• All
    companies
  • All
    industries
April 22, 2008: 5:41 AM EDT
Email | Print    Type Size  -  +

Can this car save Ford?

Ford is betting its future on a new strategy, starting with a small car built for the whole world.

By Alex Taylor III, senior editor

team_fiesta.03.jpg
Team Fiesta: Engineering chief Derrick Kuzak (l) and his team, shavings of modeling clay at their feet, gather around two mockups of the Fiesta. The cars are partially obscured because this version does not go on sale in North America until 2010.
fiesta.03.jpg
Super model: A lightly disguised version of the North American Fiesta, due to go on sale in 2010, was a big hit at the New York auto show in March.
alan_mulally.03.jpg
One Ford: CEO Alan Mulally is convinced that his vision for a globally integrated company making cool cars can return Ford to profitability by 2009.
martin_smith.03.jpg
Designed to sell: European design chief Martin Smith's mission: Give Ford a style makeover.
failure_chart.03.gif

(Fortune Magazine) -- What makes a Ford a Ford? The question is simple, and a 105-year-old company should know how it wants its cars to look, feel, and drive: the resistance in the steering wheel, the spring in the seats, the rumble from the exhaust. But Ford is still struggling to find an answer. So on a blustery spring morning, CEO Alan Mulally and 25 top executives from the United States and Europe meet at a test track near company headquarters in Dearborn, Mich., to tease that question out, one component at a time.

As the executives cluster around a whiteboard, Mulally, dressed in a blue Ford windbreaker, sounds off on the first topic: the new transmissions for the lineup. These offer consumers the option of shifting themselves or letting the car do it automatically. The question is, Should Ford offer drivers buttons on the steering wheel or racing-style paddles behind the steering-wheel spokes? It is a small detail - each component costs about $25 - yet it produces spirited discussion.

Mulally wants to know how the gear changes will be signaled to the driver. Mark Fields, who runs Ford's car business in the Americas, worries about durability and warranty costs. More fundamentally, he questions whether drivers even want to shift gears themselves. "I'm concerned we're going in the wrong direction," he says. Jim Farley, newly recruited from Toyota (TM) to oversee global sales and marketing, is thinking about how the action will feel: "If the paddle shifter is well done, it could be a big advantage for us." After 30 minutes, the paddle shifters seem to be winning. But before the issue is resolved, the group moves on to the next topic: the electronic chimes that remind drivers to turn off the headlights or remove the ignition key.

Feature by feature, the meeting goes on for another 90 minutes. This kind of obsessive attention to detail is new to Ford (F, Fortune 500), and it comes after years of strategic confusion and operational indecision. During the 34 months of CEO Jac Nasser's reign, which ended in October 2001, Ford tried to reshape itself through acquisitions but neglected its day-to-day business.

When Bill Ford, great-grandson of Henry, took over, morale improved; still, U.S. market share continued its decade-long slide - from 25% in 1997 to 15.6% in 2007. Bill Ford talked up innovation as a core strategy and sharply increased the emphasis on research; even so, the cadence of new product introductions faltered. "We kind of lost our core focus five or six years ago," says Barbara Samardzich, who runs Ford's global powertrain operations. "Alan has refocused us on one Ford."

One Ford: That is the subtext of all those discussions at the track. The idea has several dimensions: to emphasize the Ford brand, to figure out the critical ingredients that make a Ford a Ford, and then to create great products on a global scale using those ingredients.

The idea of integrating design, engineering, and manufacturing is not exactly revolutionary. GM went in that direction in the late 1990s, and European, Japanese, and Korean automakers have never done it any other way. It came naturally to Mulally too. At Boeing (BA, Fortune 500), his previous company, the cockpit in every aircraft had the same configuration, but Ford couldn't manage to put the windshield-wiper switch in the same place.

Ford DNA

Now that's changing. Ford has recently identified 300 different characteristics - from the chirps on the electronic key fob to the clunk of a closing door - that define the personality of its vehicles. "There is great value for us in creating a Ford DNA," Mulally says.

Later this year that DNA will take tangible form in the shape of the new Fiesta - a four-wheel advertisement that Ford is committed to making great small cars again. The Fiesta will debut in Europe, and the same basic model will roll out in North America in 2010. It is the first vehicle developed under the "one Ford" philosophy. That was not, however, the original idea. Back in 2004 the European team began designing the Fiesta, and the United States dithered over whether to join up. So the two regions went their separate ways on it, as much by default as decision.

Since 2006 that has changed: Mulally has forced the regions to play in the same sandbox. With high oil prices downsizing U.S. tastes, the Fiesta is Ford's big bet that it can make a profit on a small car - something it hasn't done in decades. Given the increasing prominence of this slice of the market, and the equivalent slump in the pickups and SUVs that made Ford rich in 1990s, it is not far-fetched to say that as the Fiesta goes, so goes Ford.

So far, Mulally's plan hasn't excited much investor interest. Ford's market cap is $14.7 billion, a smidgen of its revenues - $172.5 billion. With industry sales in the United States going downhill fast - results in March were the worst in 15 years - Ford is in a race against time. Can it return to profitability before the money runs out? If it doesn't, it could be the end for the company that, by rolling out the Model T exactly a century ago, did more than any other to create America's car culture.

On the verge of collapse

When Mulally arrived in September 2006, he took over a company on the verge of collapse. Ford lost $12.6 billion that year and another $2.7 billion in 2007. Mulally put up every asset, including the blue-oval trademark, as collateral to borrow $23.5 billion to keep the company afloat. Then he set about his mission of creating a global Ford, both in terms of the vehicles it produces and how it produces them.

One key: focusing on what he calls the "phenomenally powerful" Ford brand. That decision represents a strategic U-turn after 20 years of unprofitable flirtation with premium brands like Jaguar and Land Rover (sold to Tata Motors (TTM)) and Aston Martin (sold to a consortium including two Kuwaiti investment firms). Volvo is likely to go next.

Mulally is gambling that by globalizing the Ford brand, which covers everything from $15,000 subcompacts like the Fiesta to $60,000 diesel-powered pickup trucks, he can raise margins, which are now less than zero: The company is losing money on every car and truck it sells in North America. "We know [this strategy] works," he says, "because this is the way Toyota grew up."

Executing like Toyota is easier said than done - and Ford has repeatedly tried and failed to get the whole company to drive on the same track. In the late 1970s Ford operations in Europe and North America decided to cooperate on a "world car" to get scale and efficiencies - pretty much what it is trying to do now.

The resulting product, the 1981 Escort, shared only two minor parts because each side kept demanding changes to suit its local market. A decade later the midsize Ford Mondeo, designed in Europe for the U.S. market (where it was called the Contour), never got traction. In 2001, Ford tried again. At the behest of headquarters, designers were ordered to develop a single global architecture for a midsize car. But the timing was complex. North America needed a new car right away, while Europe wanted to wait until it amortized the engineering costs of existing models.

Ford wound up splitting the program into two: Ford Europe, Volvo, and Land Rover got one version of the car; Ford North America got the other, which it christened Fusion and Edge. Could such divisiveness burn the Fiesta? Not likely. The Fiesta will be sold only under the Ford brand, and North America has agreed to adapt the European design, rather than go off on its own and reinvent the four wheels.