Insight No.4 : Jun 2009 : Rolling Out Business Change in Turbulent TimesAuto Recovery : An Interview with Executive Al Kammererby Dian Schaffhauser
Al Kammerer is torqued. He's just been asked what lessons he learned during his front-row viewing as a product development director of the extraction of Jaguar and Land Rover from Ford after the Tata Motors acquisition. "Don't ever do it again!" he proclaims. "If you go in and say, 'Here's the master plan,' everybody who has been through it will laugh at you." He should know. He has spent a lifetime in senior roles in the automotive industry, a segment now undergoing turmoil unlike anything he's ever seen before.
Kammerer grew up around his dad's Sunnyvale, CA body shop, tow service, and wrecking yard. By the time he got through California Polytechnic State University with a bachelor's of science in mechanical engineering and Stanford with a master's, he decided going to Detroit "to help them figure out how to make cars that were easier to work on would be a fun thing to do."
Kammerer landed at Ford in 1974, where, for the next 34 years, he worked in a multitude of engineering, marketing, product planning, program management, and business planning roles in both the company's US and UK operations. Vehicle lines he's been involved with have run the gamut, from pickup trucks to the Econoline van, from the Escort and Focus to the Escape, the Explorer, and the Expedition, from the Crown Victoria to Jaguars and Land Rovers.
After retiring from Ford in 2008, Kammerer took leadership roles in three companies - Pcubed as an Executive Associate for Manufacturing, San Diego, California-based Fallbrook Technologies and Detroit-based ASG Renaissance, both carving out different pieces of the same industry he's been in for his entire career.
In this interview, Kammerer riffs on the challenges the Detroit Big Three face, why the car makers alone won't be able to achieve an average 35 miles per gallon, and CEO Alan Mulally's not-so-secret weapon that's transforming Ford way ahead of the others. Along the way, he explains how dynamic business planning enables organizations to change at a speed that can appear "unmanageable" during turbulent times.
How do you rank the current turmoil in the auto industry compared to what you've seen in the past?
Al Kammerer: It's a whole lot deeper than anything we've seen in the past. It seems like every 10 years or so there is an economic downturn that creates many crises. The auto industry starts laying off. Consumers stop buying or start moving to smaller cars.
Just as background, a lot of people have a hard time understanding that the auto companies really try to design and manufacture cars that people want to buy. Yes, we went a little overboard and gave up on cars when we shouldn't have done. There were a whole lot of people who wanted to buy big trucks and SUVs. The fact that we had this buying binge in the economy, which has changed for a lot of Americans and changed their point of view on how much they're going to leverage themselves with loans, how much of a vehicle they're going to saddle themselves with, it's caught a lot of industries off guard, not just the automotive industry.
I hate the term, the perfect storm. But you had the auto companies that understood they needed to move to smaller cars, had a plan to get there, but the economy tanked before they were able to execute. They now have to work their way through that.
Just how long is the planning/building/distribution cycle for a vehicle?
All the auto companies use what we call a 10-year cycle plan. That is, for the next 10 years out, they have a reasonable idea of what their product plan would like to be... They do a financial business plan for typically about five years out, and the first year of that five-year plan becomes the budget for next year. That's the higher level structure of how they operate.
Inside that 10-year plan, years six through 10 are pretty flexible in terms of precisely what you're going to do. But they have an influence on the overall business plan financials for the first five years, because if you're going to launch a vehicle in year six, you're spending engineering and tooling money in year five to do it.
Inside the five years, years one, two, and three are locked in. You're throwing a lot of money to change the plan. You've spent a lot of money on engineering already. You might have already made some decisions on high-level capital investments. So you really try hard not to change any of that three years. Then years four and five are firmer, but more moveable than years one, two, and three.
Lately, the president of the United States has been quoted as saying in regards to GM, that they're going to get in and get out as quickly as possible. But given what you're saying, it sounds like there are no ways to solve the problems of GM quickly.
Most of the problems at GM they've already solved. The getting in and out of bankruptcy quickly is to deal with the problems that they can't solve outside of bankruptcy.
Let me put that in perspective. You heard an awful lot about discussions with the United Auto Workers (UAW). The real discussion with the UAW is actually around healthcare, not around how much they get paid per hour. The general person on the street really thinks, oh, those UAW guys really have high incomes and live cushy lives. When you look at the actual hourly rate that a UAW worker makes vs. the transplants - Toyota, Nissan, Honda workers - it's less than a buck an hour on an average basis.
