FORD'S $6 BILLION BABY Developing this ''world car'' for Europe and the U.S. cost plenty. The American version will be lucky to break even.
By Alex Taylor III REPORTER ASSOCIATE Wilton Woods

(FORTUNE Magazine) – DETROIT'S remarkable resurgence contains just one flaw: The recent performance of Ford Motor, No. 2 in the U.S. and the world, has been a significant -- and surprising -- disappointment. Ford is a world leader in manufacturing efficiency. It sells six of the 12 most popular cars and trucks in America and runs its factories close to capacity. That's usually a formula for fat profits, yet Ford lost money on its U.S. car business last year and earned under $200 million in the first quarter of 1993 -- half as much as Chrysler. One huge drain on earnings: the vast sums Ford is spending on new models. The company plans to spit out one all-new or substantially updated car line about every three months from now through 1995. The most ambitious: the midsize Mondeo (pronounced mon-DAY-oh), a ''world car'' on which Ford is lavishing a tidy $6 billion. The car is already on sale in Europe -- that's the version in the photo above -- where it replaces the popular Sierra. In the summer of 1994 it will succeed the Ford Tempo and Mercury Topaz in the U.S. . Six billion dollars is twice what Ford spent on the vastly successful Taurus and Sable, introduced in 1985, and nearly four times as much as it cost Chrysler to bring its admired 1993 LH cars to market. GM holds the record: an estimated $7 billion for its ill-run GM-10 program (see table). Despite a $6 billion outlay, Ford stands to make little money on the Mondeo. Because of intense pricing pressures on small, fuel-efficient cars, the Mondeo will do well to break even in the U.S. Building a world car -- one that can be made and marketed around the globe -- has been a holy grail for automakers because it should represent the ultimate in economies of scale. Only Volkswagen's classic Beetle, and perhaps the Toyota Corolla, have come close. To bring off the Mondeo, Ford had to reconcile divergent European and American engineering standards, fly hundreds of technicians back and forth across the Atlantic, and spend tens of millions of dollars on late design changes. By the time the cars go on sale in the U.S. as the Ford Contour and Mercury Mystique, the entire program will have taken eight years -- twice the usual time to market. The Mondeo is clearly the biggest, most complex global car project ever attempted. A closeup look at its development underscores the complexity, enormous scale, and often perverse economics of the industry that's second in the world only to oil. The Mondeo saga also illustrates what might be called the Pentagon corollary of Murphy's Law: On big projects, everything costs more and takes longer than expected. For its $6 billion, Ford got a conventional front-wheel-drive sedan that comes with an in-line four-cylinder engine or a V-6. (Europeans can also pick a station wagon and a diesel.) The styling is attractive but hardly head- snapping. Most of the improvements over previous models are inside the car. The passenger compartment seats four comfortably; the controls are especially well laid out. A superior suspension and stiff chassis make the Mondeo nimble and responsive. Production began last February in Genk, Belgium. The launch has been marred by an embarrassing marketing glitch. To match the European competition, mainly from GM's Opel Vectra, Ford had to roll back preliminary prices about 7%, chiefly by reducing dealer margins. The Mondeo now starts at $16,800 in Britain. Ford aims to build 400,000 cars a year in Europe. In the U.S., where the cars' principal rivals will be the Honda Accord, Pontiac's Grand Am, and the Mazda 626, the target is 300,000. U.S. prices could average about $17,000.

