The Auto Industry: Structuring for Survival in the Global Market of the '90s

I dreamed I was an angel
And with the angels soared,
But I was simply touring
The heavens in a Ford
New York Evening Sun (1926)

In the days when clipper ships raced across the oceans, the purpose of trade was as clear as the ships were beautiful. They sailed to Japan (or China, or Australia) loaded with something that Britain had and the Japanese wanted, and returned with tea, silk or wool. These merchants did not bargain or negotiate the way U.S. President George Bush did in Japan earlier this year: We buy your cars so you should buy ours. Silk for silk, the Japanese would argue, is not a very worthwhile trade!

According to media reports, a very messy, but nevertheless essential, summit between Japanese and American leaders was reduced to a sumo-wrestling match over cars and car parts!

Personal diplomacy may be one of George Bush's great strengths as President; car salesmanship is not!

Japan practises what Peter Drucker calls "adversarial trade." That is, it does not import the same sorts of goods as it exports. However, if I remember correctly the first principles of economics, the point of international trade is to allow a national economy to specialize in what it does best. This is what David Ricardo, the 19th century British economist, meant when he coined the term "comparative advantage."

Arguably, the end of the Cold War and the collapse of the Soviet Union presents an opportunity to create a world of open markets among democratic governments that abide by a more-or-less transparent set of trading rules--perhaps for the first time since Sarajevo in 1914.

With the fall of communism, the international threat that most worries North Americans is no longer nuclear warfare but something far more subtle. Their principal concern is an erosion of living standards, as North American industries lag in the global competition with foreign rivals, especially Japan. And these concerns are magnified by recent announcements from pillars of corporate North America, like General Motors, that they are cutting thousands of workers and permanently shrinking.

Unfortunately, Japan bashing--led by a protectionist chorus of leaders who call themselves "fair traders"--has suddenly become a frenzy. Prolonged sluggishness in the Canadian and U.S. economies, the upward creep of unemployment and a run of huge layoffs has made North Americans very job-conscious. Every Japanese car sold here, even if it's made in Ohio, has come to symbolize fewer North American jobs.

The Japanese and other foreign automobile manufacturers have cut significantly into the market share of the Big Three. I am reminded of a famous cartoon by Larson. The Indians were attacking with fire-arrows and the wagon-train defender asks: "Can they do that?" The Japanese can invade the turf of the Big Three. They did!

Increasingly, auto industry analysts are asking tough questions of the Big Three. Despite considerable improvements during the past decade, can the Big Three consistently turn out cars as appealing--in cost, quality and technology--as the Japanese? Is Detroit wed to the mass manufacturing methods of Henry Ford and the mass marketing methods of Alfred Sloan, which the Japanese have left behind? Does Japan have a comparative advantage in making cars? Do the Big Three truly understand that production is not simply the application of tools to materials; in the words of Peter Drucker, it is "the application of logic to work." In an industry facing a North American over-capacity of almost three million units, what steps can be taken to reduce this capacity? And finally, with Canada's share of North American auto production at an historic high of 18 per cent, can steps be taken to shield this country from the pending storm?

These questions (and others) expose the raw nerves of a continent in profound economic distress, of a people with declining faith in themselves, their leaders and their past, a people very uneasy about their future. These questions are of great consequence in the debate about North America's condition at the end of--what has been called--the North American Century. As John F. Kennedy once said: "Change is the law of life, and those who look only to the past and present are certain to miss the future."

The Empire Club's guest today, James G. O'Connor, the President and CEO of Ford Motor Company of Canada, accepted his latest post at a time when the issue of restructuring was becoming the top priority in boardrooms and factory floors across the continent.

Mr. O'Connor's 26-year career with Ford Motor Company has included senior sales and marketing positions in both the U.S. and Canada. He has been President and CEO of the Canadian affiliate since October 1, 1990. Interestingly, Mr. O'Connor is the first American to head the Canadian subsidiary since Edsel Ford held the job in 1929.