Where the real issue was is in the cost of healthcare and the age of the UAW population vs. the non-union workforces at these other transplants. Those were the things we had to get sorted and have, indeed, done. So the UAW came to the party, and they've got that fixed. And it's fundamentally parity with the transplants now...
The other hurdles are internal to the company. GM had a worse problem than Chrysler. Chrysler had to shed some plants because they had too much capacity and they had to shed workers. GM had to shed some plants, some workers, and also shed some brands. They could not afford the capital intensity and other administrative costs of running eight brands. They've cut that in half. All of that is good stuff, and all of that has been done outside of bankruptcy.
The third piece that was much harder outside of bankruptcy - and it actually took the threat of bankruptcy to get it done - was to get all the [major] bondholders to accept pennies on the dollar for money they had loaned GM, and, oh, by the way, you're going to take most of it in stock.
The last piece of the puzzle is a whole bunch of other people that the auto companies have to deal with - and either they were too large in number to negotiate with one by one, or there were state laws that precluded the auto manufacturers from taking action upon them.
Let me take the last one first. The dealers. All of the domestics have way too many dealers. It's in court right now with Chrysler. The Chrysler dealers are saying, "Hey, wait a minute. We actually generate revenue for the company. We put money in your pocket. Why do you want to shut us down?" Unfortunately, the auto manufacturers have not done a good job of articulating their case.
The average Toyota dealer sells about a thousand cars a year. The average domestic dealer sells somewhere between 200 and 300 cars a year, depending on whether you're Chrysler, GM, or Ford... Toyota has about a quarter of the number of dealers that these other guys do.
So you say, what difference does that make? If you own a business and you have five times more volume than the guy next door or down the street, and you have a customer come in with a problem, you're going to be much more inclined to put money on the table and fix his problem. And our dealers are our front line with customers. If the dealers aren't profitable to the extent of really maximizing customer satisfaction, it's a competitive disadvantage.
The ripple effect of that competitive disadvantage is that the domestics have to put more incentive money on the cars or basically "bribe" the consumer to buy a domestic car. They believe they're getting a better deal upfront, so they're willing to put up with dealers that can't take care of them after they've made the purchase.
There is an administrative cost of supporting dealers, and I'll come back to that. That administrative cost is nowhere near the big problem they're trying to solve. What they're trying to do is reduce what they call their variable marketing - incentive spending or "bribes" - they pay to get you to buy a domestic car vs. a Japanese car. On average, the domestics are spending about $5,000 a car on incentive money, and the Japanese are still down less than $2,000.
There's a $3,000 disparity in revenue opportunity, because we have to give that back to the customer to get them to buy our car.
The administrative costs of keeping dealers open - it's not a big, big deal, but it is a cost. All vehicle manufacturers have some form of field force - the people to call on the dealers, to train the dealers, help them understand what's going on, work with them to help improve their business, get them to order the cars and all that administrivia. It's not like a dealer is sitting in the middle of Iowa and he gets on his computer and says, "Give me 10 cars," and we put them into production system and we ship him his cars and never talk to him again. That just doesn't happen. It's not only for the car, it's all the service parts and training their service technicians. There's a cost of doing all that to the vehicle manufacturers. So clearly the fewer dealers you have, the less of that money you have to spend.
Is this strife just a US issue?
It's a little known fact that of the 12 largest vehicle manufacturers in the world, in the first quarter of 2009 Ford Motor Company was the fourth most profitable, even though they had a substantial loss. There were only two vehicle manufacturers that made a profit in the first quarter of 2009 - Volkswagen and Honda. But the fact that Ford [with a net loss of $1.4 billion] was the fourth most profitable out of a dozen vehicle manufacturers says the whole industry is hurting right now. Yes, the [United States] is a bit worse in aggregate. But it's not just a US issue.
The other thing we have to keep in mind is that for a long time currency has been benefiting the Japanese. When you look at why they're losing money, it's because a big chunk of it is the exchange rate shift between the yen and the dollar, which helped them lose some money.
