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Saturday, May 3, 2014

A Perspective on Ford and the Automotive Business

Here is a student's perspective on a day spent with Bill Cosgrove, a retired Ford executive with experience at the senior level in Ford World Headquarters and in Brazil, South Africa and Europe. I will later move comments over from the Economics 244 blog where this was originally posted by Kade Kenlon on May 1st.

With more than 40 years of experience in the auto industry, Mr. Cosgrove had plenty of insight to share. Before he retired in 2003, after 31 years with Ford, he served as corporate vice president and the chief financial officer and chief of staff for the Premier Automotive Group (PAG). PAG was Ford's London branch that specialized in luxury cars including Jaguar, Aston Martin, Land Rover and Volvo. Although he retired from Ford, Cosgrove is still involved in the auto industry as he is on the board for Metalsa, an automotive supplier of structural parts.

Cosgrove began his talk discussing his fascination with the auto industry. There are so many resources needed to produce a car and getting everyone together on the same complex machine is truly amazing. The production of a car is so vast and so intricate, and it is not by any means an overnight process. Sheet metal takes time to produce and when you combine that with all the other necessary parts to a car it can take a very long time. The other point he makes about the auto industry is its uniqueness. You find everything in the auto industry including finance, economics, marketing, computer science, and so on. And, you can apply the knowledge you get from the auto industry to almost any other industry.

The complexity of the industry lead Mr. Cosgrove to develop a 5 step plan that, when followed, will bring success to an auto company. The plan is as follows:

1. Great Products

- It is impossible to survive without quality products. It seems like a simple and obvious step but it can definitely not be overlooked.

2. Competitive Costs

- Mr. Cosgrove stresses that this does NOT mean the LOWEST costs! Costs must be comparable to other cars from other companies that are on the same level.

(Steps 3,4 and 5 are sub-steps of 1 and 2. Without success in the first two steps, the next three are useless.)

3. People and Process

- This step demands strong leadership, the best engineers, the best IT guys, the best marketing guys, etc.

- Process refers to high discipline. An example of a bad process would be not knowing cash flows.

- GM exhibited poor process techniques when they refused to recall a flaw in the ignition switch that was causing accidents with their vehicles.

4. Strong Balance Sheet

- It is good to have lots of cash

5. Running Scared

- Always worried about what is on your back. When you think you have the answers, that's the beginning of the end.

- You have to realize that you need to change.

Running scared is the most important step. Cosgrove says that the reason that the Big Three all faced difficulty was because they weren't running scared. There was a change in the market, new players were introduced and legacy costs became a huge problem. These companies never expected to lose their enormous shares in the market. In the heart of their troubled times, they were spending more money on medical costs than they were on steel. "The key to running scared," says Cosgrove, "is having leadership in the company that encourages opposing views and doesn't allow the status quo."

Here's where other industries tie into the auto industry. To be any type of successful entrepreneur, you need to be running scared. It is necessary to be able to take a step back and look at the future and understand the bigger picture. You need to be uncomfortable, you're either growing or you're shrinking, status quo can't be an option.

After lunch with Mr. Cosgrove we came back to hear his predictions on future market share. He showed the most confidence in his prediction for Toyota that they would be losing market share. He thinks that because of legacy costs catching up with them, and a recall that has destroyed their public perception, they will go down.

Other Predictions from Cosgrove:
  • GM-down. Although their products are majorly improving, the competition is also so he expects them to struggle.
  • Chrysler- down. He is shocked that Chrysler is still around today, and believes they are at the top of their cyclical market share right now.
  • Honda- flat
  • Ford- Up and down
  • BMW- slight increase

The day finished with a lovely dinner at the Chinese restaurant Canton in Buena Vista, VA. A long conversation over dinner gave us more insight on what it is like to be involved in such a large corporation and other ideas about the auto industry and where it's going. A large part of the conversation focused on the advancements we are seeing from Tesla with the completely electric cars. We discussed the logistics of a car like that and the potential it has in the market.

After a long day with Cosgrove you can gather a lot about the auto industry. But, you can also learn more about an interesting man, and so I will leave you with the most interesting facts I learned about Bill Cosgrove.

  • He is an avid Jacksonville Jaguars fan. Being from the nearby area I guess it makes sense, but really the Jaguars!? He wouldn't be opposed to drafting Johnny Manziel, but right now he's just trying to get over how terrible Blaine Gabbert was.
  • The luxury car he would purchase for the quality: The Volkswagen Phaeton. He says it is beautifully constructed but it doesn't sell because it's a Volkswagen. Makes sense.
  • Favorite place he's lived: London
  • Favorite Ford car: The one he owns, the Lincoln MLK hybrid. Amazingly, it took him 17 gallons to get from Florida to Lexington, a 10 hour drive!