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Bill's Brand-New Ford

It was panic stations at the start, but Bill Ford never doubted he had the right stuff to revive his great-granddaddy's car company. Now he has to prove that his controversial strategy will keep Ford in business for another 100 years.

By Alex Taylor III/FORTUNE MAGAZINE

Looking southeast from his corner office on the 12th floor of Ford World Headquarters in suburban Detroit, Bill Ford can see the Rouge manufacturing complex erected by his great-grandfather 87 years ago. Dominating the room, his seven-foot-long, burled-walnut desk is discreetly monogrammed with the initials of his grandfather, Edsel Ford, who once used it himself. Everything else, though, is Bill's—from the rich blue carpet to the oversized aquarium stocked with exotic fish—a 300-square-foot sanctuary of environmental perfection. The office was designed and built, says a clearly proud Ford, using only renewable resources, like recycled newsprint (for the ceiling tiles), wool, and ramie. Even the leather used to cover the five chairs was tanned without using chemicals.

In days gone by this kind of impassioned commitment to all things green earned the otherwise low-key scion a reputation as an impractical dreamer. Today, though, it serves as convenient shorthand for Ford's 32-month tenure as CEO of the family company (the Fords still own an estimated 5% of the common stock and 40% of the voting stock): Ever his own man, this Ford will do things his way, even if it bucks conventional wisdom. When he took over from Jac Nasser (who was undone by his grandiose ambitions), Ford, now 47, seemed to possess precious few of the skills required to run the U.S.'s fourth-largest corporation. Ford had a few doubts of his own. "In those first six months, my head was spinning," he said in an interview with FORTUNE. "I almost wasn't sure where to begin. It was panic stations every day."

Indeed, Ford Motor went on to lose $5.5 billion that year, and some even thought the company was headed for bankruptcy. But, quietly operating under the radar, Bill Ford had gradually started to rebuild the company, by focusing on the fundamentals—lowering costs, raising quality, and developing a regular program of new models. To anyone who knows the founder's great-grandson, his keep-it-simple, back-to-basics approach is entirely in keeping with his demeanor. The big surprise is that it has worked. Ford has made a fetish out of underpromising and overachieving—and he is showing he can do so with enormous proficiency.

Bill Ford blew his cover when he unveiled earnings of $1.9 billion for the most recent quarter—twice as much as the company had told Wall Street to expect and far more than historical rival General Motors, which made only $1.3 billion. What's more, Ford and his newly reconstituted management team looked smart doing it. Rather than relying on windfall profits from a couple of hot-selling models that might cool off later, the company showed a mastery of the myriad small but important details that bolster the bottom line. It reduced overhead, cut product expenditures, and slashed warranty costs. At the same time, it boosted revenues by targeting incentives and increasing the mix of high-profit vehicles, such as SUVs with four-wheel-drive packages. Sexy the strategy isn't, but it pays off, and the first quarter was one to remember in Dearborn. Even Bill Ford couldn't hide his excitement, declaring to an assembled audience that "Ford Motor Company is on a roll."

That moment marked Ford's coming of age as a CEO. (He had acted as nonexecutive chairman since Jan. 1, 1999.) After the confusion of his first months at the helm, he has assumed a firm command of the day-to-day issues facing the company and has begun to devote more time to charting the company's long-term future. "I have a thicker skin than I had 2 1/2 years ago," he says. "I'm probably more confident than I was. But I always felt I could do this job—even if others didn't. I really don't look to anyone else for validation."

Behind the earnings hoopla, something even more interesting is beginning to emerge: Bill Ford's strategy for the company. It is uncharacteristically audacious, and sweet in its apparent simplicity. Ford wants to make more money selling fewer cars. In Detroit that makes him a virtual heretic and threatens to turn accepted industry practice on its head. This is a business where the fixed costs are so enormous that bosses like DaimlerChrysler's Juergen Schrempp have staked their company's future on selling more cars, whatever the immediate impact on profits. Pushing fewer cars out of the factory also means accepting lower market share, blasphemous to some ears, particularly since Ford has been losing share since 1995. And prioritizing profits might also threaten brand loyalty, a fragile commodity. Customers who shop elsewhere because Ford's prices are a few dollars higher could be lost forever.

For now, though, the strategy is working well: Ford is discontinuing slow-selling, low-margin vehicles like two-door Explorers, holding back on sales to rental-car fleets, and using a rifle instead of a shotgun to target market incentives. Bada-bing! Residual values should go up, increasing the value of used Ford cars and making leases cheaper. Better still, net revenue per vehicle has climbed $934 over the same period a year ago—a big deal in an industry that has found it impossible to raise prices for the past few years.