The other thing you have to keep in mind - which is a very interesting statistic - if you evaluated the 2008 calendar year for the US vehicle manufacturers on a metric called jobs-per-car - this is jobs supported for every car they sold - there's about 220 to 230 jobs per car that includes not only the UAW workers, but engineers, analysts, financial analysts, product planers, the entire workforce in the US producing these cars. For the big three Japanese - Toyota, Honda, and Nissan - it's like 80 jobs in the [United States]. At Hyundai, which is looking pretty sweet right now, it's something like 14.
The point behind all of that is that the dot-commers of the world and those guys who sit in D.C. saying, "Hey, I'm from Alabama, I've got a bunch of car companies here, and they're doing quite well, thank you very much - just blow away Detroit," well, hang on. There aren't that many jobs that these guys are supporting. The impact on the entire US economy is a big deal.
What you're reading about now is all the complaints about shutting down dealers and plants, which many of us in Detroit find quite amusing. The exact same senators that were chastising the auto industry for being bloated and out of touch, are now saying, "OK, they're getting their act together. That's fine, but don't do it in my backyard. Keep my assembly plants, keep my suppliers happy, keep my dealers open. Do it in someone else's state."
And the numbers I quoted are the direct impact. What it doesn't talk about are all the restaurants and shops around the assembly plants that are going to lose a whole bunch of business when the plants shut down. All the laundry companies. All the truck drivers that deliver parts. The ripple effect is huge. We didn't include those numbers, but they grow by five or six times if you include that ripple effect.
Is there anybody who stands to gain from this turmoil?
Absolutely. There are a lot of consultancies, purchased services, and the like - people that can do work for the auto industry where the auto industry doesn't have to hire workers full time. I say that because [President] Obama just signed into law some new [Corporate Average Fuel Economy] (CAFE) standards. By 2016, the entire industry has to average 35 miles per gallon. That's something like 32, 33, 34 for trucks and 39 for cars to get to the average of 35.
Actually, even the Japanese don't know how to do that today.
But because the automakers have just laid off a whole bunch of people, they're going to be nervous about turning around and hiring any of them back. They will assign it to the people they have left, but there will be specific research or analysis or testing projects that will be a small package of work that they'll outsource to somebody outside their own company. I've talked to three different companies now that do that kind of work, and they're talking to the vehicle manufacturers, getting projects in place and contracts prepared.
When you say that automakers don't know how to achieve that average mpg, what do you mean?
Let me clarify. They don't know how to achieve it at $2 a gallon. Take the price up to $4 or $5 a gallon and it'll be no problem whatsoever. It's demand side vs. supply-side economics. I can put a whole bunch of small cars on a dealership lot, but if you don't want to buy them, how is that going to get me to a fuel economy of 35 miles per gallon? Back when gas was $4 a gallon, you couldn't find a hybrid for sale. They were all gone. As soon as it dropped back to $2, they had to put out incentives to sell hybrids.
People point to Japan and Europe and say, "Well, see all those small cars? Just bring those small cars to the US and we'll be fine." What they don't also include in that statement is that a cheap gallon of gas in Europe is $6 a gallon. It ranges from $6 to $10. It's no better in Japan. They also have the other issue of narrower roads, and they don't put the money into parking lots. But the whole market dynamic does not support a 35 miles per gallon CAFE standard at $2 a gallon for gas. It doesn't do it.
So what's going to happen come 2016?
Several things will happen. Number one, we're going to be paying more for gas whether we want to or not. If you actually look at the cyclical nature of the price of oil over the past few years and the answer is, in the next 3 to 5 years, it will not average $2 a gallon, nor will it average $4 to $5 a gallon. It'll be in the $3 to $3.50 range on average. It will continue to rise over time.
If it's not important to the consumer because it doesn't hit 'em in the wallet, there's precious little the auto companies can do to really affect it. But also, along the way, there will also be new technologies coming that haven't yet made it into the vehicle manufacturers plans that will help them get to the 35 miles per gallon, because the 35 is an average model mix. Not every car is going to be 35. You're going to have to have some that are 40 to 45 to offset those down in the 25 range. The company I'm dealing with now - Fallbrook Technologies - is selling a new technology that improves fuel economy of vehicles. We're getting interest from the OEMs.
Ford was the only of the big three that chose not to go for government aid. Was that brilliant or something else?
