As prepared for delivery
FOLLOWING ARE REMARKS GIVEN BY TONY K. BROWN, GROUP VICE PRESIDENT, GLOBAL PURCHASING, CENTER FOR AUTOMOTIVE RESEARCH, MANAGEMENT BRIEFING SEMINAR, TRAVERSE CITY, MI, AUGUST 15, 2008.
Thanks for coming here on this sunny northern Michigan morning. I bet one of my colleagues $5 that this room would have more empty chairs than full ones, so I guess I’ve lost my bet. I’ll do my best not to hold you up.
Your attendance this week is a good indication that you already know plenty about the trouble in the auto industry, but I want to start by talking a bit about where we are. It sets the tone for our conversation – what suppliers need to do now to thrive in this new automotive landscape – and what I think we have learned at Ford that can help all suppliers as our businesses face unprecedented change.
Several years ago, our host David Cole saw what was coming – he described it as the auto industry’s “perfect storm.” You’ve probably all heard about the actual storm he is referring to -- which was actually three separate and powerful storms converging on each other in the Atlantic Ocean more than 15 years ago. It brought gale-force winds and waves reaching 100-feet high.
If you’ve read the book or seen the movie of the same name, you know that trip didn’t turn out well for those on board the ship.
Was David exaggerating? I don’t think so. The industry is facing a magnitude of change and convergence of circumstances that have the force of a “perfect” storm. There already have been a number of casualties, and sadder yet … we know it is necessary that there will be more to come. The restructuring is proceeding, but it is not complete.
Let’s take a quick look at some “then versus now” comparisons …
The economy in the U.S. as measured by the year-over-year change in growth in Gross Domestic Product fell to a weak 1 percent in the first quarter. The trend rate of growth for the U.S. is about 3 percent -- so you can appreciate how slowly the economy is moving at the moment. With key fundamentals continuing to deteriorate, GDP is likely to continue to fall until sometime in 2009.
Take a look at how consumers are feeling. The Consumer Sentiment Index fell to its lowest levels seen since the sharp recession of the early 1980s. This negative consumer outlook is part of what has driven a sharp decline in U.S. vehicle industry sales rates through the year.
Here is what is putting consumers in such an unhappy mood. Two of the largest manifestations of the economic downturn are the housing collapse and a general credit squeeze. As you can see on the left, the housing collapse accelerated in the April-May period, exacerbating the negative feeling that many consumers already were experiencing about their own personal financial prospects.
This has had a particular impact on us as this has had a disproportionate effect on the sales of full-size pickup trucks as home and business construction has slowed. The effect has been particularly severe in the hardest-hit areas such as Florida, Texas, Nevada, and California.
The credit squeeze also strengthened as we moved into the Second Quarter. Even though the Federal Reserve continued to lower its benchmark interest rates, as shown by the blue bars to the left on the right-hand graph, the interest rates consumers had to pay as they financed new vehicles grew substantially through May.
Consumer purchase preferences are usually affected during an economic slowdown or downturn. But consumer product shifts have been further skewed by soaring prices of gas and diesel fuel. As shown on the left, the price of a barrel of crude oil increased by 37 percent since the end of the First Quarter. This, in turn, led to a corresponding increase in the pump price of gas and diesel fuel, shown on the right.
We noticed that about the time that gas passed $3.50 a gallon, consumers did start moving towards smaller vehicles. Now, the price of gasoline has gone down a little bit in the last few weeks from its highs in July. But we still believe there is a permanent and structural shift up in the prices people can expect to pay for gas going forward.
Here is something many of us in this room know all too well – the rise in commodity prices, especially steel. Since just last year, the spot market price of steel has doubled. And since the first quarter, it has increased by more than 50 percent. What does this mean to our industry?
There is about one ton of steel on average in a new vehicle. So doubling the price for steel costs the industry about $500 per vehicle. And steel isn’t the only commodity that’s going up. Aluminum, copper, zinc, lead, precious metals, resins… have all gone up and often gone up substantially.
And this is the result of how the market has reacted. Small cars…basically B and C segment cars – now account for nearly one-third of the U.S. industry, a 35 percent jump in share of the U.S. market compared with February. At the same time, full-size pickups fell from 13.6 percent of the retail market in February to just over 9 percent in June, a decline of one-third. We’ve seen a similar fall in traditional SUVs, and of concern, we’ve seen the previously “hot” crossover segment fall nearly 20 percent in terms of segment share of the retail industry, to 17.6 percent in June.