National borders mean less and less in the world auto industry. Mercedes- Benz plans to build a factory in the U.S., for example, while GM wants to import several Opel models to fill holes in its U.S. product lineup. Almost everyone is trying new ways to integrate global design, manufacturing, and marketing. Why? To leverage resources, balance currency fluctuations, and satisfy local markets better. In Ford nomenclature, the Mondeo is code-named CDW27. CD designates the size category, W stands for world, and 27 identifies where the project fell chronologically. Three disparate engineering centers took part. Detroit designed the V-6 engine, the automatic transmission, and the heating and air- conditioning units. Dunton, just outside London, contributed the interior, the steering, the suspension, the electronics, and the four-cylinder engine. Cologne, Germany, did the basic structural engineering. It also designed three sheet-metal bodies for the car tailored to different markets -- so much for the elusive goal of a single car sold worldwide. The executive in charge of CDW27, John Oldfield, 56, an Englishman, was based in Cologne, but final responsibility for the program rested at Ford's world headquarters in Dearborn, Michigan. So Oldfield traveled back and forth across the Atlantic about once a month for six years. During one nine-month stretch, he made the roundtrip once a week. Ford CEO Harold ''Red'' Poling and other top executives flew to Europe three times a year to test-drive Mondeo prototypes. BESIDES SOLVING intricate international logistics problems, Ford had to create uniform worldwide engineering standards. For example, every specification had to be expressed in the metric system, with no conversions into English measure allowed -- except for the car's basic dimensions, which top management in Dearborn wanted reported in more familiar inches. The company also had to create uniform standards for raw materials and design, procurement, and manufacture of individual parts. The list of vehicle specifications fills two 8 1/2-by-11-inch books each three inches thick. So with all that complexity, why did Ford create CDW27? Developing a single car for the world market seems to violate Nineties wisdom about getting close to your customers. Wouldn't it have been cheaper and easier to develop separate vehicles, one for Europe and one for the U.S.? Almost certainly. But a global carmaker's bookkeeping takes other factors into account. Ford says it was really looking for more bang for its engineering buck. By having one 800-person engineering team produce the car for both Europe and the U.S., Ford was able to deploy the rest of its people and facilities to other projects. Says Alexander J. Trotman, 59, the executive vice president who is expected to take over when Poling retires later this year: ''The product development team that isn't doing the CDW27 is doing something else: a new truck, or a new Taurus, or a new Mustang.'' For sure, Ford needs new models. The current Mustang has been around since 1979, the Tempo and Topaz since 1983. Since the Sierra is also ten years old, Ford decided to double up and design one car for both continents. Tastes differ less these days, although European buyers prefer manual transmissions, demand better handling, and dislike air conditioning. The world-car project clearly did benefit from economies of scale. By using identical production tools at both Genk and Kansas City, where the U.S. cars will be built, Ford saved an estimated 25% on such custom-built factory items as jigs that hold the frame for welding and dies that stamp out structural parts. Ford also got better prices from suppliers. Recalls Louis Ross, 61, now vice chairman, who oversaw the program as head of international operations: ''We'd say to suppliers, 'Listen, this isn't 250,000 units, this is 700,000 units annually, and you're going to have it all.' The goal was to save $75 per car. We came closer to $150. On 700,000 units that will be $100 million a year.'' But if Ford saved all that money, why did CDW27 cost so much? For one thing, it required renovations and retooling at nine big factories, including engine plants at Bridgend in Wales, Cologne, Cleveland, and Chihuahua, Mexico. The car called for an all-new 2.5-liter V-6 engine, a new 2.0-liter version of an existing four, and two new transmissions. While the engines will be used in future models, most of their cost was charged to this project. Also, the car's basic structure can become the nucleus for other vehicles. Ford changed directions during the program -- with costly consequences. It had planned to sell the European version in the U.S. as a Ford and modify it slightly for the Mercury nameplate. But when Ford tested the European design in California in 1991, potential customers disdained it as ''a car of today, not the future,'' says Kenneth K. Kohrs, 54, head of Ford's U.S. car product development. Trotman ordered designers in Europe to create a unique new skin, which will add $25 million a year to production costs. The Contour now has a more modern, rounded look, with no grille on the front. Competitive pressures forced a second change. Initially, Ford targeted the 1990 Honda Accord as the car to beat in the CD class. But the European introduction of the 1991 Nissan Primera -- sold in the U.S. as the Infiniti G20 -- raised the standards for