How Ford Motor Is Making Its Comeback

Wall Street Journal

A year ago, Ford Motor Co. steered clear of the auto industry's version of the "public option." You know, a government-funded bankruptcy. Maybe the decision wasn't entirely altruistic. Plan B, as in bankruptcy, would have ended more than a century of Ford family control.

Whatever the motives, Ford chose a private solution for regaining its corporate health, and today the patient is walking without a government crutch. Last week Consumer Reports gave the company quality ratings comparable to those of Honda and Toyota. On Monday, Ford reported its second consecutive quarterly profit—and more impressively, a swing from a $7.7 billion cash burn a year earlier to positive cash flow of $1.3 billion in the just-ended third quarter, helped by but not due to Washington's cash for clunkers program. The company gained a percentage of market share in the first 10 months of this year, no easy feat in an ultra-competitive market.

In fact, there's almost too much good news coming out of Ford's Dearborn, Mich., headquarters these days. In the often-bizarre world of labor relations in Detroit, good news can be bad news in dealing with the United Auto Workers union. Exhibit A is the UAW's recent rejection of contract amendments at Ford to parallel the provisions that the government imposed on GM and Chrysler. The implications aren't pretty for Ford and they're even worse for the union itself.

Before parsing those implications, though, it's worth examining Ford's recent spate of good news because there has been precious little of that from Detroit in recent years. The company's turnaround actually began three years ago with decisions that amounted to zagging every time that General Motors zigged, which was remarkable for a company whose strategy for decades was to follow GM.

When General Motors kept its CEO (the recently deposed Rick Wagoner) a few years ago, Ford brought in a new one, Alan Mulally from Boeing. While GM kept its unwieldy assortment of eight brands, Ford sold Jaguar and Land Rover, cutting its brand lineup down to a manageable size. (Another Ford brand, Volvo, appears close to being sold.)

The zig-versus-zag pattern continued when General Motors bet big on home mortgages through GMAC and then sold control of the financing unit, which now is on government welfare, just like General Motors itself. Ford avoided home mortgages and held onto its finance arm, Ford Motor Credit, choosing instead to mortgage all its assets to raise money to fund its turnaround effort.

In the often-bizarre world of labor relations in Detroit, good news can be bad news in dealing with the United Auto Workers union

Ford's self-help strategy carries a cost: The company now has much more debt than GM, about $27 billion to $17 billion, because the General had some three-fourths of its borrowings washed away in bankruptcy court. But controlling its source of dealer and consumer financing is a huge advantage for Ford, and the company is shoring up its balance sheet by swapping some of that debt for new equity.

What's more, shedding brands and shunning the mortgage business has helped Ford focus on quality, where it had slipped badly early in this decade. Consumer Reports said last week that 90% of Fords, Mercurys and Lincolns rate average or better in quality, right up there with Honda and Toyota. When the economy recovers and car sales increase, Ford could be in great shape. That presumably will happen by 2011, when the company says it expects "solid profitability."

It's sadly ironic, then, that the rain on this parade came the very same day that Ford reported its stellar financial results. Monday also brought the news that the UAW rejected contract amendments to freeze the pay of new hires, to forgo strikes for the next six years, and to reduce the number of job classifications in Ford factories.

The 70% vote against those changes was a stinging setback for the UAW's leadership, which had accepted similar provisions at GM and Chrysler in return for the government bailouts of those two companies. Obviously, Ford isn't desperate enough in the eyes of the union's rank-and-file, even though the company barely avoided bankruptcy, and its bond ratings remain deep in junk territory. UAW President Ron Gettelfinger tried to contain the damage by telling Automotive News that the proposed contract changes would have saved Ford "only" about $30 million a year anyway.

But that statement has more spin than Mariano Rivera's cut fastball. Forget about the wage freeze and the no-strike clause. Factory wages aren't Detroit's problem, and strikes are very rare in the auto industry nowadays. The real issue is the job classifications.

Ford's UAW contract has lots of them, governing who can and who can't perform specified tasks on the factory floor. So if a machine breaks down, an assembly line can come to a halt while everyone waits for the worker with the proper classification to arrive at the scene. If other workers nearby are perfectly capable of fixing the machine, well, that doesn't matter. The number of job classifications is less than it was a decade ago, but it's still far too many to maximize a factory's efficiency.

The classifications and attendant work rules are enforced by union bureaucracies—members of each plant's shop committee, grievance committee, health and safety committee, etc. They're all paid by the companies, as are their legions of corporate counterparts. One man's feather-bedding is another man's job.

All this begs a fundamental, and uncomfortable, question. Can a UAW-represented car company compete effectively, long term, with its nonunion competitors? At the very least, companies organized by the UAW have lots of extra costs to bear at their factories located in the U.S.

It's interesting, then, that Consumer Reports rates the quality of the four-cylinder Ford Fusion higher than the Toyota Camry and Honda Accord, and the Lincoln MKZ higher than its Acura and Lexus counterparts. The Fusion and MKZ are built in a factory without job classifications because it's in Hermosillo, Mexico, and isn't represented by the UAW. If Ford targets future expansion in Mexico, the recent contract vote will spell further decline for a union that, like Detroit's car companies, badly needs cultural change.

Ford's shares jumped more than 8% Monday on the company's earnings news. But investors should understand that in buying Ford stock they're also buying the company's relationship with the UAW, with all its implications.

Mr. Ingrassia is a former Dow Jones executive and Detroit bureau chief for this newspaper. His book "Crash Course," about the recent bankruptcies and bailouts of General Motors and Chrysler, will be published by Random House in January.