Steady Driver on a Treacherous Road
Alan Mulally, Chief Executive Officer, Ford
AN INTERVIEW WITH ALAN MULALLY: Ford's talented CEO is not shy about touting his company. What he sees for the economy, auto sales -- and more.
FORD CEO ALAN MULALLY SAT DOWN IN NEW York last week with three Barron's editors to share his views on the economy, the battered auto industry and, especially, his still-struggling but reinvented company.
Displaying the kind of salesmanship that any car dealer would envy, he began by flatteringly noting that Ford had followed suggestions we'd made in an open letter to him, published a month or so after he had left Boeing and took the job in Dearborn.
Three years later, few would dispute that Mulally, despite the extreme pressure applied by the global recession, the credit crisis and the crash in vehicle sales, has done an excellent job of reshaping Ford. Thanks to his pre-credit-crisis decision to mortgage the company's assets to build up capital for that restructuring, Ford is the only member of the Detroit Three that hasn't sought bankruptcy protection. What's more, the company has at least temporarily overtaken General Motors to become the largest U.S. car and truck maker.
That doesn't mean all Ford's problems are over; far from it. The company is still losing money. Its stock remains in the doldrums, despite a big gain recently. In China, Ford is a relatively weak player in a strong auto market. In Europe, it's making money, but not much. And in the U.S., Japan's Toyota and Honda remain formidable rivals, newcomers like Korea's Hyundai pose a threat, and a newly slimmed-down and more efficient GM is emerging.
But Mulally, who seems unshakably optimistic, appears undaunted by the challenges, as our discussion quickly indicated.
Barron's: You've managed to keep Ford out of bankruptcy. But has this put your company at a disadvantage against Chrysler and GM, which have used the bankruptcy process to reduce debt, dealers and workers?
Mulally: No, the bankruptcies at GM and Chrysler haven't put us at a disadvantage. Yes, they have negotiated deals with the UAW and restructured debt. But it's not my perception that GM and Chrysler have more strength in dealing with the union. If it would have been an advantage for us to go to bankruptcy, we would have gone to bankruptcy. But we think that we can recreate a viable company without that, and we are already on that path. Every company has a slightly different business model. We negotiated things that were important to us. They negotiated things that were important to them.
In fact, the GM and Chrysler bankruptcies may have helped our sales. There is a survey showing that 97% of all the people in the United States know that GM and Chrysler declared bankruptcy and are taking taxpayer money. And another study shows that new-car buyers were looking first at Ford, Toyota and Honda because of that. Buyers like our products, they like the fact that we are creating a strong long-term viable business, and they feel that they are dealing with a company that will be here for the long haul.
What about the recession? Are we coming out of it? And how soon do you see the auto market reviving?
We won't be able to say whether we're now on our way out of the recession until we can look back at it in a few years. But it may be that we are. We have just seen a 1% contraction in U.S. GDP in the second quarter, and we pretty much agree with most economists that we'll see a 1½% expansion in the third quarter, maybe a bit more than that in the fourth and a continued slow pickup over 2010. As for car sales, the current selling rate is a bit below 10 million a year, down from a peak of 16 million. Our best look forward is that we'll see around 10.5 million to 11 million for 2009, 12.5 million in 2010 and maybe 14.5 million in 2011. Now, clearly, this would be a very slow recovery, compared to what we have seen in the past, and a lot of people believe that we are being pretty conservative. For sure, at these lower rates, we aren't even at the normal replacement rates for cars, and the demand driven by the government "Cash for Clunkers" program alone is unbelievable. But it's appropriate for us to be cautious.
You've been a supporter of a cohesive U.S. energy policy. Are we getting there?
A higher gasoline tax [to discourage consumption] is one element of a comprehensive energy policy. But we need a strategy that addresses all the pieces. It must involve the consumer. We need to build energy awareness into all the other things we are doing I'm very pleased that the administration has moved energy independence up on its agenda. Ford is on track to meet the new tougher gas-consumption rules for vehicles.
