Bill Ford on Tipping Points and Thinking Small

[Cougarpower]

After a loss as large as the one Ford (F) posted in the second quarter, you might expect the chairman of the board and the most high-profile member of the famed auto family to be crying in his beer. But Bill Ford is embracing the prospect of a more fuel-efficient Ford with gusto. He recognizes that it's a tough moment for the company and its employees as high gasoline prices dramatically change the game in Detroit. Yet he has a risk-taking CEO, Alan Mulally, in place and a new marketing whiz, James Farley, shaking up the culture. While Bill Ford says there will always be a need and desire for the company's iconic trucks, he doesn't believe that the American driving and buying public will ever go back the days when SUVs ruled. A student of Zen, he has awakened to a new future—and guess what, it's small.

 

MARIA BARTIROMO

Bill, the company reported the worst single quarter in history last week, a loss of $8.7 billion. What's happening, and why did we see such a loss?

 

WILLIAM CLAY FORD JR.

We had a good first quarter, we made money, and we thought we were on our way. Even though fuel prices were rising in the first quarter, we didn't see a big change in customer behavior. But when gas crossed about $3.50 a gallon, that was the tipping point. And, of course, we had no idea where that tipping point was going to be. Literally overnight people stopped buying trucks and big SUVs and came into the dealerships demanding the smallest and most fuel-efficient vehicles they could find, and the fall-off [in sales], therefore, was very dramatic. What you saw in the second quarter was not only the result of that but also the result of falling residual values of trucks and SUVs.

 

A lot of people say Mulally was the right guy to bring in, but he seems to have been surprised by the second-quarter loss. BusinessWeek reported that he was unprepared for the loss until about two months ago. Why didn't management see this train wreck coming sooner?

I think you go back to what I said earlier. It wasn't until early April that customer behavior began to change, and then the train started moving very fast.

 

For years the F-150 pickup was the best-selling vehicle in America, and it really did help shape the perception of the company. How do you now retool Ford's image in the mind of the buying public?

That's an interesting point because first of all, we're not walking away from the truck market. We're the best there is in the truck market, and people are still going to need trucks. But the challenge that lies before us is to reestablish ourselves in the car market. And we're doing that with the Focus—we're basically sold out of the Focus and the Fusion. So what we need to do now is to add to that [lineup of smaller cars]. But we will have a marketing challenge to get customers to understand that Ford is a fuel-efficiency leader.

 

On a scale of one to 10, with 10 being the most confident, how confident are you that this switch to smaller cars is going to work?

I'm very close to the 10 end of the scale because we're basically bringing over our European product, which has been very, very successful. They're extremely profitable, have won lots of awards, and are very fuel-efficient—plus they're extremely well-appointed. It's not like we have to create these products from scratch. They're there, and they're ready to come over here. These are not what you think of when you think of small cars, which we used to produce here, which tended to be stripped down and not terribly desirable.

continue at the link

[RichardJensen]

That was a good read.

 

Possibly because David Kiley didn't conduct the interview. Then the questions would've been like, "Do you regret not hiring Alan Mulally in 2000?" "Should you merge with Nissan?" "You couldn't hire Carlos Ghosn--why didn't he want to work for you?" "Why didn't you sell Jaguar sooner?" "Why haven't you sold Volvo?" "When did you stop beating your wife?"

 

Anyway, it was a good read. I think Bill Ford nailed the psychology of the small car switch. If gas prices dip lower, and stay low for an extended period, people will still remember this year, and they will definitely not move back to SUVs. The second gas crunch ('79-80) practically killed Detroit. However, I don't quite agree that this shift away from larger vehicles is permanent. Nothing is permanent.

Edited August 6, 2008 by RichardJensen

[Daryll40]

That was a good read.

 

Possibly because David Kiley didn't conduct the interview. Then the questions would've been like, "Do you regret not hiring Alan Mulally in 2000?" "Should you merge with Nissan?" "You couldn't hire Carlos Ghosn--why didn't he want to work for you?" "Why didn't you sell Jaguar sooner?" "Why haven't you sold Volvo?" "When did you stop beating your wife?"

 

Anyway, it was a good read. I think Bill Ford nailed the psychology of the small car switch. If gas prices dip lower, and stay low for an extended period, people will still remember this year, and they will definitely not move back to SUVs. The second gas crunch ('79-80) practically killed Detroit. However, I don't quite agree that this shift away from larger vehicles is permanent. Nothing is permanent.

 

I think it was a good article as well. And while I agree that if the oil shock continues to subside, people will start buying larger vehicles again, I also agree with Ford that we're not going back to the days where everyone had or wanted an Explorer or Expedition. I think the enormity of the shock...basically gasoline doubling in price in a few months...and the constant harping about "peak oil" (which I still don't know if is true or is just environmental whacko talk) has scared people from investing $40,000 in new guzzlers. If they can get the smaller vehicles here quicker..and the hybrid Fusion/Milan...they COULD turn things around. I wonder if the recent lease write down will cover all of the huge SUVS that will come back or just a portion. More writedown needed?

[Edstock]

And a really great article on Jim Farley!

 

http://www.businessweek.com/magazine/conte...95040365207.htm

 

EXCELLENT!

[Cougarpower]

I think the writedown covered all heres how it went

 

Indeed, Ford warned investors Thursday that the company’s operating results for 2008 would be worse than 2007, when it had a pre-tax loss of $3.7 billion (a net loss of $2.7 billion), and that it would burn more cash than expected.

