in

the United States. Ford sales boomed in the 1990s because of its big, truck-based

vehicles such as the F-150 pickups, Ford Explorer, Ford Expedition and Lincoln

Navigator, but its car models suffered. Sales of the Taurus and its sister vehicle, the

Mercury Sable, peaked in 1992 but after 18 years, despite a redesign in 2000, sales fell

by 50 percent.

It was considered that the Ford-Mazda collaboration would help both companies

become more efficient, although the bigger benefit for Mazda would come when the

Ford started using its I-4 engine. In the same way that Jaguar and Volvo retained their

brand presence, although they both belonged to Ford’s Premier Automotive Group,

Mazda intended to retain its separate identity through its sports cars such as the RX-8

and its well known rotary engine.

The US Industry and Market

In 2004 market shares for the Detroit 3 (GM, Ford, and the Chrysler unit of

DaimlerChrysler) fell to a new low of 58.5 percent, while Japanese brands reached a

new high of 30.6 percent and Korean brands climbed to 4.1 percent (U.S. Department

of Commerce, June 2005).

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Manufacturers were using more novel marketing such as heavy discounting and

complementary offers. For example, the VW Phaeton had a $10,000 rebate and Ford

offered a free computer with the purchase of some Ford Focus vehicles.

Both GM and Ford attempted to streamline their operations by closing plants and

consolidating manufacturing lines, but continued to invest heavily in new assembly

plants and equipment for both manufacturing and product technology. GM focused on

increasing its manufacturing flexibility using new manufacturing technology that

allowed vehicles based on different platforms to be built on the same assembly line.

In contrast, Ford invested in a Chicago-area Supplier Park, to provide more flexibility

at its Chicago assembly plant, which had previously produced the Ford Taurus and

Mercury Sable, but was then adapted to produce the Ford Five Hundred and Freestyle

and Mercury Montego.

Europe

The European consumer expects a model that is different both in terms of design and

technical characteristics, with diesel motors being very important and accounting for

43% of the market. In the United States light trucks represent nearly one-half of

automobile sales whereas this is less than 5% in Europe and mini-cars are very present

in Japan (30%).

A rationalisation drive that was already underway began to take on a new strategic

dimension insofar as it was now guided by the search for a closer relationship to the

market, something that involved setting up new relationships with end-users (make-and

deliver- to-order approach). New vehicle profit margins having been squeezed,

manufacturers have had to build up a greater presence in customer services.

Structural changes enabled manufacturers to consolidate their positions not only in their

local regional market (stagnation of Japanese market share, financial losses by

American subsidiaries) but also in other markets via alliances or mergers (in particular

the Renault-Nissan alliance and the Daimler Chrysler merger).

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Some suppliers are relatively independent from manufacturers and therefore oriented

towards a number of different clients (unlike the historical link between Ford-Visteon

and Toyota-Denso, for example). This is true for large multinationals like Bosch and

for medium-sized family companies and small firms. Thus, the European industry has

moved towards a type of modularisation and specialization, which is evidence of

cooperation between firms.

In this context the co-operation can be seen at assembly level, with suppliers’ parks and

suppliers presence on-site and on manufacturers’ assembly lines (a trend that is less

developed in the other two Triad regions); and also at the design level, with the advent

of co-design practices that associate manufacturers with suppliers or with engineering

service firms (Groupement de Recherches Economiques et Sociales, 2004)

China

China maintained a positive but smaller growth rate over the period 2002 – 2004. While

sales grew at a rate of 15 percent in 2004, this was less than previous annual growth

rates of nearly 40 percent. This decline was due to several factors. The Chinese Central

Government followed policies that tightened credit and slowed the overall economy.

The more restrictive consumer loans resulted in less auto buyers. In addition, the

market is caught in a cycle of price reductions where consumers expect the price to be

lower the longer they wait to buy.

On the supply side, Volkswagen announced plans to invest another $6 billion, GM an

additional $3 billion and DaimlerChrysler $1 billion. Ford, from a relatively small base,

planned to invest an additional $1.5 billion (U.S. Department of Commerce, June

2005).

The Global Perspective

In 2003, global sales of passenger cars and trucks were 57 million units. Sales are

concentrated in the developed markets with the USA and Europe accounting for 62 per-

cent. Global players, such as GM, Ford and DaimlerChrysler dominated and the USA

was the largest market with sales of 17 million units in 2003.

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Intense global competition together with significant excess capacity in the developed

markets has depressed the profits of the global automobile makers compelling them to

strongly enter the emerging markets such as China and India, where economic growth

is creating huge demands. This same competition has increased consolidation in the

industry and technological alliances are increasing as companies see vehicle platform

sharing as a means of cutting time-to-market and costs. Finally, they have to face the

challenges of increased globalization and the ever-increasing emission and safety

standards.

If the global economic recovery gains in strength then the automotive industry will

prosper in future years. But, if oil prices stay high then the global economy could slip

into a recession and create high uncertainty for the industry. (Global Automotive,

ReportSURE, October 2004)

After several years of intense activity on the mergers and acquisitions, DaimlerChrysler

revised its Asia strategy as its major partner, Mitsubishi, continued to lose profit. DC’s

share of Mitsubishi dropped from 37 percent in 1999 to 19.7 percent in 2004.

