What's Behind Ford's Fall? Late products, lousy sales, low morale--and it doesn't help that the top guys have different agendas.
By Alex Taylor III

(FORTUNE Magazine) – On the opening page of its annual report, Ford Motor uses small blue check marks to indicate record-breaking achievements. Last year there were nine, designating historic highs in such categories as revenues, unit sales, and earnings per share. Don't look for many checks this year--if there are any at all. The company once regarded as the best-managed U.S. automaker has run into a ditch.

Some of Ford's troubles can be blamed on the massive recall of Firestone tires used on its popular Explorer. But a larger problem is that customers don't like the company's aging products and are buying cars and trucks made by foreign competitors, as well as those of General Motors. Even before Sept. 11, Ford was spending heavily on marketing incentives to keep more customers from defecting. Manufacturing quality and productivity have slipped, as have launch dates for new models. Although U.S. auto sales are headed for their third-best year ever in 2001, Ford lost money in the second quarter and expects to post a third-quarter loss as well. Chrysler, which has its own set of problems, is also losing money, but GM has remained profitable.

Behind the scenes the company has been hurt by a rift between Chairman Bill Ford Jr. and President and CEO Jacques Nasser. The two men appear to have separate agendas, and down in the ranks, employees question who is in charge. Persistent stories about differences between them have damaged morale, slowed decision-making, and split the company at a particularly vulnerable time. The rift raises questions--yet again--about whether the Ford family, which still controls 40% of the voting stock, is able to run the world's second-largest automaker through professional managers.

In separate phone interviews, both men denied they have a problem. "We've always had camps here," said Bill Ford, 44. "I don't think there is anything I can do or Jac can do to prevent it. The fact is that we have a very easy relationship." Said Nasser, 53: "We share the same views about where the company should be heading. We probably should have moved a little earlier than we did [to stop rumors about a clash]. Now it is a question of refocusing our energies on the fundamentals."

In July the board formalized a power-sharing arrangement between the two men. It created a new office of the chairman and chief executive that makes Bill Ford an equal partner with Nasser in running the company day to day. Instead of relying solely on informal conversations, Ford and Nasser hold formal meetings twice a month at which they discuss a prepared agenda. Sounds good, except that the new office has been seen as an erosion of Nasser's authority. In September, Bill Ford sent a companywide e-mail complaining that gossip about Nasser's future was hurting the company.

It's clear that both men are redefining their roles. Ford has begun seeing Nasser and other top operating executives more frequently, in an effort, he says, "to get closer to the pulse of the company. Has the last year been lousy? No question." Nasser, meanwhile, is throttling back on activities like dealmaking that diverted him from running the business. "I'm going to spend a great deal of my time in the product arena," he says. "I'll be all over every single brand and every single product in this company as of yesterday."

A battle at the top is the last thing Ford Motor needs right now. Its European operations are barely profitable, and the company is losing money in Latin America. In North America, former Ford of Europe chairman Nick Scheele, 57, has been installed to restructure operations. Scheele is expected to reduce manufacturing capacity and streamline operations, adding to the 4,000 to 5,000 white-collar workers who Ford has already announced will be laid off this year. Cost cutting is overdue. In a meeting with employees recently, Scheele declared that Ford's cost per vehicle had climbed $1,000 in the past few years, at a time when automakers have been unable to raise prices. "Morale couldn't be worse," says an industry consultant who works frequently at Ford. "The only topic of conversation is who is going to be canned. Nobody feels safe."

Ford is also running short of cash. After spending $13 billion on acquisitions since early 1999 and $3.5 billion to pay for two recalls of Firestone tires, it has seen its cash reserves shrink to $4.1 billion (GM's are twice as big). That's a problem going into a recession, because Ford must keep investing in new models even when it is losing money. "We are in a cash crisis like none we have experienced in recent memory," manufacturing boss James Padilla was quoted as saying in the Detroit News. "We simply cannot afford to underestimate its gravity." Nasser has already said there will be no executive bonuses this year, and in October the company cut its annual dividend of $1.20 by 50%. The stock, which was selling for $31 as recently as April, is now at $18.

The cash shortage is slowing the company's ability to develop new models that are the lifeblood of the auto business. While Japanese, German, and Korean competitors are preparing new product blitzes, reports in trade publications say that one new Ford program after another is being reconfigured or pushed back. So many new cars and light trucks have been delayed that future sales are likely to suffer, causing plants to run below 80% capacity, says economist Sean McAlinden of the Center for Automotive Research in Ann Arbor, Mich. Backbiting is rampant. When the company approved development of two new crossover vehicles that will cost $1.6 billion, critics leaked word that the vehicles had been panned by customer focus groups and would produce 40% less return than expected. Others claim that the vehicles have been praised by dealers and the projected return on investment is realistic.

At a time when GM seems to have halted its slide in market share and solved its product development and design problems, Ford's fall has been especially shocking. Bill Ford and Nasser rode a wave of favorable press coverage when they ascended to their respective jobs on Jan. 1, 1999. The smart, personable Ford was going to represent his family's historical interests while simultaneously pursuing his goal of making the company more environmentally friendly and socially responsible. Nasser, tough and tested by years in the organization, was heralded as an automotive Jack Welch, a high-energy change agent who would transform the automaker from a 19th-century metal bender into a consumer-focused corporation that would develop long-lasting relationships with car buyers.

But as history has shown, the Ford family has considerable difficulty working with its professional managers. Ever since Henry Ford II took control of the automaker from his senile grandfather in 1945, the family has periodically reached an impasse with the men it has chosen to run the company. The firing of Lee Iacocca in 1978 is the most famous example, but other top executives like Ernie Breech, Don Petersen, and Alex Trotman were also forced out by the family after falling from favor. "The history of the company is that there is only one outcome to a dispute like this," says a family insider. "Either the executive gets on board, or he's gone."

