'For small cars, India is the centre of the universe'
Scepticism ran high within and outside Ford when William Clay Ford appointed ALAN MULALLY — President and CEO, Boeing Commercial Airplanes—the President and CEO of the ailing carmaker in September 2006. “What does an airplane guy know about cars?” people wondered. Three years down the line, his coming on board appears to be the best thing that could have happened to Ford.
By moving quickly, Mulally raised $23.5 billion (when the financial markets were still robust) to fund the restructuring plan that included matching production and demand, striking an important wage deal with the unions and investing in new products.
He also sold marquee brands such as Aston Martin, Land Rover, Jaguar and pared Ford’s stake in Mazda. These actions ensured that Ford—unlike its Detroit rivals—did not have to suffer the ignominy of dipping into federal funds for survival after the global markets collapsed following the bankruptcy of Lehman Brothers in September last year. His informal candour and easy-going nature hide a shrewd brain.
Speaking in his 12th floor office at Ford’s world headquarters in Dearborn, Michigan, Mulally outlined Ford’s transformation and its India game plan. Excerpts:
Your testimony before the Senate Committee. It was one hell of a confession...
(Laughs) It was the second testimony and I had five minutes of uninterrupted time to describe Ford’s entire transformation. Henry Ford had a vision of safe, efficient and affordable transportation for everybody.
He wanted Ford to operate all around the world by creating strong businesses and great vehicles in every country. So when I walked in, Ford was everywhere but what he (Henry Ford) did not imagine was that they (businesses in different countries) would work very independently and not really collaborate.
Ford also had many brands. We were kind of known as “a house of brands”. We had purchased Jaguar, Land Rover, Aston Martin, Volvo, Mazda and, of course, we had the Ford brand, too. You can imagine how difficult it is to be world class in all of those simultaneously. We were also losing money and given all the complexities, there were not enough actions in place to turn the company around.
On the other side was the phenomenal loyalty and goodwill to Ford. We made the #1 selling trucks in the US for 34 years. We made great cars in India, Asia-Pacific and Europe, which the Americans have never seen because we just did not make cars here. So, we had a lot of strengths but a couple of very real opportunities.
How much of the transformation has happened?
We divested most of the brands, pulled our weight together and leveraged our assets worldwide. We made a commitment to bring best-in-class products whether small, medium or large or car, utility vehicle or truck to every market around the world.
ALAN UNPLUGGED |
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| The Ford CEO’s frankness in laying bare his company’s problems in the US at the Senate hearing last year surprised many. This is what he said: |
| It used to be that we had too many brands. Now we have a laser focus on our most important brand: the Ford Blue Oval. |
| It used to be that our approach to our customers was: If you build it, they will come. Now we are aggressively matching production to meet the true customer demand. |
| It used to be that we focussed heavily on trucks and SUVs. Now we are shifting to a balanced product portfolio, with even more focus on small cars. |
| It used to be that our labour costs made us uncompetitive. Now we have a groundbreaking agreement with the UAW to reduce labour costs. |
| It used to be that we operated regionally. Now we are leveraging our global assets, innovation, technology, and scale to deliver world class products for every market. |
| Excerpted from Mulally’s testimony before Senate Committee on Banking, Housing and Urban Affairs on December 4, 2008 |
We came out with a plan to get back to profitability, accelerate the new products, borrow some money to finance it and work together. The goal, of course, was to deliver a longterm growing company for the good of all of us.
We are like three or four years ahead of where I thought we will be. We are not taking the taxpayers’ money and (are) doing this on our own. It is a pretty exciting thing. I would say we have completed 50 to 60 per cent of the work. In fact, we did make an operating profit in the first quarter of 2008.
Then the global slowdown happened. Industry went down from 17 million in the US to a little over 9 million—an incredible fall in volumes. So, we paddled even faster and took more action. We hope to get back to profitability in 2011.
US car manufacturers appear to have lost their way on the home ground...
