Saturday, January 17, 2009

Ford Motor Company at Harvard

Ford Motor Company at Harvard:
Progress and an Urgent Need for Green Leadership
This was actually completed on 7/14/2008. I submitted it to some newspapers for publication, but none took it on. It seems sadly prophetic now.
Copyright, John Carlton-Foss. All rights reserved 2008.

Three years ago I drove my Honda Hybrid up to a gas station and was stunned to see the $80 bill that my predecessor had rung up. My bill was $20. That was before the recent gas price escalator, which would bring that SUV’s bill to well over $100. Yesterday the man in the next bay was aggressively asking me questions about my Prius, what my total bill would be ($26 in this case), and what kind of mileage I get (50-55 mpg in summer, 45-50 mpg in winter for the Prius, and slightly better for the Honda). Honda and Toyota had scooped Detroit once again. Detroit had lost by embracing a business strategy of going to Washington to get special consideration to be other than green. I really hate to say it, but I’ve been telling people that for years. Sometimes it hurts to be right. Rather than adopting a creative portfolio approach, streamlining its organizations, and providing some leadership, Detroit has been left green only with envy. Temporarily happy stockholders during the SUV craze are profoundly not happy now.

At least that is the view I have had about Detroit for about three decades. Might this be changing? Susan Cischke, Senior Vice President at Ford Motor Company, spoke on May 5 in the Future of Energy Series at Harvard. This was much more than a public relations speech. Cischke spoke about Ford’s strategies for addressing energy issues, and about her disagreement with Congressman Markey about the new CAFÉ standards for automotive fleets. (Did she have any inkling that one of his constituents might be in the audience?)

The talk began with the dimensions of “sustainable mobility,” clearly an important topic. For this to be successful, private enterprise and private capital need to play a role, and these require profitability and business viability. Socially, the issues are Energy Security and the rapid growth of mobility in emerging markets such as China and India. “Energy security” seems to include notions ranging from the reliable availability of plentiful energy to the energy self-sufficiency of our country. To a business-as-usual company such as Ford, this would seem to mean the reliable availability of plentiful energy. With the economies of China and India now burgeoning, this is not a realistic a condition of the future. All developed nations need to concern themselves with cutting back on their own excessive carbon emissions so that there is room for China and India to expand. As an auto manufacturer, Ford needs to be concerned about the carbon footprint for producing its products, and the degree of fuel economy and carbon efflux for its cars in use.

According to Ford, there are striking differences between the auto market in Europe and that in the United States. 6% of American cars have manual transmissions versus 80% of European cars. 75% of American cars have 5 cylinders or more, while 89% of European cars have fewer than 5 cylinders. Is this purely the result of user preferences or some other set of factors? Ford seems to think it is user preference. A competent businesswoman, Cischke repeatedly referred to serving users and providing for their choices. She pushed away any suggestion of how Detroit might play a role in forming those preferences.

A key point of the talk was the view that addressing climate change issues will require a collaboration of all stakeholders: auto manufacturers, consumers, government, and fuel producers. Consumers will have to adopt the new technologies, many of which will be more expensive than the conventional technologies until they reach full production. Fuel cells burning hydrogen will have impact in 20-30 years. (Yet Shell already has established a trial set of hydrogen stations north of Washington D.C.) Hybrid powertrains will serve 10-15% of the market. (Perhaps for Ford, but not for Toyota.) Benefits of hybrids are realized [only] in urban driving. (Yet my experience with Honda and Toyota hybrids indicates that benefits extend to all situations. Modern clean diesels will be part of the core approach for the next 40 years. (Yet this does not answer the challenge of carbon in the atmosphere.) Advanced highly efficient gasoline engines will be using existing capital and refueling structures. There is a partnership between Ford and Southern California Edison for cars powered by fuel cells and plug-in electric drive trains, which are especially suited for short trips. In this way Ford passes the responsibility on to electric utilities to put minimal carbon into the atmosphere as they produce electricity.

The picture that emerges is summarized in Ford’s projections for fuel use. In 2008 we will burn slightly under 10 billion gallons of conventional corn-starch based ethanol. This use will level off at about 14 billion gallons by 2015 and be supplemented by 16 billion gallons of cellulosic ethanols, 5 billion gallons of advanced non-cellulosic ethanols and biodiesels, and 1 billion gallons of biodiesels by 2022. This is good for energy security but not so good for global warming, because burning all of these fuels still puts large quantities of carbon into the atmosphere

Ford identifies its large contribution as its “EcoBoost.” Direct injection will increase fuel economy. Turbocharging will decrease CO2 emissions. Engine downsizing will increase performance. T his last item seems a bit counterintuitive, but Ford has a graph showing a higher and more constant engine torque for a 3.5L V-6 gasoline EcoBoost engine than for a conventional 4.6L V-8 engine. To understand Fords’ thinking, it is necessary to understand the numbers, and therefore the need for Ford to get it right the first time. In Ford’s view the impacts become really favorable when the numbers of cars sold is in the millions.

Other than the avant-garde experiments (a hydrogen fleet, or an electric fleet using green electricity) these are all nice incremental, comfortable changes. They tend to provide answers to challenges of international petroleum shortages. Unfortunately they also assume business substantially as usual. Most people including Detroit seem not to have understood the urgency of the real issue yet. The most urgent issue is carbon. Humanity is already putting vastly too much carbon into the atmosphere, and the yearly injection is increasing. I agree with James Hansen who recently co-authored a paper stating that people need to reduce the atmospheric carbon from present levels now if we are to have hope of continuing in anything like the civilization that we now have. This will require something akin to a Manhattan Project along with major changes in the way people behave.