Perhaps the best way to wrap up the introduction of the President of Ford during a time of restructuring is by quoting the company's founder: "The only history that is worth a tinker's damn is the history we make today."

To explain how history is being made today in the auto industry, I am delighted to introduce James G. O'Connor. Please give him a warm welcome.

James G. O'Connor:

I'm honoured by your kind invitation to speak to you on the state of the automobile industry. It was well timed for several reasons. First, the Toronto International Auto Show opened today at the convention centre and Skydome.

So far this year I've attended the Montreal, Vancouver and Ottawa auto shows. I'm pleased to report that attendance is up considerably over last year. Customers still seem to have a love affair with their car or truck.

In my job, I have very few bosses but I'm extremely pleased that one of them is with me at the head table today--my fellow Ford of Canada board member Roy Bennett. Roy was also president of Ford of Canada from 1970 to 1981 and is widely recognized as a leading Canadian business leader.

I'm honoured also by the presence of our dealers, both at the head table and in the audience. Scott Vickers, chairman of the Metro Toronto Ford Dealers Association, is a real student of the business and a second generation dealer. And I'm sure you all know that the head of the Mercury dealer group, Al Palladini, is a 'pal of mine.' I will come back to the importance of the dealer organization in the automobile industry of the '90s later in my remarks.

Another reason why it is appropriate for someone from Ford to be invited as your speaker is that The Empire Club and Ford Motor Company share the same birthday year--1903. Together we have shared a long and rich history in Canada.

And speaking of history, you already know that I'm the first American president of Ford of Canada since Edsel Ford, son of Henry Ford, in 1929. What you may not know is that 60 years later, Henry Ford's great grandson, Edsel Ford II, succeeded me in a position I held in Ford U.S. before returning to Canada.

It's rumoured, however, that Edsel has more long-term potential in the company than me.

You may also be interested to know that in the global village of today's automobile industry, a man who was born in England and grew up in Scotland runs Ford's North American Automotive Operations; a Canadian from Barrie is in charge of all Ford plants in Australia; and an American who once worked at Ford of Canada heads up our European operations.

Also, two Canadian executives I worked with while I was here from 1984 to 1986 are further examples of the opportunities available in our globalized industry. One is executive vice-president of Ford Motor Credit Company in the U.S.; the other is director of marketing at Ford of Britain.

So you can see it's not really that unusual that I'm now back at Ford of Canada.

In a sense, Ford's globalization began when Ford of Canada was founded just 14 months after Mr. Ford established the U.S. company--the year, 1904.

Today, the Ford oval is a familiar sight in more than 200 countries and territories around the world, and the makeup of Ford's worldwide management team represents a rich diversity of nationalities and cultures.

To come back to the reasons for the excellent timing of my appearance today, I want to tell you that the sky is not falling on our industry. Yes, there has been a lot of bad news lately--now I'm not blaming the media--but I feel strongly we need to put some things in perspective.

Some positive things are happening right here in Ontario. For example, have you driven past Ford's Oakville complex lately? In what was once an open area between our two plants and our central office building lies an 800,000-squarefoot building. It's a $439-million high-technology building that will begin state-of-the-art painting of cars this May. In time, it could also lead to additional investment for new products at that plant.

And if you drive along Highway 401 to St. Thomas you'll see a plant where $300 million worth of retooling, modernization and automation was completed last year to produce a new generation of family sedans, the Ford Crown Victoria and Mercury Grand Marquis.

Also, since you're already that far, you might as well continue down the 401 to Windsor where work is under way on a new aluminum-casting plant that will utilize new technologies to produce components for Ford engines in the 1993 model year.

These projects combined will cost $1 billion.

I mention them not to give you a commercial about Ford, but to tell you, more important, that the sky has not fallen on Ford of Canada's plans to invest in plants and products that will ensure our competitiveness in the '90s.

