By Phoebe Wall Howard
Detroit Free Press
Henry Ford II passed up the opportunity to get Volkswagen for nothing.
After World War II, the victors divided Germany into pieces, and the British found themselves with the region that housed the auto factory. They offered it to the eldest son of Edsel Ford in 1948.
“I don’t think what we’re being offered here is worth a dime,” said Ernest Breech, chairman of the board at Ford, who joined the auto executive on a trip to Cologne, Germany, to discuss the idea. Hank the Deuce declined the offer.
These days, Ford and Volkswagen are talking about a broad partnership in research, production and shared office functions that could mean billions for the companies. An announcement is expected as soon as next month as Ford also looks to trim its white-collar workforce, which grew significantly in the past five years even as market share was flat.
Analysts say Ford has little choice if it is going to snare a chunk of profit in the high-tech transportation future — but they see a risk of the American icon ultimately being dependent on a bigger partner.
“Ford has little choice but to form some kind of partnership with one of the top-three truly global automakers of Volkswagen, Toyota or Hyundai-Kia in order to survive long term in any form,” said market analyst Jon Gabrielsen, who uses data from corporate filings to advise automakers and suppliers.
The Beetle versus Model T
Back to that post-WWII decision, documented by Walter Henry Nelson in “Small Wonder,” a history of the German carmaker published in 1970 by Little, Brown & Co.
The Volkswagen Beetle ended up breaking a production record set by the Ford Model T, and in a bit over 60 years, VW had eclipsed Ford in overall sales.
“It’s sort of ironic,” said John Heitmann, a professor at the University of Dayton who teaches automotive history and has visited VW’s flagship factory in Wolfsburg, Germany, more than once.
“Remember, VW is committed to being the largest manufacturer in the world of automobiles,” Heitmann said. “In this case, it could be the mouse that swallows up the cat before it’s all over. You can never underestimate who you’re dealing with in terms of these partnerships.”
He added, “Ford is talking about collaboration with an organization that is very German: Very authoritarian, very hard-nosed, very command-organized from the top down. And here Ford is trying to work their teams from the bottom up now.”
Ford and VW executives say neither company will take an ownership stake in the other. People close to the companies’ talks about cooperating on some projects say an announcement could be made as soon as early 2019, likely after the Detroit auto show in mid-January.
Too much needs to be done to spotlight new products for the thousands of international journalists that travel to Detroit each year; announcing a deal would steal the thunder from both companies’ plans to unveil new vehicles, sources indicated.
“We believe in auto shows. They bring a lot of customers. It’s still a great stage,” Pietro Zollino, chief communications director for VW North America, said during a Dec. 11 visit to the Motor City to preview the new VW Passat sedan, which will debut at the Detroit show.
‘It’s not a merger’
Ford earlier this year signed an official agreement with Volkswagen to explore talks that initially focused on commercial trucking. Those discussions expanded to include shared investment in electric and autonomous vehicles, costly work that carmakers need to remain relevant as transportation changes over the next couple of decades. Then, the CEO of Volkswagen said this month the company may expand its U.S. production presence beyond Chattanooga, Tennessee, by building products in underutilized Ford factories with UAW workers.
“Look, we’re in discussions,” said Ford spokesman Mark Truby. “It’s not a merger. These are discussions to have an alliance in specific areas of business where we’d have mutual benefit. Our companies have complementary strengths. There are some interesting discussions going on about how we could work together to strengthen the business.”
CNBC reported that one area of discussion is the idea of the companies merging their marketing and distribution operations, leveraging company strengths and allowing Ford to adjust its role in Europe, where the company is bleeding financially.
For the third quarter, Ford reported a loss of $245 million in Europe, $208 million in Asia Pacific and $378 million in China. The loss of $152 million in South America demanded a “fundamentally different business model,” said Bob Shanks, Ford’s chief financial officer, said Oct. 24, 2018.
Meanwhile, Volkswagen reported record sales globally in 2017, with the bulk in China.
VW is the top selling car company in China, the largest market in the world, “averaging one sale about every 10 seconds,” according to a June 2018 story in Autocar UK magazine, and leading CEO Herbert Diess to say, “China will have a decisive effect on the success of our future strategy.”
Industry observers say, all things considered, an alliance is obvious.
“VW is strong where Ford is not: Europe and China. Ford is strong where VW is not: North American trucks and autonomy,” said John McElroy, longtime industry observer and host of autoline.tv. “Both need help in South America. Each one could help the other in a variety of ways, and the savings could be poured into electrification and mobility.”
Market analysts have watched Ford lose market share and struggle to win investor confidence. This is part of the reason that the Dearborn-based carmaker is offering sweet retirement deals and buyout packages. Morgan Stanley analyst Adam Jonas has predicted Ford will cut 25,000 jobs globally.
While Ford CEO Jim Hackett has cast doubt on that number, other sources say it could be higher.
Slashing 20,000 jobs could take Ford back to its 2013 level of 218,000 employees.
