San Francisco 

Question: On the issue of global over capacity in car manufacturing. The Korean manufacturers seem to have very little market share here, certainly compared with back in Australia. Do you know what the proportion is now in the States?

Answer MZ: It's pretty small right now. They are trying now with the weak Won to make some inroads. They don't have as extensive a dealer network proportionally here as they do in Australia. So, they are looking at new ways of selling cars. I think Hyundai is coming in and is going to be using college students, as I understand it, to try and market their vehicles. They are trying to look at, I guess, direct sales through these college students on campuses.

Answer JC: ...But looking at alternative distribution channels, and, as they have in Europe as well. They've probably had best success in penetrating the market in Canada and in Europe, primarily Britain, but even there it's a pretty small presence.

MZ: Also, a problem is that Hyundai came in a number of years ago and quality was very poor and their reputation suffered greatly. So they are trying to overcome that now by offering an extended warranty, six years, something like that. So they are starting to try to increase, but you're right, they're proportionally much bigger in Australia than they are in the US.




Q: I guess the interest for us is - they clearly have state of the art plants, if not the highest quality of cars being manufactured - the oversupply situation certainly hasn't been relieved any globally has it.

MZ: No, the situation hasn't appreciably changed, but in light of the Asian crisis, some of the plans for Korea have been scaled back, I forget the total, I think it's something like a million units that was on the drawing boards might be pushed out somewhat. But when you look at what's happened to their domestic demand and the prospects for domestic demand, you wind up saying that their excess capacity hasn't changed. They might have extended some projects, or pushed them out in time, but because demand has fallen off so much. When I was in Australia (in 1997) we were talking about an industry of about 1.7 million, and now I think they'll be lucky if they make it to a million this year and next.

So, we've really not had an appreciable change in the excess capacity situation, for Korea or worldwide.




Q: What are the numbers worldwide for excess capacity at the moment?

MZ: The latest number was 1997 and I believe it was 18 million units of excess capacity, out of an industry total capacity of 71 million, so 53 million of demand. And the projection out the next five years, even adjusting for what we do know from announcements about Korean excess capacity, would put the number in the next five years somewhere between 22 to 25 million units.




Q: How do you project the collapse in the value of their currencies affecting market penetration in the US, for example, and in other parts of the world? Are they likely to get a big advantage in increasing market penetration?

MZ: I think it definitely presents a challenge for established manufacturers around the world because the big fall in their currency does give them a big cost advantage in the segments they participate in. Where they do have distribution networks that they can expand more rapidly, they are doing that. Australia's an example of it. In the US, I think it gives them the incentive to try to do it. But again, they have to overcome some previous reputation problems and also to build a distribution capability. But I would expect they will try.

Another interesting case is the Japanese Yen. That has certainly led to … if I look at markets where Japan ships to, exports from Japan are up quite a bit in Canada. They are up quite a bit in Europe and last year they were up in the US but this year they're not up that much, and I think there's a political calculation going on in the Japanese manufacturers, of not wanting to exacerbate trade tensions too much with the US. But given where the Yen is and given how depressed the domestic economies are in Japan and Korea, I think there's going to be an incentive for them to export their way out of their problems.




Q: It's my understanding that over the last five years, the US domestic manufacturers have actually increased market share. Is that right.?

MZ: Over the last few years, yeah. I think one of the key features in the North American market has been the strength of the utility and light truck market and the US domestic producers are much more, I shouldn't say much more competitive, but their products are much hotter in the market. That has allowed the overall market share for domestics to do all right.

Market share, of the Japanese, because they have been pulling their punches a bit, has not been up that much in the US.

Let me give you these numbers, because I do think it's interesting. This is Japanese vehicle exports. In all of the European Union countries. I 1997, their exports were up 27.9%. In 1998, as of July, their exports were up 15.4%. Canada. In 1997, exports were up 98.3%. In 1998 year to date it's up 33.5%.

Now the US in 1997, they were up 15.8%. Year to date 1998 they are up 0.85%, which is I think an interesting set of statistics. It does indicate, I think, that they've been holding back in the US for political reasons. But with the Yen where it is and their economy showing no signs of improvement and perhaps getting worse, I think there's a problem.