In Ford’s case, it is very interesting. Everywhere around the world Ford has led—be it small cars, mediumsized cars or large ones. We have always been very competitive. In the US, we chose to focus on larger vehicles, SUVs and trucks. That is what the customers wanted here. Fuel prices here are low, geographical area is big and people have different hobbies.
But the reason we did not so much focus on cars in the US was that our cost structure here was not competitive. It was just not profitable to make cars in the US. So, we focussed elsewhere on world class cars. We went to our Union partners and said if we reduce our cost structures we can even make cars in the US and provide jobs.
We now have a pathbreaking agreement with United Auto Workers, which has brought down the labour cost from $75 (around Rs 3,600) per hour to less than $50 (Rs 2,400). Our legacy costs have been capped. Couple of months ago, we announced that we are converting a truck plant to a car plant right here in the US.
Your sense of timing appears perfect. You raised money before the financial markets went kaput and sold Land Rover and Jaguar just weeks before global markets collapsed.
Coming from Boeing, I have been through these big cycles worldwide— be it bird flu, SARS or the economic crisis in Asia and how that disrupted economic development and travel. When I saw this slowdown, the feeling inside me was I have been there and have experienced it.
In such circumstances, the most important thing is to move decisively to reduce your capability to the real demand. If you don’t, you just start burning cash and you are out of business. The second thing is during the toughest of the times when you are restructuring to the low demand you accelerate your investment in new products. That’s how Boeing’s 767/777/787 came about. When the cycle turns around and the economy revives, you are there with the best products in the world.
Ford’s plan is very similar. We wanted to restructure and that costs money. We also wanted to accelerate new product development. We went to the market, pledged our assets and borrowed $23.5 billion (Rs 1,12,800 crore). We are making our investments and the products are coming on line. We have already paid back $10.1 billion (Rs 48,480 crore) of the debt.
Do you think Ford will have enough cash to ride out this downturn and not touch the $9 billion (Rs 43,200 crore) federal line of credit?
Absolutely. We have told the US government that we will not need any bridge loans from them. After we borrowed money in 2006, we have made a lot of improvements on productivity and quality so we even have a cushion in case the world slows down further. We are in good shape.
The world is gravitating towards small cars...
The US is very unique in that it likes bigger vehicles. Most areas around the world do not have the mass and the openness, the low fuel prices and interest rates that the US has had. But the future of the automobile is going to be in the small cars worldwide with higher quality and more features.
It is not going to be small is cheap but small is beautiful and high quality. If you look at the entire world, 60 per cent of all the vehicles globally will be relatively of a smaller size, about 25 per cent will be medium size and 15 per cent will be large cars. We will be world class in every segment and market.
Ford is investing over $2 billion (Rs 9,600 crore) in emerging markets such as India, China, South Africa and Thailand...
To me, it is very clear that if Ford is to be an industry leader, we absolutely need to serve all the major markets around the world. Going forward, a third of the global market will be Americas, about a third will be Europe, Africa and Russia and a third will be Asia-Pacific led by India and China. It makes sense to start with India and China and use all your global resources so that you can bring the very best values to the customers in these markets.
Finally, a small car for India...
That is the biggest challenge and biggest opportunity. As I said, if the whole world is going to be 60 per cent small cars, the solution for India—making a wonderful high quality small car and making it efficiently—will be the foundation for rest of the world. For small cars, India is the centre of the universe.
Ford and Hyundai entered India in 1996. The Korean car major has already made India its global small car hub. Do you think Ford has been slow off the block?
We had to deal with areas that needed attention. As the US slowed down, we did not have all the vehicles that we needed here. We also needed to get profitable and this is where we made our big investment. You will see an accelerated development of the Indian business. We are investing $500 million (Rs 2,400 crore) in India—to launch a small car, double our capacity from one lakh to two lakh units, expand engine production capacity from 60,000 units to 2.50 lakh units— for mutually beneficial growth.
