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Q&A: Ford's Nick Scheele

Ford thinks it's time to climb out of the barrel
by Paul A. Eisenstein/The Car Connection 12/16/2002

If you want to keep things proper, you’d add “Sir” before addressing Ford Motor Co. Chief Operating Officer Nick Scheele. He earned that royal honor for his work in turning things around, a decade ago, at Ford Motor Co.’s ailing British subsidiary. But the affable Englishman isn’t one to stand on formalities. His easy-going style only barely disguises a savvy sense of business and incredible discipline, both essential skills as Scheele sets out to implement the tough turnaround plan he outlined last January. TheCarConnection’s Publisher, Paul A. Eisenstein, met with Scheele to discuss how things are going, and the challenges still ahead for Ford.

TCC: You’ve sold off or closed an array of businesses since announcing the turnaround plan last January. But one of the reasons you got into them in the first place was to help counter the down cycles of the auto industry. What went wrong?

SCHEELE: Let me just say, we’re a $160 billion automotive business. For us to get counter-cyclical, we’d have to build an $80 billion business, a $100 billion business. I mean dicking around with $500 million here or there ain’t going to get you there. If we took over GE, it has $103 billion turnover, that’s what we’d need. The number of different businesses we’d need to get countercyclical. And as you do that, the real issue that gets you is how are you going to manage them? Where will all the talent come from? How do you synergize? This becomes hugely problematic. I believe we’ve now learned this idea isn’t going to work.

TCC: So you depend on profits from trucks. But the Japanese are now targeting the heart of your market with light trucks. It’s clear the days when you went unchallenged in the truck market is probably past its peak. So how do you plan for dealing with that?

SCHEELE: The new F-Series is what we’ve got to do. (Editor’s note: a new, full-size pickup with far more differentiation between versions is due out shortly.) What we’ve got to do is start ratcheting up. Currency does give (the Japanese) an advantage. The lack of legacy costs (ie high retirement benefits) give them an advantage. Even when they build here. They can also get significant advantages from states and provinces that want to induce them. So how can we outgun them? We have to do it with features, and by getting out ahead of the pack. That’s what all of us in Detroit are trying to do. We have to recognize we do have some strengths.

TCC: An automaker like Ford can no longer get by with a weak piece in its business. You better have good product. You have to drive down lead time and costs. Your marketing operations has to be right.

SCHEELE: That is absolutely correct. Nor can you win this with home runs. You win with singles and doubles and the odd treble and home run. Barn-burner products, you can’t have that anymore. And that’s because the competition is so intense.

TCC: Your incentives costs have to be phenomenal.

SCHEELE: Yes—but the real issue is what are your net revenues? Our net revenues went up during three quarter of this year versus last year. And that’s the real measure that we should be talking about, not money against the market. We’ve been very clear that we’ve added cost. But we’ve also upped our net revenue.

TCC: How?

SCHEELE: By people paying more for the options we’ve added. A classic example is Navigator. When we originally added movable running boards, we thought (the option rate) would be 5 percent. We thought the electric rear seat would be maybe 20 percent. They’re both damned near standard. On Escape, the side curtains are close to 45 pecent Wall Street has beaten us up on cost. We don’t like the fact that our cost line has gone up. But the important thing is our revenue line has gone up. The fact that our net revenue has gone up shows that we’ve plowed that increase into supporting variable marketing (incentives). But we kept some of it for the bottom line.

TCC: But that mans you’re still not getting the true value of what those added features are worth.

SCHEELE: I agree. We’d like to get more. But in all honesty, if the trade-off is being competitive or not, we have to be. Otherwise our dealers would stop. And we have to support our dealers.

TCC: Do you see any time soon when these incentives will ratchet back?

SCHEELE: I think with the economic uncertainty, even if the outlook is not that bad, it would be a brave man who would sit here and say this is going to stop quickly. It is unlikely too because, quite frankly, why would anyone stop right now (with) the downside risk? The other factor is that borrowing costs are so low right now.

Why is the consumer still supporting us? Because the average number of weeks to buy the average car is now under 20 for the first time, well, I can never remember it being under 20. Gas is at an inflation-adjusted low. It’s not an issue. So, this is a pretty good time to buy. And today’s cars have ever more safety content, ever more features and are ever more fun to drive. So you expect the industry to be high.

TCC: With no real pent-up demand, the industry has done a lot better than many might have expected. But the sad part is, despite the high sales numbers, it’s a lot harder to make money than it was, not that many years ago, when sales were lower.

SCHEELE: Yes, it is. And that’s partially because of the marketing incentives, and partially because of the sheer weight of competition. The consensus is that we’ll be looking at 20 million units of capacity in North America. (ED: versus sales of around 16-17 million.)

TCC: Will Ford need to cut more capacity than previously announced?

SCHEELE: No, with the (turnaround) plans announced in January, we’re about right. We looked at it at the time and asked if that’s the right number and concluded it is. It takes roughly three-quarters of a million units out of the system. And you do need some turnaround capacity. You don’t cut to your (base) sales expectations.

TCC: Every company seems to have it’s “time in the barrel.” You’ve been saying lately, though, that it’s time to stop talking about a turnaround. Are people listening? Or will it take time to prove yourself to the skeptics?

SCHEELE: We’ve been pretty blunt and very open about how we stand. We said, at the start of the year, we’d get to breakeven by the end of the year. We said we’d close five plants, including one in Canada . We said we’d get $200 out of the cost of a vehicle, on top of our normal cost reductions. We said we’d get rid of a billion dollars in assets and that we’d get $2 billion in non-production savings. Everyone said we couldn’t do those things. We did all of them. We said we’d get launches off on time. We hit our launches on time, though we did have a minor glitch on Navigator and Explorer. Yet people have discounted all that and said, ‘they should have done better.’ We want to accelerate because we’re not satisfied, but we’re trying to be realistic. I think it (the criticism) has been a trifle overdone.

But one thing I’ve learned is that you tend not to get out of the barrel until someone else falls in.

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My first car was a 67 Mustang Coupe, 2nd one was a 67 Cougar XR-7, 3rd one was a 66 Mustang Coupe. Why did I get rid of these cars for ? I know why, because I'm stupid, stupid, stupid.

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