Business Week, January 09, 2007


Mulally: Ford's Most Important New Model

To help turn Ford around, its new CEO is first attacking its entrenched bureaucracy, forcing it to be smarter and more efficient

With six concept and real production cars to show at the North American International Auto Show this week, Ford Motor (F) is trying to make a statement to the world that the 103-year-old automaker, despite falling market share and deep financial losses, is serious about being around for a second century. As important as the vehicles are, however, the most important new model to be found in Detroit's Cobo Hall is the new CEO, Alan Mulally, who is just completing three months on the job after coming to the struggling automaker from Boeing.

Mulally hasn't earned his stripes as a "car guy" yet. In fact, as he walked around Ford's show cars in October shortly after arriving, one Ford designer showing him the Lincoln MKR concept car explained to him how important the C-pillar design would be in future Lincolns. "And what's the C-pillar?" the former Boeing (BA) executive asked. Such naivete in front of underlings on the part of an auto industry chieftain operating in a historically testosterone-filled business might have spelled a kind of social and political death by backroom chatter a decade ago.

Not now. Ford Motor's future is so precarious that even many hard-bitten veterans of the Detroit auto wars once quick to reject outsiders are embracing his methodical and hyperdisciplined coach approach to fixing the automaker. It's an approach that relies more on asking questions that haven't been asked before than it does on dictating sweeping brand realignments or new product ideas. "We don't need a hip-shooter, we need someone who has been through a reckoning like we are going through now," said Chairman William C. Ford Jr. in a recent interview.

Weeding Out Needless Complexity

Mulally is doing nothing less than undoing a management scheme put into place by Henry Ford II almost 40 years ago-a system of regional fiefdoms around the world that has sapped the company's ability to compete in today's global industry and one that Chairman Bill Ford couldn't or wouldn't unwind. And Mulally is accelerating a shift begun in small ways under Bill Ford when he was CEO, before giving way to Mulally. For example, there is a new emphasis on lessening the power of Ford's historically powerful finance department, which too often compromised a model's competitiveness in the interest of saving a few dollars.

A phrase frequently uttered by Mulally these days, which now draws snickers from staff that have taken to respectfully impersonating his friendly delivery, sometimes with arm around shoulder, is, "I hear what you are saying, but I can't get there." Take that Lincoln concept car Mulally was shown a few months ago. The show car is built off the rear-wheel-drive-engineered Ford Mustang. Ford has another rear-drive-engineered car it could have chosen, the Australian Falcon. Mulally's questions, said Ford President of the Americas Mark Fields, have centered not so much on the design, which he liked, but on why Ford had two separate platforms for rear-drive small and midsize cars like the Mustang and Falcon. Fields says the answer lies in Ford's past regional system whereby Ford Australia wouldn't want to jointly develop a chassis with Ford North America and vice versa. "He [Mulally] is really driven by finding needless complexity," says Fields.

When Mulally arrived at Ford last September, that needless complexity was the first thing he zeroed in on. He also found multiple engineering and manufacturing platforms in development for the small sporty cars and for large SUVs and small vans. Most puzzling to him was that a global company trying to create manufacturing and efficiencies worldwide and fighting for its life had one product chief for North America and another for the rest of the world. Just three months into the job, the CEO who didn't know that the C-pillar is the vertical support behind the rear passenger door appointed one global product boss, Derrick Kuzack, and has him reporting to Mulally rather than Fields.

Not Afraid to Apply the Brakes

Mulally isn't a complete neophyte about cars. He speaks with knowledge and affection about a series of Nissan (NSANY) sports cars he owned in the 1970s whose engines ran hot in part because the fuel line, he says, was wrapped around the engine block in a way that wasn't ideal. One part of the car Mulally is definitely familiar with is the brakes. So far, he has slammed on them to postpone two big and potentially costly decisions that had been all but final before he took over.

The first is the sale of Ford's ailing British luxury brands, Jaguar and Land Rover. An executive with knowledge of the company's midsummer reckoning of its restructuring plans says there was "a strong direction toward selling the brands because of more foreseeable losses well into the future." Mulally tabled the subject for more study. "You only get to sell those once, and he wants to make sure," said the executive. Mulally said this week that Jaguar is not for sale.

But he has also been helped by a lack of serious bidders. Renault-Nissan CEO Carlos Ghosn said last September he wanted to talk to Ford about the luxury brands and other issues. But more recently, he has said he is no longer interested. Mulally also delayed a plan to build a new low-cost manufacturing complex in North America [likely Mexico] announced by Fields last year. Instead, he took Fields to Japan in late December for meetings with Toyota to discuss, among other issues, the possibility of a joint manufacturing project in North America.

Bringing Order to a House of Lords

Ford has mortgaged its assets to borrow up to $23.4 billion to fund a massive restructuring plan and cover billions in losses expected until 2009. The company, which lost $7 billion in the first nine months of last year, expects to burn up $17 billion in cash during the next two years. Ford is expected to lose its status as No. 2 automaker by sales this year in the U.S. to Toyota (TM).