Now, let's talk about automobile sales in Canada How bad have they really been? I'm often asked: How does this recession compare with the recession of the early '80s? In 1982 total car and truck sales by all companies fell to a low of 918,000 before climbing to a record 1,538,000 in 1988.

Well, in the current recession, the low point was 1,285,000 vehicle sales in the year just ended--367,000 more vehicles in 1991 than in 1982, or 40 per cent more vehicle sales. So the sky has not exactly fallen on sales, either.

In fact, in the last three months of 1991--and that's the first quarter of the 1992 model year--Ford of Canada's car and truck sales were up six and two per cent, respectively, from the same period in 1990. In January, when you exclude the distortions caused by the GST factor, our sales were up by eight per cent.

Perhaps the most significant good news I could share with you today deals with one of the real hard indicators of our business. In the first quarter of 1991, Ford's assembly plants across North America experienced a total of 93 down weeks as a result of declining dealer orders and customer demand. In the first quarter of this year, we're projecting about 54 down weeks.

That means that Ford's car and truck production will be 57 per cent higher compared with the first quarter of '91. What that tells us is that dealers are seeing more showroom traffic and they're ordering more vehicles for the spring and summer market.

For 1992, we're looking for industry car and truck sales to increase by at least five per cent over 1991 and go as high as 1.4 million--most of it coming in the second half. Beyond this year, we can see a return to record volume levels in the 1.5 million range by mid-1993 or 1994.

As you've probably guessed by now, most people in the automobile business are optimists. We love this business--you might say we have gasoline in our veins. We always tend to see the glass as being half full, rather than half empty.

But in order to temper my enthusiasm with the reality of our times, I asked the economic experts at Ford to give me their latest forecast. They sent me a note asking: "For what day?"

The crystal ball we use at Ford of Canada has to also cover the U.S. More than 80 per cent of Canadian production is exported to the U.S. market, so the health of our bottom line depends even more on the rate of recovery in that country.

While there is continued softness in U.S. vehicle sales, the outlook there is also for gradual improvement as 1992 progresses, and, importantly, as the U.S. presidential election draws closer.

It will be interesting to see how the economic stimulants contained in Mr. Bush's State of the Union message impact on the economy, and who the Democrats throw against him.

In both the U.S. and Canada, declining interest rates and much stronger stock markets than six months ago should be pointing the way to a slow, but sustainable recovery.

Housing starts are considered an important source of economic stimulus for post-recession recovery. In the fourth quarter of 1991- three quarters after the economy appears to have bottomed--housing starts are up 88 per cent.

This is a much stronger recovery than after the recession of 1980-82 when housing starts were up four per cent. The missing ingredient, to this point, is a strong dose of consumer confidence.

However, I for one believe it will start to improve as people realize that interest rates aren't going to get much lower, and that consumer incentives on big ticket items--particularly cars and trucks--won't last forever at their current extravagant levels.

But even when all these things come to pass, we are under no illusions that it will be business as usual in the months and years ahead.

For some time now, the global auto industry has been undergoing a massive structural change that has been redefining the cost of doing business, and the standards required to compete successfully in the 21st century.

As the decade unfolds, automotive companies and their suppliers are aligning their resources for a decisive confrontation in the world's major markets. You simply can't compete today unless you're a player, and a major player, in North America, Europe, Asia-Pacific, and Latin America.

Any company that hopes to survive will have to be outstanding by tomorrow's standards--just being good will not make the cut.

There's general agreement that we're now in a 'no excuses' era It's an era that places a premium on efficiency and performance--an era when the only verdict that really counts comes from the customer.

Canada will not be sheltered from the coming competitive storm.

In his study of Canada's competitiveness, Harvard Professor Michael Porter warned of, and I quote: "unprecedented challenges to its future economic viability and prosperity," and he noted that "the comfortable old order is disintegrating."

The old order changed for the automobile industry when' the Canada-U.S. Autopact of 1965 created a virtual free market in automobile production in the two countries. By competing successfully, Canada became the world's seventh largest motor vehicle producing nation.

