The global auto industry is beset with problems and challenges right now. All companies are feeling the strain. But for Ford Motor Company, there has at least been a welcome turnaround from loss to profit, even if how it got there has been more than a little controversial. Dave Leggett recently sat down with Ford president Sir Nick Scheele, in the comfort of his office at the top of Ford’s World HQ building in Dearborn, and put a few questions to him. The full transcript of the interview is available for members to download here.
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DL: Are you happy – in general terms – with the overall performance of Ford at present?
NS: No. I would have to say we must do a lot better to be competitive. But, given where we were three years ago and given the competitive positioning in both the US and European markets in particular, I think we’ve made enormous progress. In the first quarter we were in the black in every business unit around the globe. I can’t remember the last time that happened.
We’ve got a long way to go, but we have made enormous progress.
DL: Where do you see 2004 profit turning out and is Ford still on target to achieve an annual pre-tax profit of $7 billion by mid-decade?
NS: Yes, we are on target for that.
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By GlobalDataFor this year, our present guidance is around $1.60 a share, which would leave our overall corporate performance a little better than last year. We see no reason to change that at the present time. Clearly, when we close the first half at the end of June, we will know better where we stand.
The market is still strong in both Europe and North America, but there are some potential dislocators. Oil is one obvious one; a geo-political event could be another.
If the Fed decides that inflation is a problem they could react in a way that would not be conducive to industry strength. Also, Mervin King [Bank of England Governor] has sent out a very strong warning about a potential house price crash in the UK and if that were to happen, that’s a problem. Every time that has happened in the past, the industry has really suffered.
And inflationary pressures in China could impact China.
And the recent EU vote and the degree of euro-scepticism that it implies, is a risk to the DOHA round [WTO multilateral negotiations on trade] being completed because it will encourage nationalistic tendencies and, clearly, to get the DOHA round done we need to see some agreement on agricultural products and access and tariffs. That will be difficult.
So, those are external risks. On balance, we still feel pretty good, but you can’t avoid saying there are a lot of external factors playing around.
DL: To pick up on one of those, the oil price, how do you see that playing out? Is there a central assumption at work in terms of how you see price per barrel and what it means for North America and Europe?
NS: One has got to be careful here. Now, 42 bucks a barrel at today’s prices expressed in 1970 dollars, that’s 22 dollars. In 1970 dollars, the peak price per barrel was reached in ’78 or ’79, second oil shock, at around 36 dollars. So, we’re significantly below prior peaks.
The issue this time is compounded by, here in the US, local standards for gasoline which have caused a refining shortage. People talk about the price point, but we haven’t seen any major shift yet. But a shortage brought about by local gasoline standards could cause a problem.
A second issue is in Europe, where taxation is a much greater proportion of the per litre price. That could cause a reaction there, particularly in the UK. I saw recently a tabulation of taxation revenues per litre across Europe and the differences are scary.
So, those two things come into play I think.
Despite all the scaremongering, there isn’t a shortage of oil. There are more reserves in the ground now than when the Club of Rome wrote that paper in 1971. The Athabasca tar sands [tar sands are impregnated sands that yield oil but require heavy processing; Athabasca in Alberta, Canada, is a known big field] are completely untapped and I know that the oil companies are doing a huge amount of work in terms of natural gas and methane and they think that will be tremendously beneficial – at the moment it’s just flared away.
I don’t think there’s an oil shortage per se; it’s how people respond to stories that might cause them to be affected.
DL: Do you see any sign yet of the market being affected by what has happened to the oil price so far?
It’s very difficult to say. I know the analysts have said that big SUV sales in May were down versus May of a year ago. Yes, that is true. But May of a year ago was a record full-size SUV sale month for us because it was the first time we’d put zero percent financing on Expedition and Navigator, so the comparison is affected.
We try to look at running rates and can’t see major shifts. Two or three points over a two-month period doesn’t really constitute a major shift. But we clearly keep an eye on it.
We do have the capability of logging how people configure vehicles on our website – real time when they go into fordvehicles.com – and the configurations are slightly up, on, for instance, compact SUVs over where they were a year ago. Now, ‘slightly up’, five percent, what does that mean? We really don’t know yet. But it is something we are keeping an eye on.
DL: What do you see as the biggest challenges facing the company right now?
NS: In the US it’s healthcare and legacy [pensions] costs. And I put the two together, but healthcare is the major one. In this country we have seen a six-point increment in GDP spent on healthcare over the last three or four years and that has come at the expense of something else – this is a zero sum game.
There’s been no debate in the US on the right thing to happen or not, and we need to encourage that debate.
I think in Europe, the big issue is the pending cost of legislation or potential legislation.
DL: Future Emissions?
NS: Yes, future emissions. The conflict between pedestrian safety – once you put more weight into the vehicle – and CO2; the conflict between particulate filters and CO2. And we are talking about marginal differentials here.
We’ve just brought out a PZEV – that’s a partially zero emissions vehicle – Focus here in the US. That car when travelling 1,200 miles puts out lower emissions than mowing your lawn once with a brand new lawn mower.
Now, that’s where we’re at. It’s difficult to think that we can take technology that people will value beyond those kinds of levels. One should never say never about technology, but consumers have to ascribe a value equation and I think in Europe we’re losing sight of that value equation or what people consider to be value.
DL: Moving on to product development issues at Ford, an area you’ve highlighted as a source of problems – on model development times for example – before, are you happy with Ford’s product development systems as they now stand?
