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Ford's Padilla, Chasing Toyota on Quality, Bets on Mazda Design

July 5 (Bloomberg) -- Ford Motor Co. President Jim Padilla meets a different group of employees almost every week to discuss what he terms his ``vital few priorities.''

He shows them a diagram that lists his top two aims as: 1) Improve Quality. 2) Improve Quality.

``This business is not about big bangs,'' Padilla, 59, tells employees in a conference hall in Dearborn, Michigan, where Ford, the world's No. 3 automaker, is based. The company needs constant improvements over time, he says.

Time may not be on his side. Padilla already faces declining sales and a loss of market share to companies such as Toyota Motor Corp. In response, he has sped up the introduction of new models by basing three sedans on an existing design from an affiliate, Japan's Mazda Motor Corp. More inspections helped Ford cut customer complaints 22 percent in three years. Yet Toyota is improving on complaints, too, so Padilla is taking his quality message to plants worldwide.

``It finally dawned on them that `We have to fix the process,''' says James Womack, 56, president of the Lean Enterprise Institute in Brookline, Massachusetts, which advises companies on how to boost efficiency. ``The difficulty is the lateness of the day and the time it takes to get this right. Once the ship sinks below the water to a certain point, it's just pretty rough.''

Declining sales prompted Ford to twice lower its earnings forecast this year, most recently on June 21. The company now expects full-year profit, excluding some one-time costs, of $1 to $1.25 a share compared with an original forecast of $1.75 to $1.95 in January. Ford doesn't make forecasts for net income.

`Refine It'

Ford shares have declined 30 percent this year, compared with a 14 percent drop by Detroit-based General Motors Corp., the world's largest automaker by sales. Toyota City, Japan-based Toyota surpassed Ford as the No. 2 automaker in 2003.

Padilla says Toyota serves as an example of how to make winning models.

``Toyota doesn't hit home runs every time at bat,'' he says during an interview in the executive dining room. ``When they don't hit a home run, they go back and refine it.''

While the quality of Ford's vehicles is improving, it still lags behind Toyota, says Dennis Virag, president of Automotive Consulting Group Inc. in Ann Arbor, Michigan.

``Ford is improving, but Toyota is a moving target,'' Virag says. ``For a person knowledgeable about cars, they marvel at the pain Toyota takes to make sure the car is right.''

Ford began Japanese-style quality efforts under chief executive officers Philip Caldwell and Donald Petersen, who together oversaw the automaker throughout the 1980s. Ford ran advertisements with the slogan ``Quality is Job 1'' from 1979 to 1997.

Camry, Accord

Under Petersen, Ford introduced the Taurus sedan, which was the No. 1-selling car in the U.S. from 1992 to 1996 before being eclipsed by Toyota's Camry and Tokyo-based Honda Motor Co.'s Accord.

Ford's quality efforts later faltered. In 2001, Ford finished last among seven automakers with multiple brands in a J.D. Power & Associates quality survey that measures consumer complaints about new vehicles. The company rose to fifth place the following year and remained there in 2004. The surveys show Ford improved to 127 complaints per 100 vehicles in 2004 from 162 in 2001.

Toyota finished first in each year, dropping to 101 complaints per 100 vehicles in 2004 from 115 in 2001.

This year, J.D. Power altered the survey, reporting only results for individual brands. Ford's Jaguar luxury brand, with 88 complaints, finished second to Toyota's Lexus, with 81. The next best for Ford was its Lincoln U.S. luxury brand, which ranked No. 14 with 113 complaints per 100 vehicles.

Below Average

The company's other U.S. brands, Ford and Mercury, finished worse than the industry average of 118 complaints. Mercury had 120 and Ford 127.

Padilla's effort to constantly make small improvements is the right approach, says Sasha Kamper, who helps manage $86 billion in fixed income at Principal Global Investors in Des Moines, Iowa, including Ford bonds.

``Auto companies are behemoths,'' she says. ``The thing to do is set a strategy and figure out small steps to make that strategy work.''

Born in Detroit of Mexican and Irish descent and the third of 11 children, Padilla joined Ford in 1966. He rose to oversee production of models including the Escort and Taurus sedans. Padilla also was director of engineering and manufacturing at U.K.-based Jaguar from 1992 to 1994, a time when Ford was trying to trim losses at the unit it purchased in 1989.

Outside the Mold

Padilla's manufacturing background contrasts with such former senior executives as Harold Poling, chairman and CEO from 1990 to 1993, who was a finance specialist, and Lee Iacocca, Ford's president from 1970 to 1978, whose expertise was in marketing.

Executives can damage quality by demanding late changes to new models, Padilla says. Executives such as Iacocca, who later became Chrysler Corp.'s chairman and CEO, ordered last-minute changes in styling at Ford, causing engineers and suppliers to make quick fixes shortly before production was slated to begin.

Padilla, who became Ford's chief operating officer in early 2004 before adding the title of president in February, says executives should express opinions but not issue last-minute mandates.