Today, Canada has 15 per cent of North American employment and vehicle production, while accounting for only nine per cent of North American vehicle sales. It has been a good deal for Canada

However, you should know that cars built overseas and shipped to our shores contribute precious little to the Canadian economy. Even those foreign cars assembled here--with their significantly lower levels of North American content compared with the domestic producers--displace more Canadian jobs than they create.

The stakes have never been higher.

Particularly vulnerable is Canada's $14-billion-a-year parts industry, whose employment has fallen to 66,000 from 82,000 in 1989. To protect those jobs, the Federal Government should require foreign companies wishing to take advantage of the Canada-U.S. Free Trade Agreement to meet a higher level of North American content--70 per cent instead of the 50 per cent now required. Incidentally, that would still leave them well behind the 90-per-cent North American content achieved by the domestic producers.

But, as free enterprisers, we should not rely on government to come to the rescue.

As automobile companies and parts suppliers, we have to compete for business with the best in the world by continuing to improve quality, by continuing to improve efficiency, and by continuing to work closely with organized labour and government to forge a new relationship that recognizes the perils, and opportunities, of the new global marketplace.

At Ford, we made quality a top priority and continuous improvement the watchword of all that we do. We've redesigned our cars and trucks to meet the demands of an increasingly sophisticated consumer. We've rebuilt and retooled our plants. We've improved productivity. We've modified our corporate cultures and we've marshalled our technological resources to improve our products, our processes, and our performance worldwide.

In short, we've restructured our businesses from top to bottom, changing the way we engineer, manufacture, sell and service our cars and trucks. We've re-thought and revised the way we deal with our suppliers, our dealers, our employees, and, above all, our customers.

Revolutions cost a lot of money.

At Ford, we've invested more than $40 billion in new plants and products over the past 10 years. That's more than we invested over the entire previous 78-year history of the company.

In Canada alone, since 1981, we put $2.5 billion into new, expanded or modernized plants to produce a new generation of Ford cars and trucks. In the 16 months since I returned to Canada in my present capacity, we have undertaken the additional $1-billion investment at our Canadian plants that I mentioned earlier. At least one of these projects--the new high-tech aluminum-casting plant in Windsor, Ontario--came to Canada in competition with locations in the U.S. and Mexico.

The quality of our work force at Windsor, where all of our existing plants have won the coveted Q1 Quality Award, and the willingness of the CAW to work out a new agreement that improved efficiency were key factors in the pro-Canada decision.

We will be opening a state-of-the-art, 800,000-square-foot clearcoat paint facility at our Oakville plant in May this year and the new Windsor plant in 1993.

But today's investments represent just a beginning, because we intend to maintain a substantially more aggressive product development program, and shorten the time it takes to get new products to the market--from 51 to 37 months.

In fact, between the start of the 1991 model year and the end of 1995, we will have redesigned or replaced virtually every car and truck in our Canadian dealerships, and replaced, redesigned, or improved almost all of our powertrains.

So anyone who suggests that Ford isn't meeting the challenges of foreign competition and an increasingly sophisticated customer is simply not taking account of the facts.

In the '90s, Ford of Canada will continue to focus on the basics of our business--a formula that produced our success stories of the '80s.

It starts with product.

Take the Ford Explorer--the 'in' vehicle in Toronto--the compact utility vehicle that quickly overtook the traditional leader in its segment, posting a 95-per-cent sales increase right here in Ontario. And guess what? There were no incentives on the Explorer, and it wasn't even built in Japan. In fact, Ford builds a version of it for a Japanese company to sell in the U.S. It's called the Navajo and sold by Mazda.

At the Toronto auto show, you'll see our new 1993 Villager, a front-wheel-drive minivan that will go into production in April. Ford will also build a version for Nissan, which designed and engineered the vehicle.

