Ford CEO Says Turnaround Strategy Can Handle Possible Recession

Ford CEO Alan Mulally delivered the keynote address to kick off the two-day Automotive News World Congress in Detroit yesterday, delivering his now-expected unscripted discussion with the assembled conference attendees. In the wide ranging dialogue with the audience, the CEO touched on a number of topics of interest with regards to Ford's turnaround plan.

• The Ford turnaround plan is flexible: Responding to questions regarding potential cuts if the market should fall into recession in the first half of 2008, Mulally stated that the strategy "would not change at all" if a recession should befall the U.S. economy. The company has been very busy in its restructuring to adjust the size of the company to a realistic market share, not the 25% share that the company was sized for when he first arrived, he said. "The most important thing we can do is size the corporation to the real demand," he said at the conference. "The worst thing would be to go with the old business model of overproduction, discount heavily, and ruin residuals." In the event of a recession, that resizing and restructuring would not change. "If demand goes down substantially more than what we are predicting, then we'll continue to restructure our business to that new demand," he added.

• Ford has sufficient cash: The US$23.4 billion mortgage that the company has taken out on its facilities and brands originally started out as US$17 billion, but according to Mulally, "We raised US$23 billion because wanted a cushion for a poor economy, like we have now. We wanted to accelerate product development." With the news that the Federal Reserve had dropped the prime rate by 0.75% that morning in response to pressures from world markets and an impending drop on American markets, Mulally voiced a favourable opinion of the action. "It's going to be a positive, but I'd also like to continue dialogue to work on other pieces of the economy because there's just a lot of elements that can be worked," Mulally said. "But a move decisively like this, I think, is a very positive thing for all of us."

• A new Taurus is coming: In his comments in the question and answer session, he let slip that "the new Taurus is the one we should have made years ago; you'll see it in the next year or so." With the current Taurus only a few months old and introduced for 2008 model year, Mulally later told a scrum of reporters that he accidentally let word of the redesigned Taurus slip. There was no word on when the new Taurus would be introduced, or how it differs from the current model.

• No Nano for Ford: Mulally said that the company does not anticipate participating in the sub-B segment that has gained a lot of attention from the recent introduction of the US$2,500 Tata Nano in India. Ford cited the B- and C-segments as likely comprising up to 85% of the global vehicle market in the coming years, and that the company would instead be focusing on those segments, in which it is competitive.

• Ford's biggest challenge is keeping a clear view of the situation: "It's just so important in business to just always be looking through clear glasses, looking at the world the way it is, and then responding," he said. "The worst thing is to not look at the world the way it is and not have a point of view about the future, and then not have a strategy and plan that can deliver profitable growth in that kind of environment."

Outlook and Implications

Not much new information was imparted by Ford CEO Alan Mulally at the conference, aside from the accidental slip that a new Taurus was on the way, and that it looked "fabulous." Ford's current Taurus, initially born as the Five Hundred and revised for the 2008 model year after several years of lacklustre sales, has not exactly set the world on fire. The original Taurus became a fleet-only vehicle before its cancellation in late 2006, and the Five Hundred began to see increasing fleet sales as well. A freshening in 2007 that included a new, more powerful engine, and a six-speed transmission helped Taurus competitively, but a staid design and fairly heavy construction has conspired with a general trend away from the large sedan segment to keep it off best-seller lists. A revision could not come soon enough for Taurus despite its recent refreshening, as a more exciting, buzzworthy design is critical to capturing the buying public's attention.

The news that Ford's turnaround strategy is able to withstand the coming economic turbulence (at least, according to the company's CEO) is welcome news, but whether or not that is actually the case is highly debatable. By Mulally's own admission, he does not know whether or not Ford has enough time to effectively execute its full turnaround before the company runs out of cash. "People ask me that question, do you have enough time?" he said at the conference. "I tell them, I don't know, I'm not clairvoyant. But the plan that's in place is absolutely the right one." Ford continues to insist that a return to profitability is still on track for 2009, but the fact of the matter is that it simply must return to profitability by that time. But the presence of a recession in the United States (and the possible effects that would have on international markets) is very troublesome, as it would dramatically reduce vehicle sales for the U.S. market to levels several hundred thousand units below the 15.57 million that Global Insight has included in its January forecast for 2008. A reduction greater than that would put the company at tremendous risk, as the recession would further affect housing, which in turn would further depress segments like full-size domestic pick-up trucks, vehicles that still comprise a significant portion of Ford's sales.

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