CEO INTERVIEW - Alan Mulally: Restructuring Is the New Job One

The new Ford Motor Co. CEO is shrinking the money-losing automaker to restore profits. Can he recapture its status as a global leader in the car business?

Ford Motor Co.'s woes are the same ones plaguing other Detroit automakers -- exorbitant labor costs and plummeting vehicle demand fueling big losses -- but there’s one big difference: the Ford family’s status in the annals of American business.

In September company chairman William Clay Ford Jr., the great-grandson of pioneering founder Henry Ford and guardian of his family’s still-significant stake in the company, recruited longtime Boeing Co. executive Alan Mulally to see Ford through a massive restructuring. So far, Mulally, who headed Boeing’s commercial aircraft unit, has focused on getting Ford leaner. He sold its Aston Martin division and announced a series of plant closures and layoffs that he says will return the company, which lost a staggering $12.7 billion in 2006, to profitability by 2009. In the meantime, Ford is tapping the proceeds of nearly $24 billion in debt offerings, in which it pledged nearly all its assets as collateral against default, to sop up the flow of red ink.

In a recent conversation with Institutional Investor Assistant Managing Editor Justin Schack, Mulally, a 61-year-old Kansas native and an engineer by training, said that the high-stakes restructuring plan is on track. The bigger question, though, is whether over the long term he will be able to convince the car-buying public to embrace Ford’s vehicles over those of its foreign rivals and restore the company to its place atop the pantheon of global business powers. Following are excerpts from the interview.

Institutional Investor: You turned this job down the first time Bill Ford asked you to take it. Why, and what changed your mind?

Mulally: It seemed initially that it would be a lot of fun to finish my career at Boeing -- you know, finish another one or two airplanes. The more I thought about it, I was very much attracted to Bill’s vision of a viable, long-term, vibrant Ford Motor Co. I was once in a similar situation at Boeing that Ford is in, where we had a few big challenges over the years. It really started to excite me, the idea of being able to use my experience to help another great American icon get turned around.

The Ford shareholders I speak with worry that your vehicles aren’t standardized around the world, and that creates a cost and profit gap with more-efficient manufacturers like Toyota. Will you change that?

Absolutely. I’m a disciple of the Toyota production system, which is the finest design and manufacturing system in the world. It’s the best quality and most efficient. The new world is one of global platforms, higher volume, more efficiency and continuous improvement in quality and productivity worldwide. The world-class companies today and in the future will be the ones that leverage their assets around the world and get the value of scale. It’s just a perfect time for Ford to transform both its product line and its production system to become a better global competitor.

That sounds easy, but how exactly do you do it?

Unlike a lot of other industries, we invest enough every year in our product line that we can redesign and re-create our entire portfolio and production system in just a few years. Our plan calls for refreshing 70 percent of our models by 2008 and refreshing or creating new models for 100 percent of our lineup by 2010. You can see the leverage you have if you decide to move to more-global platforms and more standardization. Every time you change the design, you get a chance to also standardize the manufacturing process.

So far you’ve announced plans to close some plants and lay off workers and you’ve sold Aston Martin. What else needs to be done?

We want to aggressively restructure the entire business to be profitable in the face of lower demand and a changing model mix. That means accelerating the development of products and services that customers really want, especially smaller and more fuel-efficient vehicles. We’ve secured financing that will help us achieve those goals, and we are further developing relationships with our dealer and supplier network. The whole value chain needs to be restructured in the same way and be prepared for the new products and services.

You’re about eight months into your job now, and sales are still falling. Do you need to make any course adjustments?

No, I think we’re pretty much on plan. We’ve said that for the next year the results will be worse quarter-over-quarter. But people kind of forget, and every time we announce results, everybody asks all these questions. Some have asked, “Why don’t you just consolidate all your facilities now?” But we don’t want to consolidate for the sake of consolidating. We want to go through the product cycles and do it with a good economic business case.

Is your goal just to restore profitability, or can you make Ford a leader in the industry again?

I think Ford can absolutely be a leader in this industry. The near-term restructuring will be the key to that. If you keep production up and then discount because the demand is not there, you never get a chance to improve your competitiveness. The market has shifted, and we’re going to shift with it, and then we’ll start to grow again.

Tata Motors is making a $2,500 car that’s being called the Ford of India. How do you compete with low-cost manufacturers like that?

Those vehicles are very different in capabilities and reliability from other market segments. Probably over time we will see more collaborative arrangements to serve those different markets. For example, we partner with Chang’an Motors and Mazda to deliver the products and services that the Chinese market wants. Right now we’ve chosen not to participate in that particular market segment -- very low-cost vehicles -- but maybe over time we will. If we do, it will probably be in a joint venture or some kind of collaboration.

Ford has been touting a renewed commitment to quality for years but continues to lose market share to foreign rivals, which consumers perceive as making higher-quality cars. Can you ever catch up?

The latest data we have shows that we have closed the gap. We are right there with Toyota. There’s still a perception gap, and we have to work on closing that gap so that everybody understands that Ford is back and it’s time to drive a Ford again. The key is going to be advertising and marketing and backing up our vehicles with warranties so that people know they have a great option in considering Ford. I’m encouraged by the fact that 60 to 70 percent of the time, when we get a customer in the showroom, they buy one of our cars.

The Street also seems to think that Ford’s culture is insular and old-fashioned and needs to be changed. Do you agree?

I have never found a more motivated, talented team than the Ford team. The fundamental processes and capabilities inside Ford are very strong.

Still, coming into a company in this bad shape, you must be shaking things up somewhat.

Yeah, when you restructure a business, you’re going to have a lot of movement, streamlining and focusing. But I think that’s good. We said good-bye to a lot of good friends. But you also end up pulling together even closer. I’ve been very gratified with the professionalism, work ethic and good will of everybody associated with Ford.

You’ve taken a lot of heat for being paid $28 million for four months of work in 2006 at a time when you’re asking the United Auto Workers and the rest of the company to tighten their belts. What’s your response?

Most of my compensation is tied to Ford’s business performance, outside of a piece that was compensation for leaving Boeing. It’s kind of gotten distorted because they just lump it all together. But I think it’s competitive, and the market decides about compensation. Leadership is worth it.

What’s it like working for Bill Ford, and how involved is he in the restructuring?

Oh, he’s terrific. He knows so much about the business. My agreement with Bill was that I’d only come and serve as the CEO if he would promise to stay as the chairman because he has a passion for the business, a vision for the business and a long-term perspective. He counts on me as CEO to manage the day-to-day operations, the strategy, the capital structure. He’s in the office every day, and I see him almost every day. He’s just a wonderful resource, but he absolutely expects me to run the business.

How important is Ford’s next contract, up for renewal this fall, with the UAW?

The contract negotiation this summer is important, but it’s just one step in improving our cost structure and competitiveness. We’ve been working on that with the UAW since even before the last contract. We have made agreements with almost every factory in our production system on work rules and flexibility that improve quality and productivity. We want to create an environment where everybody knows what we need to do to increase our competitiveness. The only way to assure that we all continue with this great business is if we keep improving our quality and productivity.