Quality is another basic of our business--and there must be a message there about our quality. Both Nissan and Mazda are getting trucks from Ford plants.

Another ingredient for success is to control costs and optimize efficiency so that, in the end, the customer receives the best 'value-for-the-money' in products and services. Affordability is critical in a market where fewer customers have more choices.

At Ford of Canada, we have improved the efficiency of our salaried work force by 15 per cent during 1990 and 1991, and will improve it by another five per cent in 1992, without layoffs.

However, none of these ingredients--innovative and appealing products, customer-satisfying quality, and affordable prices--would ensure our success without the dedicated, competent, and customer-driven men and women who operate our dealerships.

As I mentioned earlier, I am honoured by the presence today of so many Ford and Lincoln-Mercury dealers from the Toronto area. It was a tough market in '91, so with your indulgence, I want to say thank you to all of them and their staffs.

Our dealers are the face of Ford of Canada in their communities. As they are perceived, so is the company. They are also significant contributors to the economic health of their markets.

In Metro Toronto, for example, 25 Ford and Lincoln-Mercury dealers employ 1,800 men and women and generate annual payrolls totalling nearly $70 million.

We live in a golden age of consumerism. Competent, and courteous service gets you into the bleachers--the minimum price of admission. The box seats are reserved for those businesses that employ a high touch and high-tech approach to customer service.

At Ford, in the last few years, we've added a lot of electronic content to our cars. Therefore, to support the servicing of these units, we have taken a giant leap forward in automotive service.

All of our Metro Toronto dealers will soon be using a revolutionary new computer system that allows a vehicle to tell a service computer what's wrong with it and instructs the service technician how to correct the problem. Known as the Service Bay Diagnostic System, the system hooks up to a vehicle's on-board computers to use direct vehicle computer information as a basis for diagnosis. The SBDS then locates the source of any problem and serves up the appropriate menu of schematic graphics and repair procedures for the technician.

In the six-month period in which SBDS was being piloted at U.S. and Canadian dealerships, there was not a single repeat repair among the first 34,000 vehicles serviced with this equipment. I think it's safe to say that it will change the automobile service business forever.

When I came to this job, I developed a very focused, long-term agenda and my approach was to concentrate on the customer by providing our dealerships--our frontline sales and service team--the support required to succeed in the consumer-dominated '90s.

As I mentioned earlier, this last decade of the 20th century promises to be the most challenging era since Ford of Canada was established by a group of young Canadian entrepreneurs in 1904. That historic event marked the start of the Canadian automobile industry.

Gordon McGregor, the 31-year-old founder, and his 17 employees had an immediate lesson in competitiveness long before it became the buzzword for businessmen, politicians and editorial writers. They struggled to survive.

At one point in those early days, McGregor tried to talk a business associate into buying four per cent of the outstanding stock for $5,000. He refused, saying he wasn't going to risk his money in some fly-by-night venture. He bought three houses instead.

The last I figured it out, four per cent of Ford of Canada stock would be worth $45 million today, give or take a million, and I couldn't begin to calculate how many hundreds of thousands of dollars in dividends would have been paid since then. Even in Rosedale, where I live, three houses couldn't have appreciated that much.

It was a classic case of missed opportunity.

Today, as we emerge from the shadow of some tough times, we too have an opportunity. To simply batten down the hatches and weather the storm would be like buying three houses--playing it safe--rather than investing in the future.

Instead, we should rise to the challenges of the new world economic order by sharpening our competitive skills, by rejuvenating our entrepreneurial spirit, and by creating a new alliance between labour, business and government.

As we go through the '90s, I am confident that consumers are poised to go on a buying spree. I am equally confident that most of them will buy only from those companies that have a passion for excellence in the products and services they provide.

Ford of Canada and its 14,000 men and women intend to be one of them.

Thank you.

The appreciation of the meeting was expressed by Harry Seymour, President and CEO, Pathfinder Learning Systems Corporation, and a Past President, The Empire Club of Canada.