How Ford is tackling its restructuring

Daniel Howes
The Detroit News
The world headquarters for the Ford Motor Company in Dearborn.

Dearborn — Ford Motor Co.’s $25 billion global restructuring is targeting its vast manufacturing and product development system, as well as its troubled operations in Europe and South America — the regions most likely to be hit with job cuts.

The efforts, still taking shape, could shield the Blue Oval’s profitable North American operations from significant layoffs, two ranking sources familiar with the situation told The Detroit News, particularly if the national economy remains buoyant as Ford launches a new midsize Ranger pickup, new compact and midsize SUVs, and a revived Bronco.

“It’s not about slashing costs and laying off people to get to prosperity,” Hau Thai-Tang, Ford's executive vice president of product development and purchasing, said in an interview this week. “It’s about becoming fitter so that we can reinvest that into delivering products that customers want and value — and doing it faster. It’s not that we have too many people or they’re not working hard or they’re not smart."

But the expectation that Ford could execute a global restructuring over the next three to five years without impacting significantly its 86,000-person workforce in the United States is being greeted with skepticism outside the company. That’s because it defies the industry’s long record of restructuring, typically synonymous with voluntary buyouts, involuntary layoffs, plant closings or some combination of all three.

"Ford is behind where they need to be on a number of fronts," said David Cole, chairman emeritus of the Ann Arbor-based Center for Automotive Research. "What that says to me is there will be rationalization of their labor force. It's just the nature of the beast."

In a note last month, Morgan Stanley wrote: "At this stage, we have assumed global headcount reduction of approximately 12 percent" — roughly 24,000 of Ford's 202,000 global workforce. "Such a magnitude of reduction is not without precedent in the auto industry.”

It's not yet certain, either. Rival General Motors Co. books slightly less annual revenue and sells more vehicles worldwide than Ford with roughly 20,000 fewer employees. Last year, GM sold 52.7 vehicles worldwide per employee compared to 32.8 vehicles per employee at Ford.

Two sources with knowledge of ongoing $11 billion restructuring talks focusing on Ford’s international businesses told The News the automaker expects to announce its plans for fixing Europe and South America as early as the end of this year. Ford employs 14,000 in South America and 54,000 in Europe, and its restructuring plans in those regions could include job cuts, but no final decisions have been made. 

“You have a morality about that," CEO Jim Hackett said in a recent interview, sidestepping a question about potential job cuts as part of a global restructuring. "You really think about them. And so if they have to go, you take care of them.

"What I've said to the teams is that the mistakes we have — it's never going to come out of my mouth that factory labor is the issue. It's not. We've got to get right and fit. We've been managing the headcount. The company shrank in (the 2008-09) crisis and almost added all the cost back."

Avoiding the high-profile bankruptcies that ensnared General Motors Corp. and Chrysler Group LLC nearly a decade ago allowed Ford to retain its dual-class shareholder structure enabling Ford family members to control the company. But it also ensured Detroit's No. 2 automaker would not be forced to make the kind of deep cuts now enabling GM to generate a similar amount of revenue with about 20,000 fewer employees worldwide.

Cost-cutting in the global auto industry almost always includes some form of job cuts, be they consensual buyouts, involuntary layoffs or a combination of the two to reduce overall payroll. Ford is signaling that it has a better way to achieve its desired result of a “fitter” company without dreaded job cuts.

Broadly speaking, Ford officials say, the automaker’s $25.5 billion workout can be separated into several buckets: first, the rationalization of product development, purchasing and manufacturing that is expected to wring an estimated $20 billion in costs from the operation. That includes transitioning from nine vehicle platforms to five global vehicle “architectures” with modular components, as practiced already by Toyota Motor Corp. and Volkswagen AG.

One example: reducing the number of what Thai-Tang calls "excessive options" on vehicles. Ford uses nine different "hub bearings" on its vehicles, the part that enables a wheel to turn freely on its axle. But where's the valued added to the customer?

“There’s no customer that’s coming into a dealer and saying, ‘You know, I want a different hub bearing,’” he said in an interview. “That’s not even something that’s visible to them. That’s just us not minding the shop. What is it about the business model that’s allowed that to happen?”