These are dramatic changes. Segmentation is usually very stable over short to medium periods of time. To see these types of changes in a handful of months is stunning. The industry has never seen these types of dramatic shifts unfold so quickly.
What has become clearer during the past few months is that no company is immune to the challenges – not even the foreign automakers that once seemed invincible. It wasn't just Ford and GM that reported disappointing results in the past few weeks. Lower quarterly figures were reported by Toyota, Nissan and Daimler, to name a few.
We know also that these changes have taken– and will continue to take – a huge toll on the supply base. Although it's hard to get an exact count of total bankruptcies, we know that there were more than 30 per year in North America in the last couple of years. And that trend shows no signs of slowing down. In fact, many of you may have heard Grant Thornton predict that one-third of suppliers are at risk of filing for bankruptcy.
But this is where the gloom and doom part of this speech stops. Because my reason for being here today is to tell you how Ford is responding to challenges like these … how my global Purchasing team is supporting those plans … and why I can say – with confidence – that Ford and its key suppliers will be among the survivors in this business.
Then I’ll share with you what I think all suppliers should consider doing now to find success in our take-no-prisoners industry.
As you have heard, Ford is responding to the consumer shifts by accelerating the pace of our progress to develop more vehicles that customers want. We are on a fast-track to bring several of our smaller, fuel-efficient European cars to the U.S. market. We are moving ahead our plans to offer more fuel-efficient engines and boost hybrid production. We will convert three truck and SUV plants for small car production.
This isn’t happening next month or next year … it is happening now.
Such a quick response to market change might not have been possible for Ford in the past. But today we are more nimble, more flexible, and better able to adjust to the churn that has become the norm in our business.
This is because we have taken our massive global company and focused every organization and employee on two words: ONE FORD. We are ONE Team. And we have ONE plan, in four parts:
- To aggressively restructure to operate profitably at the current demand and changing model mix
- To accelerate development of new products our customers want and value
- To finance our plan and improve our balance sheet
- And finally, to work together effectively as one team.
What we have created is a “One Ford” enterprise that leverages our global assets to tackle the business challenges in North America. Every organization is playing a role – every organization has clear objectives tied to the four priorities. We are tackling our issues with a global focus, and having that framework in place has allowed us to respond in a much faster way.
A real-time example of how this is working is our upcoming C-car program. One of every four vehicles in the world today is a ‘C’ or Ford Focus-sized vehicle. We expect the segment to grow more than 20 percent to 6 million units in North America and 25 million worldwide by 2012.
The C-Car is unique for us because it truly is a global vehicle – built off a common platform. And here's where the Ford Purchasing organization is working with suppliers on an essential piece of the puzzle. Internally we have set global commitments to maximizing common sourcing on global programs. We want Ford -- and our suppliers – to get the most out of our collective investments.
How does this translate? We are maintaining present business with suppliers – and growing that sourcing with those same suppliers to build on economies of scale. We are making decisions that reuse prior investments. We are targeting contracts that maximize the efficiencies between Ford and suppliers we have chosen to do business with on a long term basis.
Then – and this is a key point – when we make a C-car sourcing decision around an important commodity, it will be for the entire global platform, for the life of the platform. Not just one or two versions of it for one cycle in a particular part of the world.
Here's some of the progress that we're making. Our baseline platform we tracked for common supplier sourcing was the North American CD platform in 2004. Thirty-eight percent of the dollar volume of that program was sourced to common suppliers. The B-car platform that will shortly be bringing small cars to North America had 63 percent sourced. Thanks to our new concentration in this area, more than 80 percent of the dollar volume of the upcoming global C-car program will be sourced with the same suppliers. We expect to sustain at least that level of common sourcing on other global programs now underway.
This is the type of a well coordinated effort we mean when we talk about “One Ford.” And it underlines a quiet – but very profound – change to how we are working with our suppliers. These long-term contracts do not represent new business for suppliers to win. Rather – this is theirs to maintain.
I will give you another example of how we are working differently. In June we had an unprecedented type of meeting at our European headquarters in Cologne, Germany. The focus was on global issues – the C-car and other global platforms, and global sourcing. On the Ford side, the meeting was attended by senior management in Purchasing and Product Development. Suppliers were represented by chief executives and others from our top suppliers around the world.