Now, shares. 1997 market shares. US, combined car and truck. US manufacturers had 71.9% and Japanese had 23.2%. that's up from 96 when the US had 73.2% and the Japanese had 22.4%. So actually, what happened is the US manufacturers' shares went down and the Japanese share went up in 1997.

Now if I go back to say '93, it's the same thing. So the US manufacturers did lose share. This is all in the US, and combined car and truck. Ford over that period, 93 to 97, has really stayed pretty much at around 25% of the market. It was 25.5, 25.2, 25.6. 25.2, 25. So not much change. GM has lost the bulk of it.

In '93, GM was 33.1, and '97 they were 30.6. Chrysler was 14.7 in '93, in '97 they're 14.8. they fluctuated some, but that's the end. So it's really GM giving up share overall, the rest of us sort of held our own.




Q: You mentioned a minute ago that much of this strength was due to strength in light utilities and sports. Am I right in thinking that that's the area of the market where you have a relatively high tariff, around 25% or so.

MZ: There is a tariff on trucks but it's not as big a deal as it used to be. There was a customs department interpretation that came into effect that essentially the four door sports utilities come in without a tariff. It applies to full sized pick-ups - I think.




Q: Are they a large part of the market here?

MZ: They are, but what has happened is the Japanese are now producing them in the US. The tariff is still there but the impact of the tariff is much lessened. One, because production has moved here, and two because of the liberalisation of the way they interpret it.




Q: I guess the point I'm getting to in all of this is how you see what's going on in Asia at the moment playing in markets around the world, particularly the US. It has - for a combination of political reasons, the strength of the local companies themselves, their ability through better distribution chains and so forth - been able to hold out imports. Does this mean the outlets for selling this overcapacity will continue to be in much like Australia and Canada and so forth?

MZ: Well, I think the fight is going to be all over. The way I see it is this. Let's go back to the capacity situation. The excess capacity, which of itself means that there's a great deal of competitive pressure around the world. Then, you add to that that countries such as Japan and Korea, that have a good deal of export capability, particularly with their depressed domestic markets, also now have a cheap currency. So that further intensifies the competition.

And if you look at what's happening in prices in Europe, in North America and in Australia, it's just incredibly intense. So that's what this all shapes up for. Just a very competitive slugfest.

Now, whether or not that leads to market share inroads is a question of how successful we are in competing on product. But I don't think any manufacturer anywhere expects that prices are going to be rising. It's more about, do you have the right product? Can you achieve market share because people want to buy your product? That's really where I see the struggle right now, that's where the fight is. There is a great incentive for the Japanese to export. There's a great incentive for the Koreans to export. What we are seeing is that in price friction. Whether it winds up in market share is a question of how well we compete.

JC: From a bottom line standpoint it raises the pressure on auto makers like Ford to take out fixed and variable costs from their structure which we've been very successful in doing, even in the face of no price increases.

MZ: In other words, what's happening is, with no price rises to increase your margins - nobody's satisfied with their margins - the only way to increase your margin is to take cost down. Last year, this is an interesting number. Last year Ford took out $US3 billion in cost for constant volume and mix of vehicles. This year, in the first half of the year, we took out $1.3 billion. You add up those two numbers, that's $US1.3 billion over the volume we sell. That's over $US600 a unit. That's a big cost reduction. That's the only way you can compete in this market, where in some markets, prices are actually falling. I mean last year was the first year in my memory that the average price of a vehicle in the US, constant vehicle, as adjusted for mix and everything, actually fell a bit. And you know the situation in Australia is very competitive. Europe is very competitive.

So the world industry, with the excess capacity and the currency issues, it's put tremendous intensity and focus on getting costs out.




Q: We've certainly seen prices in Australia over several years, falling in real terms. It's been bumpy and different across product ranges, but certainly in the area where the Koreans are in particularly, prices are at rock bottom levels. The other impact of this that I'm interested in is that this surely increases the imperative for the globalisation of manufacturing doesn't it? Simply the cost pressure?

MZ: I think there are several dynamics driving this globalisation. First and foremost is the cost of product development has been increasing. Particularly because regulatory costs are demanding a higher level of technology and higher costs. We're going for improvements in fuel economy, improvements in air quality characteristics, safety, all of that is leading to the cost of developing cars becoming higher.