It was clearly a brilliant decision. The reason they didn't have to go ask for aid was some tremendous forethought on the part of our former CFO, Don LeClair, and our present CEO, Alan Mulally. When Alan was first hired in 2006, Don had already started the process to go - as Alan Mulally says - take out a "home improvement loan." [The company ended up securing $23.5 billion in financing.] Their view was, we will need cash to fund a fundamental restructuring of Ford Motor Company from the ground up and be able to weather an economic downturn. They didn't think the economic downturn was going to be as bad as it has been, but they knew something was coming. The brilliant decision they took wasn't not asking the government for money, but in recognizing what it would take to fundamentally re-engineer the entire business from top to bottom.
They were able to manage their way through the economic crisis by incremental cost cutting, plant closings, and layoffs.
Ford has undergone a massive transformation in the last four or five years. How have those efforts affected what Ford looks like today?
One of the biggest changes that happened was bringing in Alan Mulally. Having been a Ford "lifer," I can attest to the fact that it's different than before Alan showed up. Alan is a very shrewd businessman, but he's also a likeable individual.
What he instituted when he arrived at Ford from [The Boeing Company] is what he refers to as his Thursday BPR - business plan review. Prior to Alan's arrival, there would be an annual process that would be a gawd-awful, teeth-gnashing, put-everything-together-to-create-a-business-plan [effort] in the March-April timeframe. In October-November you'd turn it into the budget. You'd put it in your drawer and operate until March and April and then do it all over again.
Alan's perspective was, that's a bunch of hooey. How are you running your business if you only look at what your business is twice a year? He instituted these weekly Thursday meetings. He basically said, "What's your plan? On a weekly basis, tell me if you're on plan or off plan. If you're off plan, what are you going to do about it? And, oh, by the way, even if you're on plan and it's not a particularly good plan, what are you going to do to get a better plan?" It was very painful to get that up and running. But once you got it routinized, it's a very effective tool because you can't hide.
It's not a, "Four months have gone by - oh, fudge, we missed all the numbers, and here are all the excuses about why I missed them." It's a, "Oh, by the way, we just had this happen yesterday, and my forecast for hitting that number has gone bad, but here's what I'm going to do to fix it, and here's what help I need."
He would go through all his direct reports and all the leaders of every region in the world. It was a ba-bing ba-bing ba-bing kind of meeting. It wasn't a long drawn out saga. Most conversations were done in five or 10 minutes. That's really what has helped them get through the last 18 months of the financial crisis. They had such a good understanding in the business. What are our stock levels in the dealerships? How are sales going? Gee, we have to cut production... The manufacturing guys would come in and say, "Hey, we don't see the orders coming in - we need to cut production now." They'd make that decision any week they needed to make the decision.
For the two hours directly after the weekly BPR there was the special attention meeting if there was a deep dive required and you raised your hand the week prior - and you'd better have raised your hand so he didn't have to call you into that meeting. If he called you into the special attention meeting, it was a different kind of a behavior than if you raised your hand and said, "I need to be in the special meeting."
Alan's very polite about it, but he'd say, "You just screwed up."" He puts it on the table. All your peers see you screwed up. And that doesn't feel very good.
He really expects you to be prepared, come in, have pre-distributed the papers, everybody's read them, so you talk about the issues. You don't have a 59-minute presentation on data and have a one-minute discussion.
What shows the most dazzle to you in the current line up from Ford?
With everything coming from Ford, that's a hard question to answer. I think the most important to watch is the launch of the Taurus this year and the success of the 2010 Fusion. In the month of April, the Fusion had its best month ever. It actually had a year-on-year sales increase of 20-plus percent. It's the Ford Motor Company competitor to the Honda Accord and Toyota Camry. And those duke it out for the number one spot for the car [segment] of the industry. If the Fusion can match the Camry and the Accord, that would be a tremendous feed. And all the indicators are there that it should be able to do it, because it beats them on fuel economy, it's a five-star crash rating, and the Fusion has a recommended buy from Consumer Reports. And it's a cool car. The media are saying really nice things about it.
The Taurus. Again, a gorgeous car - one of my former designers from Land Rover designed the thing, so I really like it. They've got some really neat features in it. They also have a high performance version of it. Many of us think it will do well. It'll be a car to watch.
You must be a very popular dinner guest right now. Everybody must be inviting you to their parties to talk about the auto industry.
[Laughs.] All my buddies are car company geeks too so they already know all of this.