Automotive News Europe DETROIT - After one year on the job, Jacques Nasser has proved he can swing a cost-cutting ax.
Ford had record profits in the first nine months of 1997, due mainly to cost cutting.
But his true test has yet to come as president of Ford Motor Co.'s automotive operations. Nasser must solve the company's enduring problems:
Unprofitable traditional cars: In 1996, only the company's big North American rear-wheel drive sedans made substantial profits. Overall, the volume cars worldwide lost money, even counting parts and financing income derived from the cars, says a Ford document obtained by Automotive News Europe.
Flat market share: For the next five years, Ford believes it must improve all operations just to cling to its current share in its global markets.
Lackluster profits: Ford makes most of its money with financing and parts operations. Vehicle sales accounted for only a small fraction.
In 1996, parts operations and Ford Motor Credit Co. financing produced $4.3 billion of pre-tax automotive income, and vehicle sales produced $0.6 billion.
The document was prepared by the marketing, sales and service staff for an October meeting. Information was compiled as early as six months ago.
Ford would not comment on the document, which included a candid self-assessment of the company's strong and weak points.
Nasser, who turns 50 next month, took over Ford's automotive operations in November 1996. He is focused on one objective: profitable growth.
'We must continue our focus on profits and profit optimization of the total business,' the Ford document states. 'In addition, we must develop and implement growth strategies for each market we sell in.'
In the USA, the problems with car profits are particularly acute.
In 1996 the Lincoln Town Car, Ford Crown Victoria and Mercury Grand Marquis generated substantial pre-tax income. Ford's other cars, including the Taurus, the best-selling car in the USA, lost $1.5 billion.
Sport-utilities earned $3.4 billion and Ford F-series pickups earned $2.6 billion in 1996.
'The company earns essentially all of its profits on F-series, SUV trucks and a few car lines in the USA, with a large part of this coming from parts sales and financing,' the document states. 'All of these businesses are under competitive attack.'
Also a top priority for Nasser is fixing operations outside the USA.
In 1996 automotive operations outside the USA lost $352 million, according to Ford's public reports. In the first nine months of 1997, non-US operations posted net income of $860 million.
Cutting the costs
Ford executives credit global cost-cutting, not truck sales, for rising profitability.
In October, Ford reported record third-quarter profits of $1.1 billion, up 64 percent from the third quarter of 1996.
Ford Chairman Alex Trotman said $2.3 billion in global cost cuts in the first nine months of 1997 contributed to the record profits. 'A lot of that ($2.3 billion) has gone right down to the bottom line,' Trotman said in an October interview. 'That is a big part of the explanation for our profit improvement.
'There has been a lot of focus on the sport-utility business in America as though that is what is driving our profit,' Trotman said. 'That is a misunderstanding. It is very good business for us, the sport-utility business. But our cost performance this year more than anything has been driving our performance in 1997.'
Nasser is working to slash costs on every Ford vehicle line. More cuts are coming.
For Nasser, eradicating Ford's high costs is a primary crusade. It is the path to prosperity in a market that demands price cuts and generous spending on marketing.
'Competitive pressures are such that É we cannot raise prices and we cannot reduce marketing costs,' the Ford document says.
Ford is burdened with costly product development at the same time the company's marketing operations identify low-cost competitors as a primary challenge.
'Net pricing will be under pressure as global, low-cost producers - the Japanese, Koreans, Chrysler, GM (Europe) and VW (Seat, Skoda) - seek to exploit their competitive advantages,' the Ford document says in assessing the current business environment.
Ford is also working on quality.
'Ford's historical uncompetitive quality and durability have seriously impacted new model sales, resale values, and repurchase intentions,' the document states.
Trotman said Ford is already getting benefits from quality.
'The product development process worldwide is going to a single system,' he said. 'The quality has improved dramatically and that means warranty costs have come down dramatically.'