“It’s not much of a surprise that Ford isn’t the behemoth company it was in its heyday,” said Jessica Caldwell, senior analyst at Edmunds. “Over the last 20 years, the auto market became fiercely competitive, making it much harder for legacy companies like Ford to keep customers. We’re now on the cusp of another paradigm shift, where companies are being pressured to focus both on near-term profits and showing the right investments in the future of mobility. Forging alliances is a smart way to help defray some of the future investment costs, while protecting shareholder value now.”
Losing market share
Even in the U.S., Ford’s market share has been pretty flat for the past six years.
“Historically, they have fallen from a much higher level when competition from other brands surfaced, but are not an isolated case, as it’s similar to what we’ve seen at General Motors as well,” Caldwell said. “Ford has historically been strong with trucks but faltered when foreign brands sold superior passenger cars.”
Ford has seen its market share steadily shrink since 1995, when it sold more than one of every four vehicles sold in the U.S., or 26.5 percent of the market. Ford’s share has hovered around 15 percent for the past five years.
“VW is small here but much larger globally,” Caldwell said.
“On the surface this might seem like an unlikely coupling, but this alliance makes a lot of sense in today’s increasingly competitive global market,” she said. “Between electrification, autonomy and mobility, all automakers are fighting battles multiple fronts and can and should take the help wherever they can get it.
“Given Ford’s success with trucks, and Volkswagen’s success with cars, there are some natural synergies that could work between the two brands. An international alliance of this sort could also prove highly beneficial, given some of the uncertainty surrounding tariffs on imported vehicles in different countries. We’re likely going to start seeing many similar mergers or alliances moving forward.”
General Motors has announced plans to cut thousands of jobs while Ford has declined to provide specifics, except to say the first three months of 2019 will reflect big changes.
In recent months, Ford workers describe going to a lot of goodbye parties, and three 30-year veterans recently announced retirement from jobs in Europe, Asia and the U.S. White-collar workers in Dearborn are being moved among departments or let go.
‘Ford has little choice’
Ford is viewed by industry analysts as “vulnerable” globally.
“Make no mistake, once Ford achieves the level of shared synergies with such a partner, it is a one-way trap,” said Gabrielsen, a 40-year industry veteran whose clients are located mostly in Detroit, Chicago and Atlanta.
“As the smaller partner, Ford cannot later exit such a relationship, because it will give up so many capabilities and capacities in the process that it will become financially impossible to rebuild them later without killing itself in the process. And the same is not the case for the much larger truly global automaker as they will still have the scale to scuttle Ford and rebuild if the relationship is not pleasing to them.”
Yet it is probably better for Ford to enter into a significant partnership while it is still optional, rather than wait in hopes that things will be all right, and find itself in the position that Chrysler was in during the Great Recession bankruptcy, analysts said.
“It desperately needed to be rescued and thus had no better suitor than Fiat, nor any bargaining power with them,” Gabrielsen said.
Data suggest some sort of immediate action by Ford is merited.
“In 1980, by multiple metrics, Ford Motor Company was twice the size of The Volkswagen Group. But by about the year 2000 VW had had nearly caught up with Ford as it went into its widely proclaimed quest to become the largest automaker in the world,” Gabrielsen said. “And by 2017 The Volkswagen Group had become about twice as large as Ford.”
Mark Clothier, VW spokesman, said the company has become one of the world’s largest automakers through careful strategy. A competitor in Detroit specifically applauded the company’s careful product release and cadence in China, where VW is strong.
“Now we’re preparing for the next phase by working to increase our productivity to expand our profitability to develop the next wave of mobility, including e-mobility, digitalization, autonomous driving and mobility services,” Clothier told the Free Press.
‘The tortoises are winning’
“In the end, I think ownership and culture enable companies to take the long view,” said Jeoff Burris, founder of Plymouth-based Advanced Purchasing Dynamics, a supply chain consultant to auto suppliers primarily in North America. “VW’s employee and government ownership have provided them the ability to take the long view and not be so dependent upon trying to generate the short-term stock price wins. German and Japanese culture favor process and long-term gains over short-term wins.”
He added, “The ‘Big Three’ have been going through an ongoing shrinking act since I became involved in automotive in 1984. They have valued short-term successes while their Japanese, Korean and German competitors have been valuing long-term strategies and slow but steady growth. The tortoises are winning the race.”
Volkswagen has moved from making news for a diesel emissions scandal to making headlines about its aggressive pursuit of electric technology and a commitment to a more sustainable future.
The automotive landscape is shifting more quickly than ever from sales in Western economies to emerging markets. In the U.S., younger consumers don’t run out and get driver’s licenses like their elders. And aging consumers don’t buy lots of cars. Growth potential is limited.
“Plus, we have an interesting political environment in the U.S. and Germany,” said Tim Zak, director of the Institute for Social Innovation at Carnegie Mellon University. “Business doesn’t like chaos, whether it’s trade issues or tariffs or a variety of things. It puts a fog around the environment.”
