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Up Against the Wall (St.)

Greg Smith's cufflinks can be rather distracting. Graced by an eagle clenching arrows of war and olive branches, the gold jewelry looks presidential. When asked about them, Smith launches into a story about former President George H.W. Bush giving them to him at a Ford Motor Co. dealer event. (See sidebar story on next page.) Take away the cufflinks, and Smith, 52, still has what it takes to be strong

Greg Smith's cufflinks can be rather distracting. Graced by an eagle clenching arrows of war and olive branches, the gold jewelry looks presidential. When asked about them, Smith launches into a story about former President George H.W. Bush giving them to him at a Ford Motor Co. dealer event. (See sidebar story on next page.)

Take away the cufflinks, and Smith, 52, still has what it takes to be strong leader.

He most recently led the turnaround of Ford's once-ailing Ford Motor Credit Co. as chairman and CEO from a slumping underachiever to the company's beacon of profitability.

This year, the lending arm is pegged to deliver three-quarters of the company's $4 billion profit, and it could carry the brunt of the profitability burden well into the second half of the decade.

Smith, promoted to president of the Americas for Ford in April, now has the task of righting the company's automotive ship in the pivotal U.S. market, helping Ford meet its mid-decade earnings goal of $7 billion annually.

A strong market should lend momentum to his task in 2005; his ballpark estimate for sales is 17 million units. During his first year-end discussion with Ward's, he says consumers will continue to face a litany of fresh product in North America.

“I still see the industry as remaining reasonably strong, and it remains a terrific time to be a customer and to buy a new product,” Smith says. “There is a great array of new products out there, and pricing remains very competitive and for the customers very attractive.”

Incentives should remain high, he says, but the auto maker hopes to change the game a little, due to its rising residual status, which has come thanks to the company's new market share-strategy.

Although he has proven he can squeeze black ink out of Ford Credit, Smith's auto-industry entree 30-plus years ago actually came by way of an engineering degree. And he'll need every scrap of experience from his early days in truck operations and stints in product planning, marketing and district management to meet his new challenge.

Smith also faces what he calls industry “wild cards:” namely, consistently high oil prices, escalating steel prices and ballooning legacy costs. Additionally, Ford's astronomically high level of debt ($168 billion, according to Envision Capital Management Inc. President Marilyn Cohen) makes the company particularly sensitive to rising interest rates. If interest rates continue to rise, Ford Credit's huge profit potential also could be in jeopardy.

Another card is the continual strain between Ford and its sprawling supplier base. Although Ford remains a highly sought customer by the chain, suppliers rank the auto maker dead last among the major OEMs manufacturing in the U.S. in a recent Ward's supplier survey.

Ford's reputation among parts makers merely is one area in which the auto maker must improve. An annual poll by Harris Interactive suggests Ford's “reputation quotient” trails Toyota Motor Corp., Honda Motor Co. Ltd. and General Motors Corp., and is about dead even with DaimlerChrysler Corp.

Ford is Enemy No.1 of the environmental lobby, with activists such as the Rainforest Action Network and Greenpeace criticizing the company's perennially bottom-of-the-bunch status in corporate average fuel economy.

However, Smith's most daunting challenge is painfully discernible: Reversing the shrinking market share — said to be at a 70-year-low — that has accompanied Ford's decision to dial back sales to rental fleets (which were good for the market-share war but detrimental to profitability).

“There's been a lot said and written about market share,” Smith says. “We are going to be very careful and strike the right balance between share and what we would call profitable share or reasonable share over the long term. It does come with some pain and pressure.”

Despite losses, Smith says Ford's dealer body is as satisfied as it has been in a long time, mostly because management is listening to its suggestions.

“If you go back two or three years, there were some things they did not like that we were doing,” he says. “We're past that. Dealer satisfaction is rising (among Lincoln, Mercury and Ford) from levels that, frankly, were bad.

“Products drive a great deal of it, and Ford has a terrific unprecedented array of new products. We just completed a 90-day period where we launched more new products than we have anytime in the company's history. I'll be the first to say it's early, but the initial response we're seeing to those products from the press, from dealers and now from customers has been extremely positive.”

But chummy dealer relations do not change the fact Ford's share of the U.S. market dwindled from 20.2% in January to 19.8% in October.

Current share is off 9% from the 22% the company held going into 2003. CSM Worldwide forecasts Ford share will take a further hit in 2005, dropping by about another half point, says Joe Barker, manager-North America sales analysis.

While somewhat down on Ford's immediate sales growth prospect, Barker finds himself among the choir of analysts applauding Ford's quest to reduce its reliance on unprofitable fleet sales.

“As the quality of market share improves, and they're able to improve quality and residuals, they're going to be a more profitable company,” he says.

Wall Street lauds Ford's pullback from the daily rental business, but it is far from comfortable with the auto maker's current financial position.

For one, Ford's slide simply is not a result of the quality-share pursuit; it also hits some of Ford's more profitable vehicles, says David Healy, Burnham Securities auto analyst.

“Wall Street is still withholding judgment on the turnaround program Ford established several years ago,” Healy says. “I think they succeeded in one part of it, which was bringing their costs down. They've got the North American automobile operation to at least a marginal profit vs. huge losses a few years ago.”

Healy adds: “The second part of the turnaround program was to pump up the new product pipeline and gain back some of the lost market share. There, the jury is still out.

“They've lost more share than just the daily rental business, and Wall Street is waiting around to see how Ford's model plays itself out (over the long haul).” The company's flagship F-Series continues to sizzle on the way to a record showing this year, but sales of the Explorer, Mercury Mountaineer and Lincoln Aviator were down vs. like-2003 through October. The hugely profitable Expedition and Lincoln Navigator are up only slightly.

Ford's European luxury brand performance is mixed: Jaguar and Land Rover are fading, with sales down 11.4% and 16.6%, respectively, while Volvo deliveries are up 7%.

Ford's domestic-brand problems often are attributed to an aging product lineup, but Smith says the company's new vehicles launched in the fourth quarter are the beginning of a record-setting product cadence that will buoy sales.

“New models bring a couple of big advantages,” he says. “A lot of showroom traffic, consumer interest, the opportunity to grow share in those models in particular, and also a little bit of a different revenue equation because most new models are able to launch for at least some period of time without the level of incentives that exist in the business.”

In 2005, Ford further upgrades the mix, including updated midsize SUVs; a new range of Mazda6-based sedans for Ford, Lincoln and Mercury; and a luxury version of the F-Series pickup, the Lincoln Mark LT.

Smith is not taking Wall Street's bearish outlook sitting down.

“I frankly have a bit of an issue with some of the analysts' thinking and some of the external things that have been written,” he says.

“Because first of all, profits are profits. Ford Motor Co. is one entity. Ford Credit is part of it. And the money we make still funds new products, and it still funds dividends to the shareholders. In the final analysis, it's profits.”

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