The fact that this group got together to discuss one – not to mention several – future global platforms and programs was a departure from anything we’ve done in the past. We showed suppliers clay models of upcoming vehicles, as well as interiors. We provided as much information as we know at this point about the manufacturing outlook – where the products will be built and the volumes we expect to generate. Suppliers had the opportunity to meet and ask questions of the vehicle line directors – the Ford people who own the C-car and other upcoming global programs.
We basically said … here are our programs. Here is what you will be a part of if you are selected. Everyone was on the same page and had the chance to see that plans are being made in a coherent and cohesive way across continents.
In the past, we wouldn’t have shared such top secret information with suppliers so early in a program. I don’t even know how much we would have shared with each other!
But that’s our new way of doing business as One Ford. And what the C-Car example shows is the important role communication and relationships play – not only between our organizations but with our suppliers -- as we move forward as one global team.
As I said, each organization has objectives tied to One Ford. One of the unique ways Purchasing is approaching this challenge is through a set of practices and principles that we call the Aligned Business Framework. It aligns our organization – as well as our key suppliers – with the One Ford strategy.
For those of you who aren’t familiar with ABF, I’d like to quickly go through some of the basics.
ABF was launched in 2005 as a way to strategically align Ford and its major suppliers for 20 key components. ABF expands Ford’s business with a select few who want to partner with us in an innovative bilateral agreement.
This is good for Ford because it enables commonality, reduces development time and cost and improves product quality – helping us deliver optimum product cost. In the end, it creates a stronger, more sustainable business model for the suppliers as well.
These are suppliers that agree to be strongly aligned with us, as we are strongly aligned with them – and as the industry churns, we shift and change together.
We started with seven ABF suppliers. We currently have 65 production and non-production suppliers who have been selected for ABF.
This slide shows all our current ABF suppliers.
By the way, we have added seven new suppliers to the team since we last publicly updated the list. They are Durr, Imagination, Jack Morton Worldwide, Linamar, Microsoft, Neapco and Synovate.
Let’s be honest here. I don’t believe I’m making any news by saying that the relationship between suppliers and domestic OEMs in the past has been a bit just short of all-out warfare. It’s tragic, but true.
ABF hasn’t totally fixed that – that’s a longer-term goal. But it’s important to stress that building better relationships is at the foundation of ABF. It challenges suppliers and Ford alike to put the old way of doing business behind us. Last week, we got an indication that we are making some progress in this area. Ford improved by two places in an annual survey by Planning Perspectives. According to the study, we are now the most preferred domestic automaker to do business with. We're not kidding ourselves. We still have a long way to go. But this coincides with a similar upward trend that we are seeing Europe. So I'm encouraged with the direction that we're moving.
This slide shows the 20 principles of ABF – what Ford commits to do, what our suppliers commit to do … and what we agree to do, together.
These 20 principles are the golden rule. I won’t go through all of them, but I’ll summarize a few:
- A Ford commitment to phase in up-front payment of engineering and development costs; extended sourcing for the life of a program or platform, including derivatives; improved commonality and re-use of parts; early supplier involvement in the product development process; broader supplier involvement in product tear-downs and product benchmarking; and extended sharing of forecast volumes and product plans.
- A bilateral commitment to competitive costs based on data transparency and cost models related to product attributes.
- A supplier commitment to bring leading-edge technological innovations to Ford.
- A supplier commitment to an accelerated achievement of competitive cost structures that will be maintained over the life cycle of products, evolving to less Ford emphasis on year-over-year price reductions.
- Continued emphasis on cooperatively pursuing low-cost supply alternatives.
- Continued sourcing emphasis to minority- and women-owned suppliers.
This last point is especially important in the current environment we face. Many of these companies are debt-financed – often with personal guarantees by the owners themselves. As a result, they are particularly vulnerable to the structural changes enveloping this industry. We as automakers – as well as the major suppliers we work with – owe it to these business owners to make sure they have a chance to succeed. It's the only right thing to do if we are going to reflect the diverse customer base that we sell to.
These and the other ABF principles drive trust. They drive technology. They mitigate risk and spark innovation. At least that was our goal when we launched. So you may be wondering, how are we doing … three years later?
I’ll start with some of the concrete things that have happened under ABF, and led to the kind of good work we are doing together on the C-car and other platforms.
In the first phase, we reduced by about 50 percent the number of suppliers we source for the 20 high-impact parts and commodities. We have reached agreements on 13 of these high-impact areas. These include seats, wiring, restraint systems and instrument and trim panels – and represent about half of Ford’s annual global production buy.
Since then, we’ve added suppliers that can help us drive technological innovation, and who show a strong commitment to quality, cost and delivery performance. We are focused now on execution and implementation of the plan with these suppliers.
One of our ABF principles is a commitment to improve commonality and reuse through the use of global Commodity Business Plans.
This fits seamlessly into our global product development vision, which will deliver more vehicles worldwide from fewer core platforms, reduce costs and allow for increased use of common parts and systems – like the C-Car that I mentioned before.
This is good news for our select suppliers. On average, ABF suppliers already can expect a 15 percent growth in Ford business through 2011, with growth in select commodities as high as 200-300 percent. And this doesn’t take into account the additional business they might see as new programs are added.
We’ve worked very hard to stay true to all our commitments. In fact, we measure our performance – and our suppliers’ performance – in all 20 areas, and we talk about those results with our ABF suppliers.
As I mentioned before, building strong relationships is an important part of One Ford – and a critical part of ABF.
We’ve tackled this in many ways. Within our company, we have created an aligned global Purchasing and PD team that is focused on accelerating development of new vehicles, improving quality, reducing costs and eliminating duplicate engineering and purchasing efforts. Not only do we meet regularly as “matched pairs” and as teams, we have regular Executive Business and Technology reviews with leadership from our ABF suppliers. We’ve had very candid conversations, and neither side sugar coats the issues.
This includes monthly meetings where myself and Derrick Kuzak, who many of you know as our group VP of Global Product Development, host a small group of CEOs from our ABF suppliers. These meetings have grown into an important forum for us to exchange views and hear candid feedback about our effort.
And of course, I mentioned the Cologne event – which I doubt would have happened if we hadn’t had three years of experience with ABF under our belts and One Ford as our guiding philosphy.
I won’t duck the fact that ABF has created losers as well as winners – and some suppliers have lost Ford business because of our strategy . And I know they aren’t happy about it.
But those who are designated as part of ABF have given us good feedback on the strategy so far. Though they realize it is evolving, they applaud the approach. They have asked us to stay the course. So we are forging ahead, together.
If you think this is all about Ford and its select suppliers – if you don’t believe any of this applies to your business -- think again.
I have believed from the beginning that the ABF framework is a model that can and should be followed by everyone in this industry – whether or not they do business with Ford.
If you take a close look at the 20 principles, there aren’t many that cannot be applied to any business along the chain.
A commitment to improved product and process stability? Of course. Bilateral commitments to best-in-class quality and data transparency? Naturally. A commitment to share technological innovations? Sure.
These are only three of the principles that make good business sense -- no matter what you make or build or how big you are.
ABF exists only within the context of a broader plan – the One Ford plan. It is our translation of the plan from a functional standpoint. It is our answer to helping make the business successful.
But if I were still at UT Automotive, or with any other supplier, I would be wise to use these practices, and I’d ask my suppliers to do the same
If these principles are good for a company like Ford, they are certainly good for you – especially in the current business environment.
We all have rough waters ahead. But it doesn’t have to end like “The Perfect Storm.” As you have heard this morning already, private equity has a role to play at a time when our industry needs additional capital to restructure.
My personal view is that private equity has to be willing to create value from capacity rationalization – and not extract it. There are both good and bad examples of this. Additionally, PE leadership needs to at least consider listening to a few auto industry professionals. This might improve their chances of success. They need to be realistic about the complexity of our industry vs fast-food, retail or other sectors. They need to understand the length of time it takes to get a return -- and the level of return that they can realistically expect. There is no doubt. PE has lots of smart people and the auto industry can be better off by working with them more strategically.
I would like to close by posing a challenge. Just as private equity can bring in new approaches, maybe it is time for the industry to look to itself for fresh ideas – to hold up a mirror and challenge our own beliefs and behaviors. As we collectively cope with a supply base that is increasingly stressed and in need of restructuring, are there things the OEMs can do differently so we don't walk through the same minefields time and time again?
I don't pretend to have all the answers. I am certainly open to hearing your thoughts.
Thank you.