Alan Mulally: The Savior of Ford

By Markets Fool.com


Former Ford CEO Alan Mulally. Image source: Ford Motor Company.

Continue Reading Below

It was abundantly clear by the mid 2000s that the once-revolutionary automaker, Ford Motor Company , had lost its way. In fact, you could argue that the company had slowly been going out of business for about 30 years.

Ford was locked into unfavorable contracts with union workers, had lost roughly a quarter of its North American market share between 1990 and 2006, had insider fighting that rivaled a Game of Thrones episode, and posted a staggering $12.7 billion loss in 2006.

Ford knew it had to turn things around -- fast -- and that's when Alan Mulally came on board and performed a business turnaround that was nothing short of a miracle.

Doubts surfaced
Many had doubts when Alan Mulally officially took over the helm at Ford, not because he lacked talent, but because he was an outsider to the auto industry. One of my favorite quotes from Mulally was in response to being asked how he planned to tackle the complex automotive business that he was unfamiliar with.

"An automobile has about 10,000 moving parts, right? An airplane has two million, and it has to stay up in the air." Mulally responded.

Continue Reading Below

Touche, Mr. Mulally. Producing cars doesn't seem all that difficult in that context.

In addition to understanding complex industries -- Mulally was also largely credited with helping Boeing navigate difficult business waters after the events on September 11, 2001negatively affected the commercial aircraft business -- he believed Ford's problems were solvable if difficult decisions were made.

Tough decisions
Mulally also knew the turnaround plan was going to be expensive to fund, and that was his first task.

In 2006, Mulally was able to secure a $23.6 billion loan to help fund Ford's turnaround by mortgaging all of the automaker's assets. A year later, Mulally was forced to make tough decisions to slim the automaker's number of brands to better focus on its core Ford and luxury Lincoln brand. Jaguar, Land Rover, Aston Martin, and Volvo were all sold off, and Ford's stake in Mazda was reduced. It was a controversial move, but one that proved necessary to focus on rebuilding its core Ford brand.

By this time, Mulally's "One Ford" strategy was beginning to catch on at the Dearborn automaker. It was a simple plan with four main points, but it proved to be extremely effective.

1. Aggressively restructure to operate profitably at the current demand and changing model mix.
When Mulally took over, Ford was essentially making one-off vehicles for different parts of the world. That was an incredibly expensive and inefficient business model, and it needed to change quickly. It was decided that Ford would begin to design vehicles that would sell well in the U.S. and overseas markets -- an example being the recent Mustang, which is selling globally for the first time ever.

In 2007, Ford's number of global vehicle platforms was a staggering 27, and that count will be slashed to nine global platforms by the end of 2016, which has helped Ford reach economies of scale that drastically improved profitability -- more on that later.

2. Accelerate development of new products our customers want and value.
Mulally knew Ford needed to revamp its vehicle line-up with higher-quality vehicles and fresh designs. The new Fusion and Escape designs were two of many recent Ford designs lauded by critics and consumers alike. Those two vehicles both posted unit sales in the U.S. of more than 300,000 last year, something no other Ford vehicle, excluding the F-Series, had accomplished in almost a decade.

A great sign for Ford, and a testament to Mulally's contributions, is that more customers are returning to the Dearborn automaker for another purchase than any other brand, according to IHS Automotive. It was the fifth consecutive year Ford won the overall loyalty to manufacturer category.

3. Finance our plan and improve our balance sheet.
While Ford's $23.6 billion loan helped finance Mulally's One Ford plan, the company was diligent about paying down its two largest obligations: automotive debt and its underfunded pension plan.

In 2010, Ford's automotive debt totaled $19.1 billion; at the end of 2014, it was down to under $14 billion, and by 2018, Ford expects to have only $10 billion in automotive debt. Even faster progress was made with its underfunded pension plan. At the end of 2012, Ford's pension plan was underfunded by a whopping $18.7 billion, which was more than halved to $9 billion by the end of last year.

Mulally's strategic decisions put Ford on the path to a much healthier balance sheet. As a result, Ford earned investment-grade ratings from credit agencies, which makes borrowing capital less costly.

4. Work together effectively as one team.
The last point of Mulally's One Ford plan might sound simple, but it was probably the biggest problem facing the company in the mid-2000s. Executives were more worried about self preservation than working as a unit, making progress on any level or project very difficult. Zooming out, Ford's entire global operations were essentially fragmented, which led to Mulally joking at one point that he planned a merger, with Ford itself.

While Mulally's plan was simple, it was extremely effective, and the automaker, which had posted losses north of $30 billion in the years between 2006-2008, managed to turn a profit in 2009 while its cross-town rivals filed for bankruptcy. Ford has since gone on to post some of its most profitable years in company history, reinstate its dividend, and seamlessly hand off the CEO transition from the savior himself, Alan Mulally, to his right-hand man during the turnaround process: Mark Fields.

It seemed nothing short of a miracle could save Ford in 2006, but thanks to Mulally, this will be a business turnaround story highlighted for decades.

The article Alan Mulally: The Savior of Ford originally appeared on Fool.com.

Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.