The J.D. Power and Associates 1997 Initial Quality Survey identified Ford as the quality leader among US manufacturers. The survey said Ford's quality improved 28 percent from the year before.
Unifying the system
The job of marketing and sales is to work more closely with the three vehicle centers that develop all of Ford's vehicles. Marketers have to know what customers want and expect in each vehicle line and help product developers translate that information in a timely fashion, the document states.
In 1996, Nasser, as group vice president of product development, began a drive to create new vehicles within 24 months while dramatically reducing costs.
It is clear why Ford is so determined to cut costs. Diminished expectations underlie the company's current outlook.
In 1994 Ford expected to post $151 billion in net revenue in 1998. But in 1996, the 1998 forecast dropped to $133 billion. It fell to $121 billion in the 1997 business plan.
Ford expects market share to remain virtually unchanged in the USA and Europe in the next five years.
With no gain expected in market share, Ford needs new efficiencies to boost profits. The answer was Ford 2000. In January 1995, Trotman initiated Ford's massive global reorganization with the aim of becoming the world's leading automotive company. The Ford 2000 overhaul unified Ford's far-flung automotive operations into a single entity.
Setting global goals
Ford is still exhorting the troops. Capturing a 17 percent global market share is one of three top objectives of Ford's automotive operations. The document does not say when it expects to reach 17 percent.
Ford's business plan expects more modest achievements.
Ford's global share at the end of 1996 was 12.9 percent, the document says. In 1997 and 2002, Ford expects to capture 13.3 percent of the global market.
Another top objective stated in the document is posting net income equal to 5 percent of sales by 2001.
In the first nine months of 1997, Ford posted net income equal to 3.8 percent of sales.
Good brand management will give clear and compelling identities to primary and nameplate brands. Stronger brands mean better profit margins.
The company's study has created the following marching orders, according to the document:
To 'energize Ford' cars by strengthening Ford brands in the USA, Brazil and Europe
To use the Mercury brand in the USA as an opportunity for profitable growth
To attract younger customers to the Lincoln brand while retaining existing owners.
Ford created a global brand management strategy in January 1996 and appointed executives to manage 65 vehicle nameplates worldwide. General Motors and other carmakers are also using brand management strategies.
The goal of brand management is to 'transform our vehicles from things into desires,' the Ford document says. Ford has switched from seeking customer satisfaction to customer loyalty, which is 'the ultimate compliment a customer can give us.'
Working for loyalty
The quest for owner loyalty has led Ford to experiment with groundbreaking retail initiatives, especially in the USA.
In May, Ford proposed consolidation of 21 Ford and Lincoln-Mercury dealerships in the Indianapolis market. The company proposed a similar venture in Salt Lake City.
Both ventures failed because dealers would not sell, but Ford is still pursuing the idea.
In each consolidated market, Ford wants a new venture, jointly owned by the company and the dealers, to oversee sales and service in megastores. The company wants to test retailing strategies such as large inventories, one-price selling and salaried sales people.
Trotman's Ford 2000 strategy has scrutinized and recast virtually every practice within Ford. The groundwork has been laid. Now Nasser must use those changes to produce a more profitable, quick-footed, global organization
Staff Reporter Arlena Sawyers contributed to this report.
Ford sees five trends that will shape the auto market in the next five years
Excess capacity will put tremendous pressure on net pricing
Excellent product increasingly targeted at niche customers
Consumer shift from traditional cars to trucks, sport utilities and minivans
Traditional distribution, service and financing methods are under attack
Low-cost competitors such as Chrysler, GM and Volkswagen will keep prices down
Ford expects its global share to hold steady in the next five years
1995 1996 1997* 1998* 2000* 2002*
USA 25.5 25.2 25.1 24.3 25.1 25.1
Europe 12.1 11.7 11.7 11.7 11.8 11.8
Brazil 11.8 10.7 14.5 16.1 16.1 16.2
Worldwide 13.3 12.9 13.3 12.9 13.2 13.3
Source: Ford Motor Co. document