As soon as Ford and Nasser moved in, talk began that they were at odds over how to run the company. After several flush years, Nasser was eager to expand; he proposed buying Nissan, and then Volvo. The Ford family reportedly discouraged him from the Nissan deal and allowed him to pursue the $6.5 billion Volvo purchase, about which they were unenthusiastic, only as a consolation prize. Emboldened, Nasser began a string of acquisitions aimed at broadening Ford's automotive base. He paid $1.8 billion for a chain of repair shops in Britain called Kwik-Fit and began making investments in Internet and e-commerce ventures that would eventually cost $500 million. Complained one friend of Bill's: "This assortment of acquisitions was meant to take the company in different directions, but they have laid a goose egg." If Nasser was aware of the criticism and second-guessing, he didn't let on, and continued his drive to make over the company.

When Nasser tried to consolidate Ford dealers in regional markets, he so enraged the remaining dealers that he was forced to unwind the effort. Nasser also installed inexperienced outsiders in key posts at the same time that he allowed veteran executives to leave, like labor relations expert Peter Pestillo and chief financial officer John Devine. (Pestillo took over Visteon, a parts-making company that was spun out of Ford, while Devine joined GM as vice chairman.) Following the example of Welch, Nasser pushed to use Six Sigma, a quantitative process-engineering tool, in the company's manufacturing and engineering operations. But with most of the effort focused on future models, he has not been able to generate the same huge savings that Welch did. After facing a flurry of employee lawsuits--mostly from middle-aged white males charging age and sex discrimination--Nasser had to revise another management technique borrowed from GE: grading Ford's 18,000 managers on a curve that automatically gave 5% of them poor performance reviews and stripped them of their annual raises. "You learn from your experiences," says Nasser now. "If you don't try things, you won't learn."

While Nasser was grabbing the headlines, Bill Ford stayed behind the scenes, building his relationship with the board of directors and advancing his environmental and social-responsibility programs. Among other goals, he wants to make Ford's vehicles 25% more fuel-efficient and build factories that are environmentally friendly. The gulf between the two men appeared stark in August 2000, when the highly profitable Explorer was linked to rollover accidents because of defective Firestone tires. Nasser, appearing in TV commercials and at congressional hearings, went on the attack by blaming Firestone. Bill Ford remained mostly invisible during the crisis. Although the bad publicity has hurt sales of Explorers, the company was somewhat vindicated in early October by a report from the National Highway Traffic Safety Administration saying that defective tires, not the vehicles, were at fault.

Many Nasser supporters believe their man is getting a bad rap. They insist that it is too soon to judge his performance, since changing the culture of a company as large and as insular as Ford Motor is a long-term project bound to create turmoil. They point out that other change agents (Welch again, IBM's Lou Gerstner) endured several rocky years before they were able to improve the performance of their companies. Moreover, it will be another year or more before new strategies developed by Nasser can be tested by the market. "Jac has taken a lot of body blows, but don't write him off," says a consultant who knows him well. "He's got the right strategy and the potential of coming out of this leaner and stronger. I still argue he's the best guy in the industry."

Nasser's supporters also say that he has been hamstrung by Ford Motor's unique governance structure. On the company's Website, Bill Ford is described as "leading the company" and having a vision "to transform automobiles and industry to benefit customers, shareholders, and society." That establishes Bill Ford as a separate power center and creates an agenda that seems to conflict with Nasser's mandate to improve shareholder value. Observers say the outside members of the board of directors seem split between their loyalty to the family and their obligation to support the CEO. Without the undivided loyalty of the board, say these observers, it is impossible for Nasser to succeed. Nasser agrees that the structure is unique, but he insists that it is workable. For his part, Bill Ford says he has no plans to back off his campaign of social and environmental responsibility.

Personally, the two men could hardly be more different. Despite his pedigreed background, Bill Ford tries to be one of the boys. Nasser wants to stand out. A small man (5-foot-6) with a cock-of-the-walk manner, he wears stylish clothes that clash with Ford's white-shirt, wingtip, and pocket-protector culture. The visible pleasure he takes from the perks of office--from his auto show entourage to the fleet of company jets--grates on some. He also violated Ford tradition by declining to name a chief operating officer; instead, he has a dozen or more direct reports.

Bill Ford shares some blame as well. He was probably unrealistic to expect that an executive as driven as Nasser, who fought his way up through the company, would easily share responsibility with somebody who seems to owe his position to birth. And by actively promoting his own causes, Ford gives the appearance of operating with a higher moral authority than his CEO, who has to make decisions about employee evaluations, plant closings, and layoffs. Says Ford now: "Maybe I was naive. Clearly we didn't do everything right. Maybe the office of the chairman and chief executive was something we should have had from the beginning."

The events of Sept. 11 and their aftermath have likely bought Nasser more time. The company is going through a critical period, and a change in leadership now would be unsettling. Besides, with Scheele still learning the ins and outs of North America, there's no one at Ford who could easily step into Nasser's job. In an emergency, friends say, Bill Ford would be willing to take the CEO's job, though only temporarily. But such a change could prove jarring to investors.

Crises have a way of concentrating the mind, and this one may impel Ford and Nasser to get over their personal differences and get on with the job of reviving their company. As Bill Ford says, "I want Jac to be successful, and obviously I want Ford to be successful." Given their rocky start, it will take a lot of work by both men to make that happen.

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