Mulally, say Ford executives, has been appalled by the power the finance department has had on product decisions. When Ford launched its Fusion sedan a year ago, for example, it did so without a navigation system, satellite radio, or side air bags. The finance department forced the limits to keep the car's "piece cost" down. But it left the car short of equipment offered even on the lesser Hyundai Elantra. The new model on sale for the 2007 model year has side-curtain air bags, as well as satellite radio and an all-wheel-drive option. The same finance system kept, until now, a stability control system out of the Ford Escape, which has been in large part why the SUV has been left off Consumer Reports' recommended list, a key endorsement Fields says Ford must get more of.

Mulally's approach to management and communication hasn't been seen before in the halls of Ford, which have historically been the atmosphere of a kingdom with competing dukes. Regional chiefs with responsibility around the world meet weekly now instead of quarterly. At one recent meeting, Mulally leaned over to Fields and asked why one of the regional directors was prattling on when he clearly didn't have the answer to the question the CEO had asked. Fields responded, "Because 'I don't know' isn't an option at Ford." Now it is. Each manager has to represent progress on new products and financial goals with color-coded progress lines. If he or she is behind, the color is red. "The important thing they know now is that it means the task is red. It's not them that are personally red," says Mulally.

Plainspoken New Guy

Mulally is big on symbolism to get his message across. An early example came at one of his weekly Thursday meetings at which he brings together the operating heads of the Americas, Europe, South America, and Asia to share progress they are making against their targets and to find new ways to share resources. In preparation for third-quarter financial results, some regional chiefs' slides said "3Q," while others said "Third Quarter." It may sound picayune, but Mulally questioned why the slides weren't uniform. Now they are. "When you get people on the same page talking the same way in the little ways, it helps with the big ways," says Mulally.

But Mulally is still somewhat green about the job. Besides his C-pillar query, he recently had to ask what the name of the auto industry's lobby group is (Alliance of Automobile Manufacturers) and what NADA stands for (National Automobile Dealers Assn., which he will address in a keynote speech in February). He uttered the name of Lincoln's concept car for the Detroit Auto Show (which he has never attended until now), the MKR, but said the acronym very slowly and turned to Fields to see if he got it right. And when asked why Ford had the poorest corporate average fuel economy (CAFE) rating among major automakers, he asked one of Ford's public-relations managers, "Is that right?"

But the lack of experience is balanced with a refreshing frankness and plain communication that staffers appreciate. Before the company's announcement of its latest restructuring, he asked staff, "What are we saying about Jaguar?" Then-Ford Europe chief Mark Schultz rattled off a three-paragraph answer he planned to read to the media. The CEO responded: "I have no idea what you just said....Are we keeping Jaguar? If so, let's just say that. If it changes, we'll let them know."

"Working Smarter" Business Model

And he is attacking, to the delight of many Ford executives, a system by which the automaker shifts managers as often as once a year. The company, for example, has had five heads of Ford Europe in as many years. "It's amazing," says the former Boeing executive. "There's been no accountability. Engineers have been shifted every six months and told to be entrepreneurs, each with their own agenda. I worked in the same job for nine years at Boeing."

Key to Ford's comeback is not so much making do with fewer resources than its rival Toyota, but working smarter with what it has. Consider that Ford currently has different V6 gasoline engines for the U.S., South America, Europe, and Asia. And it has had three distinctly different small cars for the South American, European, and U.S. markets. "The cost and complexity of that duplication is ridiculous," says Mulally. Ford has recently committed to building one small car for all its world markets, with slight changes in sheet-metal designs to reflect local tastes.

That's to avoid the failure of trying to sell the same car around the world, which the company did in the 1980s and early '90s with the Ford Contour compact sedan. And the car's engineering will be sourced from one recently formed core engineering center in Michigan. "We wound up with so much duplication because Europe wanted to source from Europe and South America wanted to source from South America, and so on," says Fields. "It's a business model that doesn't work, and we're paying the price for keeping it going as long as we did."

Drive and Curiosity

Mulally is coy about divulging details of his trip to Japan last month to visit Toyota Chairman Fujio Cho. Generally, he says, it was to discuss fuel-economy regulations and technology as well as "places where we could cooperate." When asked how long the meeting lasted, his almost comical attention to detail is evident. "Two hours and six minutes," says Mulally.

Mulally, who may be motivated to succeed at Ford in part because he got passed over twice for the CEO job at Boeing, has an almost kid-on-Christmas-morning curiosity about Ford. On a recent trip to Las Vegas, he rented a Ford Taurus, a car he has affection for from when he studied the car's development 20 years ago for Ford's production systems. Ford recently ceased production after turning the car into a rental fleet car. "I haven't had time to do the deep dive on why we stopped investing in it, but I'd like to," he says wistfully. "You know, Toyota used to be scared to death of Ford and the Taurus and thought we had this big plot hatching when we stopped investing in it to make it better. I wish we had."

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