Longer term, questions remain. Other automakers, like GM in the early 1990s and Chrysler in the early 1980s, experienced quick turnarounds and then fell back to earth. And by playing his cards so close to his chest Bill Ford has left some analysts trying to figure out exactly how the automaker, which rang up $164 billion in sales last year, did it. After describing Ford in January as a "mystery, wrapped in a riddle, inside an enigma," veteran Goldman Sachs analyst Gary Lapidus declared in April that it was "still a riddle wrapped up in an enigma." Morgan Stanley's Steve Girsky said, "I've never seen a company where the numbers were so good and the people were so skeptical." Some investors suspected that Ford was sandbagging them, and they aren't cutting it much slack. Its stock hit a 12-month high of $17.34 in January and has recently been trading around $15.60.

Even though Bill Ford hasn't told investors much about his new strategy, he's emphatic in his belief that it's essential to the long-term viability of the company. "At a certain point, market share does become an issue," he says. "I do think '05 will have a different market share story than '04 [because of new models], but I'm not going to draw a line in the sand. If I had been pursuing market share over the past 2 1/2 years and draining away the assets of the company rather than building them, I think that would have set us up for a very different kind of future."

Key to the evolution and execution of Ford's strategy is the team of executives he has assembled around him. They work well together—a big change for a company that historically has been rife with sharp-elbowed infighting and palace intrigue. Ford put the final pieces in place in April when president Nick Scheele (pronounced SHAY-la) moved closer to a badly needed hip-replacement operation and eventual retirement by giving up his operating duties. Scheele is still a core member of the team, though, unlike his onetime rival David Thursfield, who ran both Ford of Europe and the purchasing department and recently left the company. The acerbic Thursfield had been unable to return Europe to consistent profitability and generated widespread animosity among suppliers.

Those management changes paved the way for the ascension of Jim Padilla, 57, a manufacturing specialist and 38-year company veteran, to chief operating officer. Padilla gets credit for boosting profits in North America by improving operations and smoothing product launches (like last year's highly successful introduction of the F-150 pickup truck). Although he lacks the superstar wattage of GM's Bob Lutz, Padilla is an inspirational leader who displays unshakable company loyalty. "I look for two things in people," says Ford. "Results—I don't like to hear a lot of bullshit, and I want to see results. And the other is teamwork and communication. We've had periods around here—too many—when there hasn't been teamwork and the communication was poor, including at the top." Ford gives his new COO high marks. "Padilla is a model of consistency in his messages," he says. "People think it is simplistic or trite, but it works." Under Padilla, employee morale is soaring, with the percentage of workers who say they feel confident about the future shooting up to 92% in April from 70% in January.

With his broad cheekbones, reddish complexion, and bushy white eyebrows, Padilla was nicknamed "Father Noel" during a stint in Brazil, but don't be fooled by the twinkle in his eye. He developed his own foolproof analytical tool, called the "table of truth," to evaluate operations. Padilla monitors factory performance by correlating model type with warranty claims to identify problems. Padilla uses a different system to analyze Ford's product line. He ranks vehicles by the amount of variable profit (the money left over after the direct manufacturing costs are accounted for) and scrutinizes any being sold for less than they cost to make. Automakers frequently sell small cars that get good gas mileage at a loss. Why? To lower their corporate average fuel economy and air-pollution emission ratings. Padilla is on a crusade to scale back the practice. "I'm a big believer in the table of truth," he said over dinner at a Ford new-model introduction in California recently. "If the other guys were looking at this, they wouldn't be putting $4,000 in the trunk of a [Chevrolet] Cavalier."

Padilla worked closely with Scheele rebuilding Jaguar in the early 1990s, and they, along with Bill Ford, constitute the company's ruling troika. They are also the core of the office of the chairman and chief executive (OCCE), a ten-member group that meets once a week to review operations. Ford has been drained of management talent—first by the reorganization known as Ford 2000 and then by the upheavals under former CEO Nasser. Beyond Scheele and Padilla, Bill Ford has had to plug holes by calling back retired executives (Allan Gilmour, Bruce Blythe) and giving them new jobs and recruiting board members (Carl Reichardt) as advisers. He also ended a long search for a new CFO by naming an insider, Don Leclair.

As the first-quarter results show, Ford's management by committee is remarkably effective. The OCCE is described as an open forum that encourages free-flowing discussion, with Bill Ford getting the last word. Says Padilla: "Bill's style is to get a lot of input and triangulate. He doesn't like a big meeting with a lot of railbirds. He's not a command-and-control CEO. He's a good listener and manages by consensus. Bill is very involved. There is not a decision that goes forward without his input and knowledge. He leaves it to the operating people to do the work. On issues where he doesn't agree with us, he won't budge."

Ford's success has set off alarm bells at GM, which has been pursuing an opposite strategy. GM wants to sell all the cars it can—regardless of the margins—to help amortize its enormous fixed costs: retiree health care and pension expenses, capital investments, and engineering. Since the cost of developing a new Chevrolet is relatively inflexible, GM believes it's better to spread the expense over 300,000 sales than 150,000. Dealers as well want to sell all the cars they can to keep up profits. (Ford has legacy problems of its own, of course, but they aren't as great as its rival's.)