The Renault/Nissan merger success continued with Nissan’s global sales up nine

percent and global production up 15 percent over the period 1999 to 2004. Nissan’s

U.S. sales increased 46 percent over the same period, going from 677,212 units to

985,989; while Renault net income increased 565 percent, from 565 million Euros in

1999 to 3,551 million Euros in 2004.

Long term, the mature markets were adding no more than 1 percent annually to their

ability to absorb additional output. In contrast, opportunities in the developing world–

especially in Asia were more buoyant. None the less, trade barriers existed almost

everywhere and the major manufacturers continued to seek local partners and to look

for outright acquisitions, mergers, and non-equity cooperative ventures.

Despite these challenges, Ford planned to meet the priorities it had set in 2005 which

were:

• Continuing to deliver exciting new products.

• Improving quality and customer satisfaction.

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• Holding overall costs at 2004 levels.

• Improving market share and revenue in all regions.

• Improving results at all automotive operations.

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APPENDIX 1

Summary of Operations ($millions except share data)

2000 2001 2002 2003 2004Total sales and revenues 169,298 160,654 162,258 164,338 171,652Income/(loss) before income taxes 8,387 (7,325) 1,064 1,339 4,853Provision/(credit) for income taxes 2,750 (2,064) 342 123 937Minority interest 127 24 367 - 314 282Income/(loss) from continuous ops 5,510 (5,285) 355 902 3,634Income/(loss) from discontinuous ops (2,043) (168) (333) (l43) (147)Effects of change in accounting principle - - (1,002) (264) -Net income/(loss) 3,467 (5,453) 1,980) 495 3,487

Automotive sectorSales 140,621 130,601 134,120: 138,260 147,134Operating income/(loss) 5,276 (7,471) (60.4) (1,556) (177)Income/(loss) before taxes 5,421 (8,762) (1,054) (1,908) (155)

Financial Services sectorRevenues 28,677 30,053 28,138 26,078 24,518Income/(Ioss) before taxes 2,966 1,437 2,118 3,247 5,008

Share Data ($)Net income/(loss) per common share (basic)

2.34 (3.02) (0.55) 0.27 1.91

Cash dividends 1.80 1.05 0.40 0.40 0.40Share price range (NYSE Composite)High 31.46 31.42 18.23 17.33 17.34low 21.69 14.70 6.90 6.58 12.61

BALANCE SHEET DATA AT YEAR-ENDAssetsAutomotive sector 94,312 88,319 102,770 115,444 116,422Financial Services sector 189,078 188,224 187,432 195,279 188,919Total assets 283,390 276,543 290,202 310,723 305,341Long-term DebtAutomotive sector 11,769 13,467 13,607 18,987 17,458Financial Services sector 86,877 106,741 106,505 100,764 89,082Total long-term debt 98,646 120,208 120,112 119,751 106,540Stockholders' Equity 18,610 7,786 5,590 11,651 16,045

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APPENDIX 2

Ford’s Sector Figures

Sales Unit sales Market

($billion) (000’s) Share (%) Market

Sector 2004 2003 2004 2003 2004 2003 Market

Ford North America 83.0 83.6 3,623 3,810 18.0 19.2 USFord South America 3.0 1.9 292 210 11.8 11.5 BrazilTotal 86.0 85:5 3,915 4,020

Ford Europe 26.5 22.2 1,705 1,609 8.7 8.6Europe

PAG* 27.6 24.8 771 754 1.3/2.3 1.3/2.1 US/EuropeTotal 54.1 47.0 2,476 2,363

Asia Pacific and Africa 7.0 5.8 407 353 Australia

Total Automotive 147.1 138.3 6,798 6,736

* (Comprises Volvo, Jaguar, Land Rover and Aston Martin)

Automotive Business unit of income before taxes ($millions)

2004 2003Americas. Ford North America 684 196- Ford South America 140 (129)Total 824 67

Ford Europe and PAG- Ford Europe 65 (1,620)- PAG (850) 171Total (785) (1,449)

Ford Asia Pacific and Africa/Mazda. Ford Asia Pacific and Africa (36) (23). Mazda and Associated Operations 118 69Total 82 46

Other Automotive (276) (572)Total Automotive (155) (1,908)

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APPENDIX 3

Ford’s Reorganisation Plan

How Ford will operate in 2000

Source: Financial Times 23/24 April 1994

Automotivestrategy office

Aligned objectives

Aligned objectives

Aligned objectives

Manufacturing

Ford Automotive Operations

Product Development

Marketing & sales

ProductionpurchasingFacilities &

no productionpurchasing

QualityProcess leadershipEmployee relationsTechnical affairs

Aligned objectives

Aligned objectives

Europe US US US USSmall FWD car

vehicle program centreLarge FWD car

vehicle program centreRWD car

vehicle program centrePersonal use truck

vehicle program centreCommercial truck

vehicle program centre

Product strategy &cycle planning

Core P.D.

Design

Vehicle operations

Powertrain operations

Components operations

Advanced manu.engineering

W/W marketing &sales operations

Regional marketing &sales operations

Customer comms.& satisfaction group

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Questions

1) Discuss – and justify – what you feel to be the main auto industry (global) drivers,

together with the corresponding generic marketing strategies and key success factors

that the major suppliers should possess, if they are to be successful.

2) Discuss the rationale behind Ford’s ‘2000 globalisation plan’ and comment on

performance over the period 1994 to 2004.

3) Drawing upon relevant issues from the case, recommend and defend a possible future

marketing strategy (or strategies) for Ford.

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