Does Ford need a faster horse?

Once upon a time, half of the cars on US roads were Fords. So what went wrong in the 1990s, and can Ford get back in the saddle? asks Abigail Rayner

Henry Ford once famously said that if he had asked consumers what they wanted, they would have said a faster horse. A legendary moderniser and inventor, Ford could envision possibilities far beyond the public’s wildest dreams. By 1920, half the cars on US roads were Ford Model Ts. Ford perfected the production line creating a business model so efficient that millions of Americans could suddenly afford a car. Roads sprung up across the US and soon the car – once the preserve of the wealthy – became a necessity for all. Consumer credit became the norm and Americans began to value consumerism and leisure beyond all else. Ford had not only invented ‘The Universal Car’ as he billed the Model T, but designed an entirely new value system that remains synonymous with the US today.

Lately, the oldest US automaker has not been as good at anticipating the public’s whims. It is clinging to 15% of the US market and is on track to lose US$10bn this year. Worse still, the company does not expect to turn a profit until 2009, and analysts are not confident it can even achieve that goal.

So how did the company that put the horse out of work fall from grace? To understand its decline it is necessary to go back to a period of success. In 1990 Ford introduced its Explorer sports utility vehicle. At the time, Chevrolet was considering discontinuing the Suburban, a large SUV with three rows of seats whose first incarnation went into production in 1935. Chevrolet believed there was no market for a vehicle so large. But the Explorer took off, transforming what had previously been seen as a commercial vehicle into a status symbol. The Explorer was given free advertising by the Gulf War, which did for SUVs what the film Top Gun achieved for army recruitment, as news footage of 4X4s gunning majestically through the desert rolled on to television screens across the US, and glamorised the idea of ‘off-road’ driving. By the end of the decade, 50% of US vehicle sales were light trucks and SUVs.

The vehicles were a boon for Detroit automakers. Constructed from a basic truck platform with a few touches of the sedan’s comfort and styling, companies could make up to US$9,000 on margin on the larger ones, compared with about US$900 for a sedan. US automakers saw them as a profit machine and Ford, which had enjoyed much success with the Explorer, was more committed to pushing the SUV than most.

The profitability of the SUV gave Ford executives little incentive to come up with any new ideas, and even persuaded them they could neglect some old but good ones. The Ford Taurus, which had a better best-selling run than the Model T, was allowed to fall by the wayside.

Asian manufacturers began to see a gap in the market. With Detroit essentially looking the other way, brands like Toyota and Honda sewed up the small car market in the US. After gaining some brand loyalty, the Asian carmakers started making dents in the SUV market too. They built factories in the US, ploughed resources into hybrid technology and, helped by a weak yen, kept their prices low.

When the US was hit with a fuel crisis earlier this year, Ford, which has relentlessly clung to larger vehicles and the profits they produce, felt the pinch more than most. In mid-November, the company reported a US$5.2bn loss for the third quarter. Its workers, once the best paid in the US, have been warned to expect no pay raises next year.

By contrast, Toyota reported a group net profit of Y405.7bn (US$3.44bn) for its fiscal second quarter. Profits improved 34% from 2005 largely on the back of strong sales in North America. Toyota also predicted profits of Y1.55 trillion (US$13.14bn) for the full year to March. In July, Toyota surpassed Ford as the second best-selling car on the road. Its sales forecasts suggest the company is on track to overtake GM as the biggest automaker in the world as early as this year.

Ford is all too aware of its mistakes. In a bid to turn things around, it has hired a new chief executive. Alan Mulally, a veteran of jet maker Boeing, took over from William Clay Ford Jr, Henry Ford’s grandson, in September. Ford Jr stayed on as chairman. Mulally, who was recruited to Boeing straight out of college in 1969, is credited with helping to revive the fortunes of Boeing against its European rival Airbus, and Ford is hoping he will work similar magic for the automaker. This may be a long shot given that Mulally has no experience of auto companies and has spent his career working business-to-business, rather than face-to-face with Joe Public. It is particularly unnerving given that, above all else, Ford needs to get to grips with what consumers want. After Mulally came aboard, Ford accelerated its ‘Way Forward’ restructuring plan, announcing the reduction of its workforce by about 40,000 and a dozen plant closures by the end of 2008.

Falling shares

The revised Way Forward is Ford’s third attempt in five years to turn around the company’s fortunes and, as such, was met with some scepticism. Following its announcement in mid-September, Ford’s shares fell 12% as analysts downgraded the company. While it is clear that Ford needs to downsize, industry watchers had hoped for more news of asset sales, but Ford downplayed speculation that it was planning to sell its badly performing Jaguar brand, and while analysts feel that Ford needs to speed up the introduction of new cars, the company made no such promise.

Ford is hoping the Ford Edge and Lincoln MKX crossover vehicles, which were due to arrive in showrooms in December, will go some way to winning back the consumer. The crossover is a sort of SUV in reverse, with the styling of a truck and the more fuel-efficient platform of a car. It is a sign that Ford is moving in the right direction, but the Edge will have to compete in an already crowded sector. Ford also has plans to produce more hybrids, crossovers and compact cars, but will by no means be a pioneer with any of these products.

The world is a very different place to the one Henry Ford knew. His company has been brought to its knees by foreign competition, petrol prices are in constant flux, and the public it hopes to serve is more educated than ever before. While modern American consumers are no less committed to the values of leisure and consumerism, they are slowly realising that it need not come at such a great cost to the environment. It is time Ford listened to what the public wants: good-looking yet affordable and fuel-efficient cars – in other words, a faster horse.

Abigail Rayner is a freelance writer based in New Jersey.