 

In the second quarter, Ford recorded a pre-tax loss of $1 billion, as strong results in Europe and South America failed to offset a $1.3 billion loss in Ford’s home market. The loss included a $294 million operating loss at Ford Credit, once a generator of billions in profit for its parent, which was hit by huge losses on leased vehicles.

 

The automaker recorded $8 billion in special charges during the quarter, partly to pay for job cuts and other restructuring actions. But $7.4 billion of the charges were to write down the value of certain truck factories that will need to be retooled and to write down the value of used trucks and SUVs coming off lease that are no longer wanted.

 

The good news was that Ford achieved $1 billion in cost savings during the period, and the company remains on track to hit its $5 billion cost-reduction goal by the end of 2008.

 

Chief Financial Officer Don LeClair said the company had “stress-tested” its financing plan in 2006 when it obtained $23 billion in loans, so despite today’s tougher market conditions, Ford’s liquidity is sufficient. The company had $26.6 billion in cash at mid-year, with another $11.6 billion in available credit lines to weather the storm.

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[jpd80]

MARIA BARTIROMO

On a scale of one to 10, with 10 being the most confident, how confident are you that this switch to smaller cars is going to work?

 

WILLIAM CLAY FORD JR.

I'm very close to the 10 end of the scale because we're basically bringing over our European product, which has been very, very successful. They're extremely profitable, have won lots of awards, and are very fuel-efficient—plus they're extremely well-appointed. It's not like we have to create these products from scratch. They're there, and they're ready to come over here. These are not what you think of when you think of small cars, which we used to produce here, which tended to be stripped down and not terribly desirable.

 

That speaks volumes - more to where the market is heading and less regarding FNA's past efforts.

 

The good news was that Ford achieved $1 billion in cost savings during the period, and the company remains on track to hit its $5 billion cost-reduction goal by the end of 2008.

 

Chief Financial Officer Don LeClair said the company had “stress-tested” its financing plan in 2006 when it obtained $23 billion in loans, so despite today’s tougher market conditions, Ford’s liquidity is sufficient. The company had $26.6 billion in cash at mid-year, with another $11.6 billion in available credit lines to weather the storm.

 

I think GM will fall further harder because they haven't done the hard internal structuring like Ford.

Edited August 6, 2008 by jpd80

[elkarlo]

And so far this year, Ford has 10.4% of the passenger car market, half what it had in 1995. end quote

 

Just interesting to know. If you add in Mazda, it's prolly getting close to 15%, not bad with all the competition there is now.

[Cougarpower]

^ add to that this from Bill Ford

 

Does Ford have enough liquidity to see it through this current crisis? Sure, Mulally comes in and leads this recapitalization and raises a lot of money, but it looks like you're burning cash faster than you can recover it in sales. How worried are you about the worsening economy thwarting the recovery plan?

 

Obviously, the economy is not where we need it to be, and we project a rather slow industry through the rest of the year. And it's hard to see next year with any great clarity at this point. But at the end of the second quarter we had over $38 billion in liquidity. And so, as you point out, we did go out, just before Alan got here, and borrowed a ton of money. And our timing was excellent because we did it right before the credit market closed down. And we had that in place when I was interviewing Alan.

[03 LS]

^ add to that this from Bill Ford

Does Ford have enough liquidity to see it through this current crisis? Sure, Mulally comes in and leads this recapitalization and raises a lot of money, but it looks like you're burning cash faster than you can recover it in sales. How worried are you about the worsening economy thwarting the recovery plan?

 

Obviously, the economy is not where we need it to be, and we project a rather slow industry through the rest of the year. And it's hard to see next year with any great clarity at this point. But at the end of the second quarter we had over $38 billion in liquidity. And so, as you point out, we did go out, just before Alan got here, and borrowed a ton of money. And our timing was excellent because we did it right before the credit market closed down. And we had that in place when I was interviewing Alan.

It's more likely that the plan was in place but Mulally sealed the deal. From what I heard, Ford (the company) had been talking with wall street trying to get the deal done, but the final presentation/decision happened after Mulally officially took over. Right before Don Leclair and assitants went to NY for the last presentation, Mulally offered "what can I do to help", Don said, "You! The only thing they have not seen or heard is you." So Mulally went and sold the plan, and got 23 bln instead of 17.

[TStag]

I think the era of huge SUV's and Trucks is drawing to an end. But I think an era of smaller, more fuel efficient trucks and SUV's is arriving. So maybe Ford should downsize models like the Lincoln Navigator rather than ditch them althogether. After all it's rumoured Ford make $10,000 on the average Truck or SUV in profit. Ford won't get these margins on cars like the Focus or Fiesta. So simply put Ford must'nt over react.

[Harley Lover]

I think the era of huge SUV's and Trucks is drawing to an end. But I think an era of smaller, more fuel efficient trucks and SUV's is arriving. So maybe Ford should downsize models like the Lincoln Navigator rather than ditch them althogether. After all it's rumoured Ford make $10,000 on the average Truck or SUV in profit. Ford won't get these margins on cars like the Focus or Fiesta. So simply put Ford must'nt over react.

One of the rumors floating around is that Ford is considering moving the Navi and Expedition to the F100 chassis, so you're spot on.