Is there a chance that U.S. gas consumption has peaked, with more people buying small cars?
We look at driving habits closely all the time. In the end, the truth is that no one knows what will happen. Even though we have increased the fuel efficiency of cars by 100% and trucks by 70% since the original CAFE [Corporate Average Fuel Economy] rule was enacted in 1975, U.S. citizens are now driving something like three times the number of miles and using four times the amount of gas. Demand and prices did peak in 2007 and have since come down. But, based on history, unless the consumer is involved in a comprehensive energy policy, little will happen to change long-term habits. We assume that, over the long term, Americans will drive more and that we'll pay more for energy. So we have to improve our vehicles' fuel mileage every year.
What about cars and trucks powered by alternative energy?
The internal-combustion engine and the diesel engine are going to be around for a long time. The most important thing is to keep improving those, especially with new lightweight materials and better electronics. Our current hybrids are the Ford Fusion sedan and the Escape SUV, but we will see more. Hybrids will always be a challenge because you are carrying two powertrains -- the gasoline engine and the electric motor. The biggest problem right now is the batteries, but we are working on that. We will have small-scale production, starting in 2011, of an all-electric Focus compact car. Hydrogen-powered cars will start playing a role further out, but the difficulty there is the required infrastructure in refueling stations.
Your recent results were better than Wall Street had expected. What's ahead?
Cash burn in the second quarter was $1 billion, down from $3.7 billion in the first quarter, leaving us with $21 billion in the bank. We think we will be profitable and have positive cash flow in 2011. We have had a robust plan over the past few years, and we have stress-tested it. We now have a track record of knowing what we are doing, and we continue to make a lot of progress. But we still need a significant cushion to deal with unknowns going forward. Things are still pretty fragile. We love our bankers. We are going to pay them back, early if possible.
What about market share?
We're gaining it. But we don't want just growth; we want profitable growth. Market share is kind of a result of running a healthy business. We are going to continue to match our production to real demand. You have to offer big incentives when you produce too many vehicles.
[continued]
Alan Mulally, Chief Executive Officer, Ford
AN INTERVIEW WITH ALAN MULALLY: Ford's talented CEO is not shy about touting his company. What he sees for the economy, auto sales -- and more.
FORD CEO ALAN MULALLY SAT DOWN IN NEW York last week with three Barron's editors to share his views on the economy, the battered auto industry and, especially, his still-struggling but reinvented company.
Displaying the kind of salesmanship that any car dealer would envy, he began by flatteringly noting that Ford had followed suggestions we'd made in an open letter to him, published a month or so after he had left Boeing and took the job in Dearborn.
Three years later, few would dispute that Mulally, despite the extreme pressure applied by the global recession, the credit crisis and the crash in vehicle sales, has done an excellent job of reshaping Ford. Thanks to his pre-credit-crisis decision to mortgage the company's assets to build up capital for that restructuring, Ford is the only member of the Detroit Three that hasn't sought bankruptcy protection. What's more, the company has at least temporarily overtaken General Motors to become the largest U.S. car and truck maker.
That doesn't mean all Ford's problems are over; far from it. The company is still losing money. Its stock remains in the doldrums, despite a big gain recently. In China, Ford is a relatively weak player in a strong auto market. In Europe, it's making money, but not much. And in the U.S., Japan's Toyota and Honda remain formidable rivals, newcomers like Korea's Hyundai pose a threat, and a newly slimmed-down and more efficient GM is emerging.
But Mulally, who seems unshakably optimistic, appears undaunted by the challenges, as our discussion quickly indicated.
Barron's: You've managed to keep Ford out of bankruptcy. But has this put your company at a disadvantage against Chrysler and GM, which have used the bankruptcy process to reduce debt, dealers and workers?
Mulally: No, the bankruptcies at GM and Chrysler haven't put us at a disadvantage. Yes, they have negotiated deals with the UAW and restructured debt. But it's not my perception that GM and Chrysler have more strength in dealing with the union. If it would have been an advantage for us to go to bankruptcy, we would have gone to bankruptcy. But we think that we can recreate a viable company without that, and we are already on that path. Every company has a slightly different business model. We negotiated things that were important to us. They negotiated things that were important to them.