The dynamics of it are, the economics of it are, that you want to spread those costs over a larger number of units, and that says it doesn't make any sense for Ford to produce an Escort sized vehicle in North America and produce the same sized vehicle in Europe and have them different cars. So, one thing it certainly says is you tend to look at getting that volume spread over a larger number of units. It also says that your product development, you want to reduce complexity as a way of getting your costs out. So what you try to do is you reduce the number of platforms. And we have aggressive plans really, and so do all the manufacturers, to reduce the number of platforms. But, still recognising that we've got to appeal to local tastes to increase the variance.

So if you look at what we are doing, we'll have fewer platforms which will reduce the complexity of design and of manufacture, but increase the variability per platform, so that we are out there in individual markets offering what we want. That's part of the whole globalisation.

The other part, and it's all again costs, as we go to world platforms and fewer number of platforms, and as we go into new parts of the world, we are asking our suppliers to play a larger role with us. They are also going global. There's a lot of R&D which is being done by the suppliers, a lot of joint efforts in terms of cost reduction. I mean that $4.3 billion I mentioned before, a lot of that is working jointly with suppliers. We had a centre out here in Detroit where we took parts, we sat down with suppliers and we saw how we could get costs out of this thing. And so you see globalisation affecting the suppliers as well.

There are a couple of other aspects to it. We would like to see governments harmonise their regulations, because that would help us achieve this kind of strategy. Not have needless additions of cost when the regulations are tending to do the same thing. Let's get the regulation right, but let's make it harmonised across regions.

So, that is all leading us to global organisation. Ford 2000 was driven by that dynamic. I think the Daimler Chrysler merger is a recognition by them that they needed to go global, and GM has made a lot statements talking about how they have to be global. Sounds very much like what we were saying a few years ago with Ford 2000.




Q: One of the interesting things for us in Australia is there was much rejoicing a couple of years ago when GMH announced it was going to be manufacturing a compact vehicle in Australia again. Ford seems firm in its commitment to having Australia involved in a large car platform, but would you say that it's unlikely that Australia will find it's place in the world expanding into ... there certainly seems to be less opportunity for anything other than a world market, which would suggest that one picks a specialisation in a market and sticks to it.

MZ: I think, first of all, we just brought out the new Falcon. We are pleased that it's getting good reviews and we're concentrating on making sure that's a success. I think as you look out, and we've not yet gotten to the point of planning the replacement vehicle for that, but I think it's safe to assume that whatever we do will be in the context of our world cycle plan, that is our vehicle development plan. And potentially I don't know what the opportunities are for Australia, but I think the opportunities are greater having vehicles based on world platforms, which means that there is some opportunity for not only domestic sales, but also for export.

And also, Ford, our product development capability in Australia is very good, and something that we prize. And I think that in the context of a worldwide product development program, that also offers some advantages.




Q: A moment ago we were talking about globalisation pressures on suppliers. Historically, a lot of Ford suppliers in Australia have been small companies that have been highly dependant on Ford, they may have had other product lines as well. Are you saying that the dynamic between Ford and its suppliers is changing such that the pressure will be on for suppliers to be of a certain critical mass so that they can participate in bigger programs?

MZ: Yeah, I think that worldwide suppliers are finding that the same dynamics driving us to globalisation mean that suppliers are being driven there and the capability of a supplier to … Let's say that we have a car being manufactured both in Australia and the US, or Europe and the US, the ability of that supplier to supply those locations is an important part of getting the business. And therefore, increasingly, suppliers are going to be asked to have that kind of global capability.




Q: Does that mean that the little suppliers in Geelong, for example, suppliers of little components who have had relationships with Ford going back decades, the competition that they are facing now could be from anywhere in the world.

MZ: Yeah, I think that's right. I don't know the particulars of suppliers in Geelong and exactly what their status is, but as a general comment, competition is becoming global for suppliers. I think that's right.




Q: One of the phenomena of the last 15 years has been the reduction of the number of suppliers, the development of closer relationships to involve them in R&D and so forth, but I guess one of the interesting things to my mind about e-commerce is that it creates a situation where a big purchaser really can get close to a situation of perfect information. So if you guys are under increasing cost pressure from manufacturers all of the world, does that create an incentive to reverse the trend we've seen over the few years of reducing the number of suppliers? How tempting is it just to put out the specifications for a product on the net and say anybody who's capable of building this product, put your hands up and we'll look at you price?

