Ford's Deep Ditch

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Ford (F) will announce its second major restructuring in four years on Jan. 23. The plan will likely include at least 10 fewer factories, some 25,000 fewer employees, and winnowing the less saleable vehicles on showroom floors. But it still may not be enough to restore the company to what Chairman and CEO Bill Ford calls "normal profitability."



What's normal profitability? The ability to earn between $4 billion and $6 billion a year on a regular basis has been the company's goal since Bill Ford took over in late 2001. He unveiled his first revitalization plan four years ago this month.



Ford Motor Credit has been the big profit engine keeping the company afloat, while Ford's automotive operations have remained seriously impaired. Through three quarters of last year, Ford's auto operations posted a pretax loss of $1.4 billion. The company as a whole in 2004 earned $3.5 billion in net income, with automotive operations kicking in just $697 million.



And that was after a relaunch of its most profitable line, the F Series pickups. In 2003 the company as a whole earned $495 million. And in 2002, Bill Ford's first full year in charge, it lost $995 million. Meantime, smaller companies are earning much more. Toyota is earning around $10 billion a year. And BMW regularly shows profits between $3 billion and $4 billion.



"LAST CHANCE." If this latest plan, dubbed The Way Forward, doesn't produce results in the next two years, pressure may start to build on Bill Ford to step aside. He has already acknowledged unsuccessful attempts to recruit DaimlerChrysler (DCX) Chairman Dieter Zetsche and Renault-Nissan (NSANY) Chief Executive Carlos Ghosn to be CEO of Ford.



"Ford views this as perhaps its last chance to restructure itself in the sense that it may not have a chance to do something more after this," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.



The 25,000 job cuts would come on top of the 2,750 salaried jobs that the company already announced would be axed by March. The 10 manufacturing facilities closed will likely include four assembly plants in Atlanta, St. Louis, St. Paul, and Cuatitlan, Mexico. The rest are parts plants. Look for elimination of models including the Ford Freestar and Monterey minivans and Ranger small pickups. Others could be cut as well.



These target areas for cuts aren't hard to see coming. Any stock analyst or car dealer could identify them. But the pressure's on Ford and his new handpicked team of managers -- Ford President of the Americas Mark Fields and Chief Operating Officer of The Americas Anne Stevens -- to establish a vision that the remaining troops can rally around.



PERFECT ANTIDOTE. Says Fields: "Since I came into this job last year, I have had e-mail in the thousands, and the ones that stick out are people who have said, 'I can do anything you want, but I need to know what we are doing.'"



Ouch for Bill Ford. Ford employees initially welcomed him as the perfect antidote to predecessor Jacques Nasser, who as a Six Sigma devotee loved such management paeans.



Fields says he was troubled to find, for example, that Ford's design, product development/engineering, and marketing departments each had different notions of what Ford's flagship blue oval brand represented. Same for the Mercury and Lincoln brands. "I'm not sure how the customer is supposed to know what we stand for when we didn't know ourselves," says Fields.



That's why Fields, the fourth head of Ford's North American auto operations in five years, is supposed to lay out brand directions on Jan. 23 for all three divisions of Ford North America that employees, as well as customers, can embrace.



LOVE IT OR HATE IT. COO Anne Stevens acknowledges that Ford has been overly focused on process change and not enough on the customer, but she says she doesn't want to be specific for fear of tarnishing products dealers have to sell. What went wrong? It's not hard to figure out. First up, the Ford Five Hundred sedan. Ford sold 107,000 in 2004, its first full year. J.D. Power and Associates, which surveys buyers and the reasons they buy vehicles, says the Five Hundred ends up in a category of "universally disliked" when it comes to styling, meaning that people who buy it are doing so for reasons such as price and interior room. Without styling appeal, discounts are needed to move the metal and profits become scarce.



That contrasts with the wildly successful Chrysler 300, which Power ranks with other vehicles in a "love it or hate it" category where auto makers increasingly want to be because those who love a design will pay more to have it. Profit margins are steep on the 300, which sold 144,000 last year and only recently began offering a $1,000 general sales incentive, have had fat profits.