Another example: designers and engineers working in an "energy room" — new spaces devoted to singular Ford products where designers, engineers and marketers solely meet to go over product plans — gave Thai-Tang three options mocked up with cardboard for a door hinge on the 2020 Bronco.

The employees told him which of the three worked best, and the team decided to move forward with a design in minutes. That process would have taken weeks, and used more expensive materials to "design" the hinge options, in the past.

The second bucket is a separate, $11 billion restructuring of money-losing operations in Europe and South America. It's likely to be a more traditional workout, reducing excess plant capacity and cutting jobs in a bid to turn chronic money losers into contributors to Ford’s bottom line.

In recent weeks, the sources said, Ford officials have met with outside consulting groups recruited to help the company navigate its restructuring. As early as the fourth quarter, the automaker could detail the future of its partnerships with Mahindra Group in India and Volkswagen in Europe and South America, though actions contemplated for those regions are expected to run into next year.

Ford does not expect to target its North American operations or its workforce in any meaningful way, according to a ranking source close to the situation, because its plants are running at or near capacity and because the operations generate the bulk of the automaker’s profits.

Additionally, Ford is expected to grow its footprint in China, its No. 2 market. After larger-than-expected losses in China this year, Ford is launching several new vehicles there, is intensifying localization of some 90,000 Ford- and Lincoln-brand vehicles imported there from the United States, and is pushing to localize Ford’s leadership in China — including likely naming a Chinese national its next CEO in the region.

Ford’s North American business is the only region in the company delivering solid, if slightly sub-par, margins this year. And belt-tightening has been a part of the plan Hackett inherited when he arrived in the c-suite in May 2017. The automaker cut 1,400 salaried workers in the U.S. last year through early retirement and buyout options.

Ford is cutting sedans completely out of its U.S. lineup to make room for larger, more profitable and theoretically more desirable crossovers. Over the next five years, the automaker plans to trim $12 billion from what it expected to spend on materials for products; $7 billion from its product development and engineering processes; $5 billion from marketing and incentive spending; and $1.3 billion on manufacturing costs. All of that serves to give the automaker more for its money as it launches a slew of new products through 2023.

Morgan Stanley, for its part, projects a 12 percent global workforce reduction would yield annual cost savings of $2 billion a year within 18 months. It envisions annual savings of another $1 billion from rationalizing engine architectures, as well as other asset write-downs. But exiting unprofitable global markets like South America or Europe altogether would be more difficult for Ford than rival GM, which sold its two money-losing European brands in 2017.

A major reason: unlike GM, Ford has concluded it cannot sell its 115-year-old Blue Oval to a rival automaker in an under-performing region — one reason it publicly denied a Bloomberg report last month saying Ford was shopping its South American unit. The brand holds too much value, the thinking goes, to entrust it in a single region to outside management unconnected to the company or its legacy.

"Like so much of the Ford investment thesis," Morgan Stanley wrote in a follow-on report about the potential benefits of a partnership with VW, this is "a show-me restructuring and capital realignment story. Investors are still wanting more action in the form of decisive restructuring, business unit transparency, capital allocation and external validation" of its Auto 2.0 mobility strategy.

Through the first half of this year, Ford lost nearly $800 million total in South America, the Middle East, Europe and Asia Pacific. Only North America, home to the franchise F-Series line of pickups and a full stable of SUVs, delivered enviable profits to Ford's bottom line.

In 2017, Ford lost $784 million in South America; lost $263 million in the Middle East and Africa; and made $234 million in Europe, a trend there that appears to be reversing this year. North American profits helped the automaker post a $7.6 billion profit for the year, underscoring the need for global restructuring.

Britain's Sunday Times reported last weekend that Ford plans to cut thousands of jobs and ax car models in Europe as part of an effort to rejuvenate the business there, but  Ford officials disputed the report. The Times said the company, the market leader in the United Kingdom, would cut the European sibling of the Fusion — which Ford plans to drop from its U.S. lineup after 2020.

“Everything is on the table,” Bob Shanks, Ford's CFO, has said. “We have looked at every single part of the business. It’s a very complex endeavor. We are determined to turn this business around right throughout the whole company. There’s more work that’s underway.”