MZ: Increasingly, relationships matter a lot, because a lot of the R&D and the joint work in re-engineering is taking place together. That is the OEMs and the suppliers. I'm not quite sure how to answer your question. I think global competition is there and will be intense. I don't think that detracts from the fact that there are going to be relationships. Now, relationships don't last unless they're satisfactory, but I don't think that …I think we're going to see more of that kind of relationship, where the OEM and the supplier are joined closer in terms of product development.




Q: Let me take the opposite position then. If that's the situation with Ford outsourcing much of what has been quite jealously guarded in house, areas such as R&D, in the past, does that mean its actually at some point much harder, if not impossible, for Ford to change suppliers because so much of its intellectual property is not held by it, but by people outside, or at least their skills base.

MZ: Don't forget, we produce a lot of models, and we are continually replacing and introducing new models. So you have lot's of opportunities to revisit a relationship, if not for a particular model, for the next generation. Therefore, if the initial relationship isn't good, competition will drive you elsewhere.




Q: That has to be at an increasing cost to Ford though, doesn't it? The cost hurdle of replacing suppliers must be increasing as you increasingly outsource at an earlier stage.

MZ: Yeah. I think that there's a …you'd have to talk to the supply community here to really understand, because I don't fully reflect, I think, a lot of the thinking that they've done. But there's a balance here between a closer relationship and maintaining more than one source so you are not beholden on a single entity.




Q: You said increasingly you are lobbying governments around the world. How do you go about that? Is that a very different sort of lobbying to what you had to do in the past, where it's really been nation by nation, I guess?

MZ: It is harder. It involves the trade associations such as in the US the AAMA, in Europe ASAA, in Japan JAVA, in Australia the FCAI, and what it involves is businesses actually petitioning governments saying this is something that's important, we'd like to get it moving. There is a world forum now for harmonising regulations. It's called Working Party 29, through the United Nations. It's through the United Nations, the European Commission for Europe, I think, is where it really got started. The US Government made a proposal to broaden that, Japan is talking about entering, the US has worked to set up a parallel mechanism, parallel to that WP29, that would allow harmonisation to emerge. But the way it got started is with companies getting together, starting initially with something called the TABD, trans Atlantic Business Dialogue that Alex Trotman (retiring Ford president) was chairing, petitioning the US Government and European governments to get started.

And Australia's been very active in this as well. But it is tough because governments guard their prerogative to set standards. Outside groups have also been suspicious that we're trying to lower standards when we're really not. We're just trying to harmonise them, saying you choose the right thing. Certainly let's do the research jointly, so that we all can say, "here are the results", and we agree on that. But there has been some opposition and we've been working on it.

But it is different, as you say, because it involves trying to get lots of governments together to agree to harmonising standards. They've made some progress in the pharmaceutical industry, and we've made some progress, limited, but we've made some progress, in terms of trying to get some simple standards harmonised between Europe and the US. But, you're right, it is different, it's harder because it involves dealing with a lot more entities, but we're pursuing it through the international automotive organisations.




Q: I was speaking with John Ochs about the strategy with this new project with the dealers. In a broader sense, is this Ford recognising that the Ford brand require it to become, apart from the obvious cost imperative, a company that's interested in services and quality of service as much as manufacturing cars? Unlike the days when Henry Ford drove around the country just getting people to sell his vehicles.

MZ: Absolutely. The essence is that what we're concerned with is the total customer experience. And that goes all the way from the manufacturer, and delivery of that vehicle to what happens after the customer takes possession of it. It's important to us, in terms of the service they receive at the dealership, when they go in to buy, when they buy it, when they come back, and we're looking at that whole process.

The other thing I would add is, when you look at the whole distribution system, and you take into account the Internet, and e-commerce and all that, we don't know really what is going to be the distribution system of the future. And what we're doing is we're trying things out to see. Really, it's a laboratory, to see what works and what ultimately provides the best value to the customer. And that's where our brand is invested.

I think part of it is related too, we want to assure the customer the best in terms of service and value. The other thing is we want to be at the forefront as changes take place, trying different things to see what ultimately is the right way. "Right" being the cost effective, or the value of producing cost effective ways to distribute vehicles.