GM executives say under their breath that Bill Ford is shrinking his company. Indeed, that's what it looks like from the outside. Forgoing all those low-profit sales has speeded up Ford's market-share loss. Ten years ago the Ford, Lincoln, and Mercury brands commanded 25.4% of North American car and truck sales, according to industry consultant CSM Worldwide of Farmington Hills, Mich. For the first four months of 2004 that number has shrunk to 18.1%. CSM sees Toyota's fast-rising brands, including Lexus and Scion, selling more passenger cars (though not trucks) than Ford this year for the first time, an industry milestone that won't cause any cheering in Detroit. By 2009, CSM expects Ford's actions and competitive pressures to squeeze its share even further, to 15.5%.

Analysts like Scott Sprinzen of Standard & Poor's are skeptical that the strategy will work. He wrote in April, "It is highly uncertain Ford can continue to sidestep competitive pricing pressures so effectively. If such market-share slippage continues, it could undermine the benefits of recent cost-cutting actions and pose a strain on its dealers." In May the pressure grew. While GM raised incentives 13%, to $4,325, driving sales up slightly, Ford boosted incentives only 2.3%, to $3,515 —and sales slipped. As a result, Ford's May inventories stood at 81 days' supply, 24% above the company's average of 66. The strategy could become an anchor if industry sales slump and Ford gets a smaller share of a declining market. Lately Ford has shown a willingness to interpret its strategy flexibly. Although it plans to reduce fleet sales further in 2004, it boosted them 9% in April and 16% in May.

Those are tough calls to make, and they produce a certain amount of internal friction. But perhaps Ford is just being smarter than the other guys by getting ahead of the curve. As new entrants continue to exploit the U.S. auto market, the existing players will inevitably see their prominence diminish. "Why even dream about returning to your old level of share when you make more money at a lower level?" asks economist Sean McAlinden at the Center for Automotive Research in Ann Arbor. "Maybe that's the only way that Detroit can become profitable again."

Soaring gasoline prices have enabled Ford to grab bragging rights by becoming the first company to introduce a hybrid-powered SUV—the Escape Hybrid (see The New Escape Hybrid's a Sure Hit—But It Flunks the Profit Test). That aside, Ford could be especially vulnerable to sustained higher gas prices. Some experts say that when all the costs, like engineering and factory tooling, are accounted for, Ford makes more than 100% of its automotive profit from two categories of vehicle: pickups and SUVs. SUV sales have risen this year but looked weak in May as Explorers, Navigators, and Expeditions all declined. While they don't yet provoke the kind of violent reaction that GM's Hummers do, there is growing concern that high gas prices and worries about future supply will eventually make SUVs socially unacceptable, like smoking in the 1980s and wearing fur in the 1990s.

Meanwhile, Ford will introduce a fleet of attractive 2005 models this fall. Product launches are tricky these days, akin to opening a blockbuster movie during the crowded summer season. Everything has to work just right to extract the maximum commercial potential. But the retro-style Mustang should be irresistible to loyal customers. Likewise, Ford has gotten positive buzz for its new Five Hundred sedan and the Freestyle crossover sport utility, which will displace the aging Ford Taurus and Mercury Sable from Ford's assembly plant in Chicago. Still, the market for rear-drive, sporty cars isn't growing, so the Mustang won't do much for Ford's market share, and although profits per car are higher for the Five Hundred and the Freestyle, fewer will be sold, giving another hit to market share.

And despite all Ford's new models, analyst Michael Bruynesteyn of Prudential Securities sees a big hole in the carmaker's product-launch schedule during the first nine months of 2005, before a new Explorer and a mid-size sedan likely to be called Fusion (it was formerly known as Futura) should arrive. Contrary to Bill Ford's belief that the automaker's share slide will stabilize at the end of this year, Bruynesteyn forecasts that the slide is "likely to continue through mid-2005." He believes that Ford will introduce fewer new models measured as a percentage of total volume than any other major automaker between now and 2007, "which we view as a major disadvantage."

So far Bill Ford's profits-over-market share plan has paid off in spades and given him some breathing room. With North America running more smoothly, Ford, Padilla, and the OCCE can focus on weaker parts of the Ford empire. Yet another new president has been installed at Ford of Europe, which, the joke goes, has had more bosses than the Vatican has had popes. Ford also needs to play catch-up in China. In June it announced plans to more than triple output there this year to 65,000 vehicles, but that is still only one-tenth of what GM will make.

A friend of Bill's once said that being CEO was a job he didn't need and didn't want. Bill agrees with the first part of that statement: "I could leave here today and my lifestyle wouldn't change at all." But he sounds as if he is growing to like being in charge. "I wasn't always sure I wanted this job," he says. "But I'm more sure today than I was 2 1/2 years ago. I don't want to sound arrogant, but I do feel that I am making a difference for this company." He won't say how long he plans to stay, but this is one CEO you can be sure isn't playing for short-term gains. The Fords have run Ford Motor Co. for more than a century now, and they show no sign of letting go.
 
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