Detroit has this curious notion of making gradual transitions and of shifting responsibility on to the consumer. To a hybrid owner the transition has indeed been gradual, but transitions have a way of becoming very abrupt for those who do not adapt promptly and creatively to the need for change.. The problem with Detroit’s delays in responding is that the transition is no longer easy or low cost, and for those who wait much longer, it is going to be even more extreme.

Hydrogen is important as a fuel because there is no carbon in hydrogen if it is produced properly. In contrast with a speech at MIT by the president of Shell Oil Company a year ago, Cischke spoke only in passing about her company’s commitment to the hydrogen economy. ) However, Ford has another area in which it can contribute. She spoke of Ford’s knowhow about logistics and Information Technology. She stated that we should look for an announcement in the next few months about Ford doing something in the area of coordinating personal transportation (autos) with busses and public transportation. This is important, and will be even more important if our society is willing to start investing more in public transportation, as it must.

One of her offhand remarks was the idea that CAFÉ standards should be measured on a per person basis rather than on a per vehicle basis. This might mean that an Explorer with its extra seats would have about the same mileage as a Prius with only five seats. It also might mean that an Explorer with only one driver and no passengers would get credit for that same mileage, which of course would be wrong because it would put everything off onto the consumer. I remember how, before I realized that I could buy a hybrid, I almost went for an SUV to carry my daughter and her soccer teammates two or three times per week. I would have been driving solo for more than 200 miles per week as a result of this. I learned that a sedan actually was adequate, and ended up choosing a Prius over a Honda for our second hybrid because of the extra luggage space.

To one trained in psychology it rapidly became apparent as Cischke talked that Ford continues to be committed to its corporate values. At the same time these values are what made it into a great company, and what may lead to its continued decline. Cischke spoke of keeping the cost of cars down, of thinking in terms of millions of vehicles rather than thousands, of worrying immensely about the cost of each component in a vehicle, of a long development time necessary to provide quality, of avoiding big changes and big risks, of aiming for the middle of the market. This sounded as though Ford was a laggard adopter of innovative technology at the same time that our society now needs innovators and leaders. She spoke of Ford’s working on electric vehicles during the 80’s and 90’s in response to a Federal initiative, but not of taking the initiative itself. And so we have what may be an outstanding hypothesis for “Who Killed the Electric Car?” It was the car manufacturers, as perhaps also suggested by the movie. In Ford we see an organization that has done well with its values, continues to be committed to them, and does not understand that it will suffer because times have changed forever.

Cischke did in a way recognize this. She noted that car purchasers had for a long time gotten ambiguous signs from the economy about what kind of car they should drive. When the price of gas was fluctuating and the economy was strong, users could select whatever car they thought they wanted. However the worldwide demand for petroleum now for the first time exceeds the worldwide supply. This represents a fundamental change. With the price of gas continuing to rise, and I might add, the fundamentals of the world economy changing possibly forever, a quarter of car sales (according to the New York Times) are now smaller, fuel efficient cars. Given this, Cischke did note that people are buying more and more fuel efficient cars.

Cischke and Ford apparently suffer from one major disconnect. One way it emerges is that she said that she has talked with our Congressman, Ed Markey, about CAFÉ standards, and disagrees with him. Ford feels that their sales depend on what the customer decides to purchase, and thus argues that it is unfair to hold Ford accountable in its fleet fuel efficiency for the vehicles that its customers select. Of course, this ignores those many commercials that for decades fostered the desire for power vehicles. As one person commented to me after the talk, Ford seems to have an incredibly passive view of its role, and it simply is not believable. In contrast, I think that the Federal view on this is that the auto industry is one of the perfect places to leverage necessary change to deal with overuse of fuel and the excessive buildup of greenhouse gases in the atmosphere.

Another angle into this same issue emerged in questions from the audience. Ford makes and sells European Fords that are much more efficient. Why not sell these in America as well? Cischke responded that Ford will produce whatever people want to buy. In Europe 80% of car sales are for four cylinder engines or smaller. She stated that Ford would bring European Fords to America when there is a demand for them. Many of us would suggest that that demand is present right now. It is for Ford and its competitors to start committing resources to let Americans know that this option is available. Such a competent commitment is conspicuously absent in promoting hybrid cars. She commented that the general population knows about the Toyota hybrid and not the Ford hybrid or the Honda hybrid. This is because Toyota did an exceptional job of making its hybrid distinguishable. Other companies will have to adapt a similar view.

Thirty years ago I started having some conversations with people from Detroit who said that Detroit was actually creating the needed designs in its R&D sections. The problem was that there were many layers of bureaucracy. Each layer required time to sign off on a new product, and each layer trimmed away new features that had been developed. A year ago I had a similar discussion. My informant said simply that the new models were there in R&D. It was just that the financial people and Board emphasized profit for the stockholders and did not accept the innovative proposals that they believed would bring less profit. Combine this with Cischke’s stated view that producing a high quality production version of an innovation requires many years. The result is that the Detroit car companies are going to have to learn agility or continue their slow death spirals. Unfortunately for us, those slow death spirals may mean deep trouble in terms of global warming. Let’s hope they get with the urgency very quickly.

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