Ford Death Watch 46: The Toyotafication of Ford

At one time, the nations of Europe took great pride in their cavalry divisions, horses and men numbering tens of thousands. Then Gatling gun made its debut, and all those horses and all that equipment became sausages and bric-a-brac. And so it is with the SUV. The Gatling gun of rising gas prices has laid waste to The Big 2.8's armies, throwing their plans into complete chaos. To its credit, Ford is attempting to regroup, rearm and re-engage. So how's it going?

Early days. Bad days. Light truck cash cows are queued-up at the slaughterhouse. Ford's leasing department is sending seas of rolling metal to auction to sell (or not) at bargain basement prices. FoMoCo Credit took a $294m hit in the second financial quarter, reversing last year's $112m profit. Ford's North American market share is now 14.4 percent, down 1.2 percent. On the revenue side, FoMoCo's North American Q2 results sank to $14.2b, down from last year's $19b take.

The bottom line: Ford booked a $8.7b loss for Q2. Downsizing accounts for the lion's share of that loss. Since 2005, Ford NA has closed 12 factories and eliminated 51k jobs or 38 percent of its workforce. The American automaker claims it's on track to reduce its annual operating costs by $5b by the end of 2008 (compared with 2005). That's some serious cost-cutting.

And it comes at a serious cost: some $700m per month, and rising. To pay the bills, Ford created a $26b war chest- mortgaging everything up to and including its logo. Equally important, the company gave itself serious reality check, in the form of Alan Mulally. "Adapt or die" may not be tattooed on the FoMoCo CEO's forehead, but it might as well be.

After contemplating the numbers, Mike Jackson praised Mulally's moves Fordward in yesterday's Guardian. The CEO of AutoNation says it's amazing to watch the speed at which Ford has slashed production and begun switching from trucks to cars. "The old Detroit [GM?] would have taken ages to come to terms with this," he opined.

"This" is the need for small, competitive, profitable products in the North American market. It's that last element that's caused Ford's corporate culture conniptions.

Mulally is up against Old Detroit, right there in his own office. During Thursday meetings, the former Boeing exec heard the "can't make money on small cars" mantra so often he [almost literally] hit his execs over the head with a simple stat. Worldwide, large cars account for 15 percent of the market. Small cars account for 60 percent of units sold.

FoMoCo NA suits' recalcitrance is understandable. The American car market was founded on cheap gas. To suggest that the U.S. market will soon mirror its overseas equivalents requires a paradigm shift in thinking, and a leap of faith. And, again, there is that thorny question of profitability. Decades of failure have taught Motown small cars equal small profits.

Mulally is counting on replicating Toyota's success. Ford's "global platform" strategy: simplify products and production on a worldwide basis, then leverage the resulting economies of scale to reap massive profits. It's a good plan- if only because Toyota's already made it work. But there are several rocks upon which Mulally's vision may founder.

Toyota's American adventure was hardly an overnight success. In fact, their success still depends on long-term, long-haul thinking. The first fruits of Mulally's global plan– the Euro-designed mass market models– arrive in two year's time. Given Ford's parlous finances, they may have one chance to "get it right:" to adapt (or not) these cars for American tastes. History suggests staving off the beancounters will be a "challenge." And if you doubt the importance of trial and error, have a look at the first generation Toyota Prius.

There's also the question of branding. What is a Ford? It will have to be something that applies across its model range that commands a premium price. Toyota owns reliability. Style, safety, green, fuel economy, gizmos, driving pleasure? Ford's three-pronged "Drive" campaign indicates a bad case of ADD. In that same vein, Ford has too many models. Simply adding European-style vehicles to a bloated product portfolio will not help.

Equally worrying: Mercury. The latest product announcements contain an unspecified role for Jill Wagner's brand. That's not good. Mercury blurs the branding message for both Ford and Lincoln, and stops both brands from seeking sales in the near-luxury middle ground. It may be cheaper to keep Mercury than kill it, it may even deliver profits/volume for Lincoln dealers, but it's the wrong thing to do.

At a recent town hall-style meeting, a Ford worker suggested that making small cars was a money-losing proposition. "Why can't we make money on small cars?" Mr. Mulally demanded. "Do you think Toyota can't make money on small cars?" The question is, can Ford be Toyota?