Ford's Deceptively Simple Strategy

Writing for the Fool has some cool benefits. One of those benefits came my way last week, when I had an opportunity to spend a few minutes talking with Ford (NYSE: F  ) CEO Alan Mulally.

I really enjoyed the conversation -- Mulally's enthusiasm is infectious -- and while he didn't tell me anything that would be news to anyone who has followed the company's turnaround closely, as a Ford shareholder it was great to hear his obvious excitement about the company's possibilities going forward.

If I were Mulally, I'd be excited too, because Ford is probably as well-positioned as it has ever been -- thanks to a simple-sounding plan with big consequences.

A long road back from the brink of disaster
The basics of Ford's turnaround story are well known: The company famously mortgaged everything it could, including the rights to its famous blue oval logo, to raise the money necessary to fund a turnaround through difficult economic times. That resulted in a horrific $30 billion-plus debt load, but it worked: Ford was able to continue funding product development through the worst of the economic downturn.

Now, the company is generating big profits and winning market share thanks to an array of well-received new vehicles, and management expects its cash level to exceed its remaining debt by the end of next year -- years ahead of schedule.

While the outline of the turnaround plan, originally dubbed "The Way Forward," was under way when Mulally arrived in September 2006, it was Mulally who led the mortgage-everything effort, and who, more than anyone else, took the company from there to here.

Mulally calls his approach "One Ford," and the overriding idea is deceptively simple: to run Ford as one company, with one set of products.

That might sound easy, but in practice, it's fiendishly complicated.

But really, only 20 products?
Speaking in London on Monday, Mulally said that Ford, which had 97 different models under several different brands when he arrived at the company, would eventually reduce its total number of "nameplates" to fewer than 30, perhaps as few as 20. "Fewer brands means you can put more focus into improving the quality of engineering," Mulally said, according to a Bloomberg report.

These remarks spurred news stories and commentary around the world, so it's worth looking at what Mulally meant. "Brands" and "nameplates" in this context are referring to model lines -- for instance, while there are probably a dozen different variations of the upcoming new Focus for different markets around the world, they all have many parts in common, can be produced on identical assembly lines, and came out of one design and engineering program.

That sounds like a sensible approach, but for years, that's not how it worked. Producing a truly global car model is much more complicated than it sounds, largely because of government regulations. The safety and environmental features a car needs to pass regulatory muster in the European Union are different from, and in some cases conflict with, the features needed to gain approval to sell in the U.S. Add in China, Japan, Australia, Brazil, and other key markets, each of which has its own set of regulations, and you can see the scope of the problem.

This, together with different consumer priorities in different parts of the world, led automakers to fragment their offerings over the years. For a long time, the Ford Focus sold in Europe was a completely different car from the one sold in the U.S. Most automakers do this, to some extent. The Honda (NYSE: HMC  ) Accord you'll find at a dealer in Germany, for instance, looks very different from the one sold here. In fact, it's a completely different car, one more closely related to the U.S.-market Acura TSX than to the U.S. version of the Accord.

On the other hand, a Toyota (NYSE: TM  ) Corolla is a Toyota Corolla, no matter where you go -- despite local variations and different versions (hatchback, sedan, coupe, wagon), the basic engineering and production requirements are the same.

The goal of "One Ford": Big profits
That's the model Ford is seeking to emulate. Just as Nokia (NYSE: NOK  ) may sell dozens of different cell phones around the world, but can't match the profits Apple (Nasdaq: AAPL  ) generates from the same-wherever-you-go iPhone, Ford plans to have fewer models, each of which is sold in more markets. That will both reduce its fixed costs (allowing for more profit per vehicle) and increase its engineering focus (allowing it to lavish more attention and refinement on each design).

The upcoming Focus, officially revealed on Wednesday in Paris, is the first Ford designed from the ground up with this strategy in mind. Mulally has said that Ford has accelerated development on other products, and the implication is clear -- we should expect a slew of new "world" products over the next few years.

And that, in a nutshell, is Ford's opportunity: an Apple-like small set of top-notch models, each of which represents the company's very best effort in its segment, sold all over the world, with lower fixed costs (and thus higher profits) per car -- coming to market just as the global economy is recovering.

Can you see why Mulally is excited?

Read more of the Fool's global automotive coverage:

Fool contributor John Rosevear owns shares of Ford and Apple. Nokia is a Motley Fool Inside Value recommendation. Apple and Ford Motor are Motley Fool Stock Advisor picks. The Fool owns shares of Apple. You can try any of our Foolish newsletter services free for 30 days, with no obligation.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2010, at 7:59 PM, Varchild2008 wrote:

    So what you are trying to get at here is that (F) FORD Motor Company is a sell. Right?

    :-) j/k

  • Report this Comment On September 30, 2010, at 8:38 PM, TMFMarlowe wrote:

    I don't know that the stock is a particularly strong buy right now, actually -- we may be in for a lull before earnings pick up again -- but as a longtime industry-watcher, I continue to be really impressed with the scope of this turnaround.

    Thanks for reading.

    John Rosevear

  • Report this Comment On October 01, 2010, at 2:27 AM, xmmj wrote:

    Ford should put Steve Jobs on their board, and "borrow" Jon Ives for 6 months.

    THAT would shake things up! (BTW - I am serious.)

  • Report this Comment On October 01, 2010, at 8:59 AM, TMFMarlowe wrote:

    @xmmj: I don't know how Ives' work would translate to cars, but... that is certainly the level of attention to design detail I would love to see Ford (or any other mass-market automaker) adopt. Certainly shrinking the product line would be a big step toward being able to do that.

    I used to think Honda was the most Apple-like of car companies, but lately they seem to have lost their focus... it's not impossible to believe that Ford could be picking up that mantle over the next few years.

    Thanks for reading.

    John Rosevear

Add your comment.

DocumentId: 1318514, ~/Articles/ArticleHandler.aspx, 7/22/2014 8:31:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement