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Ford CEO Describes a New Deal for Automakers

August 8, 2007

Ford chief executive Alan Mulally said Wednesday, August 8, that the crisis in the automobile industry has created a climate attractive to top executives interested in the opportunity to rebuild undervalued and beleaguered corporations.

The announcement earlier this week that former Home Depot chief executive Robert Nardelli would take the reins of Chrysler has reinforced the widely held notion that investors are seeking executives from outside Detroit who can bring greater fiscal and operational discipline to the industry. Mulally was hired by Ford in September 2006.

“This is a business that needs to be run as a business, and the players that I think you are seeing coming into the business are business people,” Mulally told reporters Wednesday at the Management Briefing Seminars in Traverse City, Michigan. “And the reason you attract that [kind of talent] is that if you have stocks that are undervalued and a chance of transforming the companies and creating value for everybody, you are going to attract more and more business people.”

GM now remains the only Detroit automaker that does not have a CEO from outside the industry. The feeling at General Motors is that the focus by the media and analysts on outside talent and the criticisms heaped upon the domestic auto industry are overwrought, says Bob Lutz, vice chairman global product development for GM.

“So if you listen to these experts you’d have to conclude, ‘No, this is really just buffoonery on the part of shortsighted, greedy U.S. car company executives,’ ” he says. “That’s not true.”

Lutz says executives like GM chief Rick Wagoner, who was a GM executive before being appointed chairman and CEO in 2003, have experience within the industry and can bring a balanced approach to a company’s turnaround. Lutz urged patience.

“Turning around a car company takes a long time. There’s no quick fix,” he says. “If anyone thinks you can do that in three months, good luck.”

Each company has put its own spin on the changing dynamic in executive leadership in the domestic auto market. New Chrysler chief Nardelli will work closely with Tom LaSorda, who was replaced by Nardelli and is staying on as vice chairman and president. Frank Klegan, Chrysler’s executive vice president of product development, calls it an “ideal arrangement.”

“The blending of traditional values and a fresh perspective is key to how we are going to move forward,” Klegan says.

In February, Chrysler outlined its “Recovery and Transformation Plan” and predicted it would return to profitability by 2008. Like all of Detroit’s Big Three automakers, Chrysler plans a heavy focus on international sales. The company recently announced a joint venture with Chinese carmaker Chery.

Mulally says Ford is on target to return to profitability by 2009. To do so, Ford plans to cut 30,000 jobs by the end of next year and to increase its sales overseas.

“We’re going to be a global company,” Mulally says. “Up until now we’ve been a regional company.”

But the biggest hurdle to profitability facing Detroit’s Big Three automakers currently is their contract obligations with the United Auto Workers. The contract makes it nearly impossible to fire workers and difficult to close plants, says Sean McAlinden, chief economist for the Center for Automotive Research, which sponsored the conference.

“The agreement actually owns the three companies in Detroit,” he said. “And it has bankrupted the traditional auto industry in this country.”

The UAW’s contract expires September 14.

McAlinden believes the biggest concern facing the Big Three—health care obligations—will be resolved by creating a health care trust managed by the union. The auto companies would pay into that fund based on a percentage of their current estimated health care obligations. Such an arrangement—known as a Voluntary Employees’ Beneficiary Association, or VEBA—is not new. Most recently, Goodyear Tire & Rubber paid $1 billion into a health care fund to be controlled by the United Steelworkers.

For his part, Mulally believes the contract dispute will be resolved soon. “I’m cautiously optimistic that we’ll have a new contract by September 14, when the contract expires,” he said.

Nardelli’s appointment as CEO comes just in time for him to learn about union negotiations, which he had no experience with as a GE executive or as Home Depot’s CEO. Mulally said the fact that Chrysler is now owned by private equity firm Cerberus gives Nardelli little advantage in the union talks. The problems besetting the industry are the same for everyone, whether public company or private. Once an industry outsider himself, Mulally advised Nardelli to listen to the views of all of the company’s stakeholders: customers, employees, car dealers, suppliers and the communities in which Chrysler operates. Then he can develop a plan to return the company to profitable growth.

“My biggest advice is to make sure to include everybody,” Mulally said, “and then put together a plan that includes everybody’s thoughts.”

Jeremy Smerd