Moreover, consumers in droves have been paying for the top-priced and thus more profitable 300C model -- at $33,000 -- with Chrysler's well-marketed "Hemi" engine. The Five Hundred, which has been criticized in the auto press for being underpowered, has an average transaction price well below that of the 300. "The two cars are a case study in opposites," says J.D. Power Vice-President Chris Denove.



DEAD LAST.Other product areas where Ford has fallen down are minivans and crossover SUVs. Ford's Freestar, and previous Windstar, minivans have never been competitive with Chrysler, Toyota (TM), and Honda (HMC). Focus groups with families over the year, pitting Ford's van against the competition, nearly always resulted in the Ford ranked last, says one Ford executive.



Even after a partial redesign of the van in 2003 that gave it a new look and a fold-away third-row seat, sales continued to tank. It seems odd that a full-line company professing to be a family carmaker couldn't get a minivan right after 20 years of trying. And Ford has often given as its excuse that it is more of an SUV company.



The company is expected to say it will build a new "people mover" seven-seater vehicle based on a concept design called The Fairlane that it showed in Detroit a year ago. It's a squarish utility vehicle that looks more like an SUV, a classic Jeep Wagoneer, than anything in the minivan category. Ford only has two crossover entries in showrooms today, despite the category's surge over the last four years: the Ford Escape and Freestyle. And the Freestyle, out less than a year, is not selling up to expectations, nor is it well regarded among auto critics.



CHEAP CARS. Ford has covered the waterfront in the below-$20,000 category with the Focus lineup, which isn't scheduled to get a complete redesign until after 2010. But Ford is scouring its worldwide operations for a car it can cheaply reengineer and sell in the U.S. for under $15,000.



Fields says the company, rightly, is concerned about losing too many first-time car buyers to surging Korean carmakers Hyundai and Kia, and about the rising number of cheap cars sold by GM, Honda, Toyota, and Nissan this year. Again, Ford is behind and will have difficulty following fast.



Certainly, Ford has had some winners in the last three years. The Mustang redesign has been successful from a sales standpoint. Ford sold 160,000 last year with only a $500 rebate available to recent college graduates.



But, spotlighting Ford's high cost structure, analysts who follow Ford closely and some insiders say the company makes no profit on Mustangs yet. The redesign of the F-Series pickup, Ford's biggest profit maker, has also been successful. But its profitability has had to offset the money lost on nearly every passenger car Ford builds.



HOME RUNS. Dogging Ford's recovery are legacies of its past, and not just rising health-care costs of retirees. Few doubt it would be better off shuttering brands that perennially distract the company from hitting more product home runs within its all-important Ford and Lincoln brands.



Closing down the Mercury brand, for example, makes strategic sense. Ford executives make the case that Lincoln dealers need the lineup, and that it actually makes a small profit. But that's only because of the 65,000 Mercury Marquis sedans -- the basic engineering of which was done in the early 1970s -- it sells to livery companies and consumers generally over the age of 60.



Likewise, the company by some estimates has lost $10 billion on its Jaguar brand since it purchased it in 1988. It has little chance to earn a profit in the foreseeable future. But Ford is not expected to announce closures of either brand, an expensive endeavor because of the required payouts to invested dealers, on Monday.



LOSING SHARE. Meantime, Volvo and Aston Martin are profitable, say Ford executives. And even the marginal Land Rover brand will not lose money this year, they say, though it's prone to bounce from profit to loss and back, depending on how new its models are.



In all, Ford has lost more than 1 million units of annual sales from 2000 through 2005. The Ford brand by itself has lost 823,955 units as the company has been slow to introduce compelling passenger cars and crossover SUVs, while sales of midsized and full-size SUVs have been slipping.



Ford sold 200,000-plus fewer Explorers last year than in 2000. It sold 145,000 fewer minivans last year than in 2000. And the aging Ranger small pickup likewise saw sales fall by more than 200,000 units from 2000 to 2005. Ford has lost market share for 10 straight years, ending last year at 17.4%, its lowest since the 1920s. The company utilized only 79% of its North American production capacity in 2005, the lowest of any auto maker, according to Harbour Consulting.



When an auto company falls below 90% factory utilization, it loses money fast as the cash generated by vehicle sales is not enough to offset the costs of running the plants and buying raw materials. When sales slip, companies have to lay on profit-shattering sales incentives to increase the flow at factories. But as Ford has shown, that's a poor way to run a company.