ride, handling, and comfort. At a cost of $200 per car, Ford had to upgrade components including the suspension, engine mounts, and exhaust system. In deciding whether to spend the money, Poling and other members of the product planning committee put in an entire day driving prototype CDW27s alongside competitors' cars. Everyone remembered the disastrous launch of the European 1991 Ford Escort, which had a rough, noisy engine. Says Ross: ''Nobody likes spending that money, but this was a decision that Poling and everybody shared in. It wasn't the elves in the back room. The question was, Do you want to put your $200 per car in up front, or put it in after like we did on the Escort?'' When Ford got ready to start building the car in Belgium, it revamped its quality-control efforts. Some background: Ford aims to have no more defects at the beginning of new model production than it had at the end of production of the previous model. That's not easy. Defects tend to start high and then decrease as production teams gain experience. With the European Escort, the number of defects shot up as high as 250% above the level of the model it replaced. Ford spent 18 months rectifying them. Since then Ford has improved its manufacturing processes, but they weren't far enough along to help CDW27. So the company created a team of troubleshooters. Ford airlifted some 150 engineers from England and Germany to big, trailer-like mobile offices outside the Genk plant. (Estimated cost: $4 million to $6 million.) Instead of spending up to 45 days or so fixing problems, they gave themselves 48 hours to notify the vehicle engineer, the manufacturing engineer, and the supplier; agree on a solution; and carry it out. At least half the problems were corrected within the 48-hour deadline. Moral: Things go faster if you eliminate finger pointing and force all parties to resolve a dispute. But as the January 6 production start drew closer, the engineers were still finding enough defects in preproduction cars to total 490 demerits in Ford's system, which weighs blemishes by severity. The team decided to delay Job 1 -- the industry term for the first car to be sold -- for a week to get the demerits below 400. It did -- to 180. PREPARING FOR U.S. production at the Kansas City plant, Ford will begin airlifting the launch team there in September. This launch will take ten months and cost up to $150 million for training and production lost during the changeover. The Contour and Mystique will finally arrive in showrooms about 11 years after the Tempo and Topaz did -- horrendously tardy by the standards of Toyota and Honda, which redo their most popular models every four to five years. Even before then, Ford faces some hairy marketing problems. The Contour will fall in the lower-middle range of the Ford lineup, so Dearborn has to keep the price low to avoid going head to head with the best-selling Taurus, which goes for $15,600 to $22,000. But in Europe the Mondeo is the second most expensive Ford, selling in some markets for up to $27,500 and giving the automaker a $2,000 to $3,000 profit per car. (Competition tends to be a bit more gentlemanly in Europe, and prices are high by U.S. standards because they include stiff taxes.) Ford needs the money. It lost more than $1.1 billion in Europe last year. In the U.S., however, Ford will be lucky to break even over the lifetime of the car, perhaps eight years. Competition is ferocious, and government fuel economy regulations create an added complication. Ford makes as much as $10,000 profit per car on big, fuel-thirsty models like the Lincoln Town Car, which gets about 20 miles per gallon. So it has to sell lots of relatively small cars like the Contour, at up to 34 mpg, in order to eke out the mandated corporate average fuel economy (CAFE) of 27.5 mpg. Other manufacturers are in the same bind, so everybody cuts prices on small cars to avoid the financial and public relations penalties for missing CAFE goals. The Tempo and Topaz have been losing money for more than a decade for just these reasons. Ken Kohrs insists: ''The CDW27 target was to vastly improve on Tempo/Topaz on a fully accounted basis ((including corporate overhead)). We are very close to the target.'' Exactly how close? ''The struggle is to have North America break even,'' Lou Ross says. ''Minus $50 per car is where I think we are now.'' He adds that by the time U.S. production starts a year from now, Ford will have improved manufacturing efficiency enough to reach the breakeven point. Fortunately for Ford, per-car profit to the manufacturer isn't the only measure of success. Contour and Mystique should outsell their predecessors, providing extra volume for dealers. The new cars will offer a fresh step up for owners of less expensive Fords. And they will produce additional volume to support all the overhead that comes with a global automotive business generating $85 billion in revenues a year. Ford could have spent less than it did on CDW27 -- but not a lot less. It got plenty for its money. Industry experts have praised the car, and initial European sales are strong. A similar response in the U.S. might let Ford raise prices. Says Trotman, with only half a smile: ''That's why we're paid so well -- to manage things like that. I'm comfortable that we'll make some profit.'' If not, $6 billion will give a whole new meaning to the term ''loss leader.''