``One person shouldn't do that,'' he says. ``We have tremendous talent, people who are in tune with the marketplace.''

Padilla says he expresses his thoughts about models while still giving leeway to designers and engineers.

Extra Inspections

To improve quality and prevent early recalls, Ford added extra inspections of new car and truck models in recent years. In December, Louise Goeser, then Ford's top quality executive, said in an interview that the company had already managed to cut annual warranty costs by about $1 billion since 2001.

Padilla has conducted 15 plant reviews worldwide since becoming chief operating officer, the No. 2 position at Ford, last year. Each review lasts as long as a full day and quality issues take up at least one hour, Ford spokesman Ron Iori says. The plant reviews also include town-hall-style meetings and slides of how the factory compares with ``best in class'' competitors, he says.

Target Abandoned

It hasn't prevented slow sales. In April, Ford said its automotive unit would break even at best this year and abandoned a target, first set in January 2002, of generating $7 billion in pretax profit next year.

On May 5, Standard & Poor's cut its ratings on Ford debt to junk status, BB+. At the same time, it also lowered GM's debt below the investment-grade category.

Since then, investors have driven up the bonds of both companies. The yield on Ford's 7 percent bond due in 2013 fell to 7.66 percent on July 1 from 8.61 percent on the day the ratings cut was announced, while the price rose to 96 cents on the dollar from 90.5 cents.

On June 21, Ford said its profit outlook for North America had worsened as vehicle sales weakened.

CEO William Clay Ford Jr., 48, says he plans to boost profit by introducing new models and cutting costs. His success to date has been mixed. While net income rose to $3.49 billion in 2004 from $495 million in 2003, more than 80 percent of last year's net income came from making loans to buyers of Ford cars and trucks.

The $7 billion target for 2006 depended on the company making most of its profit from auto sales.

28-Month Decline

Ford's share of the U.S. market, the company's largest, has declined for 28 straight months. During the first six months, Ford's market share slid to 18.8 percent from 20 percent a year earlier.

The biggest success has been the redesigned Mustang, whose sales increased 31 percent through June from a year earlier. Those gains have been more than offset by declining sales of mid- and large-sized sport-utility vehicles, or SUVs, such as the Explorer and Expedition, because of rising gasoline prices.

``It's an incredibly difficult industry right now,'' says Dan Poole, vice president at Cleveland-based National City Corp., who helps manage $34 billion, including Ford shares.

``You're going to be selling fewer Explorer SUVs at $60-a- barrel oil than at $30-a-barrel oil,'' Poole says.

Ford's sales of mid- and large-sized SUVs fell 20 percent in the U.S. in the first half of the year.

Padilla says the company might have made the 2006 target if it had cut some new models. ``We're not going to do that,'' he says. At an April news conference, Bill Ford said the best chance to boost market share would be the introduction of the three Mazda6-based sedans -- the Fusion, Milan and Zephyr -- in October.

`Design for Assembly'

One of Padilla's initiatives has been to ensure that new models are designed with easy assembly in mind.

``You don't let product development design whatever they want,'' says Ford Group Vice President Phil Martens, 45, who is in charge of product development. ``You design for assembly.''

Toyota isn't the only Japanese carmaker Padilla says is worth following. Ford owns one-third of the shares of Hiroshima-based Mazda and is using the Japanese affiliate's know-how to get new models to market sooner. Mazda re-uses more existing components in new models than Ford, enabling it to reduce development time and costs.

``They do things consistently over time,'' Padilla says.

By basing its three new sedans on the Mazda6, Ford cut the time from design to production to 37 months from about 50, Martens says.

`An Opportunity'

Ford needs to re-use more parts, such as seat frames and controls for moving windows up and down, when it comes out with new or redesigned models, National City's Poole says.

``This should have been done 40, 50 years ago,'' he said. ``This is where I see an opportunity.''

Since his days at Jaguar, Padilla has held positions with responsibility for South America, North America, global manufacturing and quality. He is still most at home on the factory floor, says David Cole, 67, chairman of the Center for Automotive Research in Ann Arbor.

``His real comfort zone is a plant,'' said Cole, who has known Padilla since he was in charge of South America from 1996 to 1998.

Padilla says his strategy is to tap everyone from executives to assembly workers and information-technology experts for their know-how on how to improve production.

``I never end any conversation without a discussion of the process,'' he says. ``We've got to fix the processes.''

Touting the Milan

Ford is making progress with its new products, he says, calling the Milan sedan ``the best execution of what a Mercury should be.''

Mercury, founded in 1939, is a brand with prices between the company's mass-market namesake brand and its Lincolns. Last year, Mercury's U.S. sales totaled 193,534, down from a high of 579,498 in 1978.

The introduction of the midsize Fusion, Milan and Zephyr will test Ford's ability to revive passenger-car sales, says Virag of Automotive Consulting Group.

``It's critical they have a smooth launch with no quality glitches,'' he says.
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