In fact, the GM and Chrysler bankruptcies may have helped our sales. There is a survey showing that 97% of all the people in the United States know that GM and Chrysler declared bankruptcy and are taking taxpayer money. And another study shows that new-car buyers were looking first at Ford, Toyota and Honda because of that. Buyers like our products, they like the fact that we are creating a strong long-term viable business, and they feel that they are dealing with a company that will be here for the long haul.
What about the recession? Are we coming out of it? And how soon do you see the auto market reviving?
We won't be able to say whether we're now on our way out of the recession until we can look back at it in a few years. But it may be that we are. We have just seen a 1% contraction in U.S. GDP in the second quarter, and we pretty much agree with most economists that we'll see a 1½% expansion in the third quarter, maybe a bit more than that in the fourth and a continued slow pickup over 2010. As for car sales, the current selling rate is a bit below 10 million a year, down from a peak of 16 million. Our best look forward is that we'll see around 10.5 million to 11 million for 2009, 12.5 million in 2010 and maybe 14.5 million in 2011. Now, clearly, this would be a very slow recovery, compared to what we have seen in the past, and a lot of people believe that we are being pretty conservative. For sure, at these lower rates, we aren't even at the normal replacement rates for cars, and the demand driven by the government "Cash for Clunkers" program alone is unbelievable. But it's appropriate for us to be cautious.
You've been a supporter of a cohesive U.S. energy policy. Are we getting there?
A higher gasoline tax [to discourage consumption] is one element of a comprehensive energy policy. But we need a strategy that addresses all the pieces. It must involve the consumer. We need to build energy awareness into all the other things we are doing I'm very pleased that the administration has moved energy independence up on its agenda. Ford is on track to meet the new tougher gas-consumption rules for vehicles.
Is there a chance that U.S. gas consumption has peaked, with more people buying small cars?
We look at driving habits closely all the time. In the end, the truth is that no one knows what will happen. Even though we have increased the fuel efficiency of cars by 100% and trucks by 70% since the original CAFE [Corporate Average Fuel Economy] rule was enacted in 1975, U.S. citizens are now driving something like three times the number of miles and using four times the amount of gas. Demand and prices did peak in 2007 and have since come down. But, based on history, unless the consumer is involved in a comprehensive energy policy, little will happen to change long-term habits. We assume that, over the long term, Americans will drive more and that we'll pay more for energy. So we have to improve our vehicles' fuel mileage every year.
What about cars and trucks powered by alternative energy?
The internal-combustion engine and the diesel engine are going to be around for a long time. The most important thing is to keep improving those, especially with new lightweight materials and better electronics. Our current hybrids are the Ford Fusion sedan and the Escape SUV, but we will see more. Hybrids will always be a challenge because you are carrying two powertrains -- the gasoline engine and the electric motor. The biggest problem right now is the batteries, but we are working on that. We will have small-scale production, starting in 2011, of an all-electric Focus compact car. Hydrogen-powered cars will start playing a role further out, but the difficulty there is the required infrastructure in refueling stations.
Your recent results were better than Wall Street had expected. What's ahead?
Cash burn in the second quarter was $1 billion, down from $3.7 billion in the first quarter, leaving us with $21 billion in the bank. We think we will be profitable and have positive cash flow in 2011. We have had a robust plan over the past few years, and we have stress-tested it. We now have a track record of knowing what we are doing, and we continue to make a lot of progress. But we still need a significant cushion to deal with unknowns going forward. Things are still pretty fragile. We love our bankers. We are going to pay them back, early if possible.
What about market share?
We're gaining it. But we don't want just growth; we want profitable growth. Market share is kind of a result of running a healthy business. We are going to continue to match our production to real demand. You have to offer big incentives when you produce too many vehicles.
[continued]