NS: I wasn’t talking about individual engineers, but rather the way things were managed. We have made enormous strides in the management of product development. I’m very pleased with what Phil Martens here and Derrick Kuzak in Europe have done. They’ve done a magnificent job.
Testament to that is the launches we’ve got out, the strength of the models we’ve got out and what we’ve got coming this year. This year is actually the highest launch product offensive that we’ve ever had or at least in my 38 years with the company. And we are going to be popping them out, globally.
DL: Is there any particular upcoming model that you are looking forward to?
NS: I look forward to the Mustang. But I also look forward to the Focus in Europe and I think that is going to be very strong.
I think the fact that in Europe with the C-Max we were able to be last to the party, but C-Max is now taking 13% of that segment – better than our overall share. And that really says, ‘hey, this is a better product’. The driving dynamics of the prior Focus are going to be exceeded again by the new model when it comes out later this year. I’m very pleased that we have been able to do that.
And I’m very pleased that we’ve been able to develop a Mustang here that…really, you’re just going to love it. Even down to getting the right V8 burbling sound, which is wonderful.
Those are two important vehicles, but equally in Australia with Territory, which is just being launched. That’s a very important vehicle. It’s the first time that we’ve moved to an extension of the classic RWD Australian V8 ute and we’re extending that product line. And it’s an outback kind of car – which is why we’ve called it Territory – and that’s very good news, actually.
DL: It’s interesting that you mention the C-Max in Europe, which seems to be off to a good start and is making a good contribution to Ford of Europe’s finances. But, as you say, it is late, and the version that was late in development but pulled five or so years ago, had seven seats rather than five. But is having only five seats a problem?
NS: No, because the five seats are actually five functional seats and you can have a lot of room. But you have to look at the whole package, which is very good. Increasingly people are asking, are five less than seven? No, because in the seven, the two at the rear are unusable on a regular basis. Heads are close to the rear glass. What value do people ascribe to that extra seating, for very occasional use?
DL: I recall that at SAE a few years ago, you said that you’d like to see a diesel Ford Focus on sale in NA in the not too distant future. Cost may have been high initially, but the point seemed to be making a start with customer perceptions. Recent comments by new COO Jim Padilla suggest that the idea has been shelved for now. Why is that and when do you think it could happen?
We don’t have any plans for a diesel Focus for North America right now. Since I spoke about this, legislation has come out in relation to diesel emissions that make it very difficult. It’s a CAFÉ-like arrangement, which enables the manufacturer to trade emissions. What you have to do – and this comes in in 2007 – to be neutral on emissions is be in ‘Tier 2 BIN 5’ and that is a NOX emission level that is incredibly tight, tighter by far than Europe.
That comes in in 2007 and we only get low-sulphur fuel nationwide in 2006. Common rail requires low-sulphur diesel. We think that the cost of getting to BIN 5 would be prohibitive on a Focus at today’s technology levels. So we’ve put that on the backburner.
We still think that diesel is a good fuel to go for, but it’s a question of what is an optimal strategy and where to put R&D resource.
DL: Obviously the European light vehicle market has gone for diesel in a big way. Do you think that gasoline-electric hybrids in North America will emerge as the green powertrain of choice?
NS: May well be. But I think you need to go back to why Europe has gone the way it has. The reason was that several European countries decided to use diesel as their Kyoto compliance strategy and they introduced tax advantages for diesel and that’s where it all started. In the UK, it was the carbon tax on company cars.
But in the US that opportunity does not exist because of lack of taxation on oil products. Hybrids are an alternative approach. Inherently, the advantages of hybrids and diesel are about the same – around 35%. The only difference is that hybrids will give you their advantage, very much higher, in urban conditions – stop-start is where they’re ideal and they lose out on the highways.
So, I think it depends on your mix of usage, very much as to how you see it.
But hybrids are also a step towards fuel cell – if that day should ever arise – because the key issue with hybrids is the control strategy and control of the electric motors really gets you into much of what you have to get into with fuel cells.
DL: What about diesel Volvos for the North American market?
NS: Exactly the same problem as with the Focus. You could do it, but you see it more on trucks, particularly in a truck CAFÉ context. Diesel trucks are more probable and that’s a judgment that you have to keep on reassessing as the legislative outlook changes.
But it is possible. And things could change. But certainly nothing before ’07 or ’08 and that’s because of the combined effects of new legislation and the lack of availability of low-sulphur nationwide until the end of ’06.
DL: There has been talk of Ford looking at Australia – like GM has done with Holden – for new rear-drive, big-engined product for the US market, such as the Ford Falcon. Can you comment on the current state of play?
NS: It’s something that keeps on coming up. We haven’t done any really serious work on it. The fact that we now have a US V8 powertrain in the Falcon is actually a help, but it’s still a Right-Hand-Drive vehicle and its not engineered to take Left.
But we do look at it and I’m sure we will again and there’s no active programme. But chance would be a fine thing! It’s a great product.
DL: Developing the new Focus platform C1 for use across the Ford, Volvo and Mazda brands seems to make good industrial sense. Who will develop the next Mondeo-sized, CD, platform – Ford Europe, Mazda, Volvo?
NS: Golly, I don’t think I can answer that. A lot depends on availability of resource at a given time. We haven’t announced anything yet.
MORE FOR MEMBERS: The full transcript of Dave Leggett’s interview with Nick Scheele including questions on platform strategy, PAG integration, Jaguar, Land Rover, customer incentives, Ford’s emerging markets strategy, Ford’s TVM initiative and supplier relations – is available for members to download here.
