Ford Motor Co. has worked hard to improve the quality of its cars and trucks, but the ghosts of past mistakes continue to haunt the automaker's bottom line.
As Ford reported a $284 million third-quarter net loss last week, it disclosed that its quality-related costs have increased by $500 million this year over the first nine months of 2004.
Those costs climbed $200 million in the third quarter alone, and the number would have been higher if the automaker had not received a $240 million settlement from Bridgestone Firestone North American Tire LLC related to the recall of 20 million defective tires in 2000 and 2001.
The rising quality costs stem largely from increased warranty expenses for 2004 models, including a trouble-plagued diesel engine for heavy-duty trucks.
"Our costs are up this year," Ford Chief Financial Officer Don Leclair said in a conference call Thursday. "They are up in large part because of the issues we had with the 2004 models."
Leclair said other factors contributed to the increase as well. Ford set aside too much money to cover warranty costs last year and added some of those funds back to its balance sheet in 2004 -- making for a tough comparison with 2005 numbers.
Vehicle quality became a major issue for Ford in 2000 when it was plagued by recalls and rising warranty costs. Ford President and Chief Operating Officer Jim Padilla has since led a companywide effort to improve vehicle quality. But the costly problems associated with 2004 model vehicles show the company's efforts have not been completely successful, one analyst said.
"Ford's been inching up -- not down" in terms of warranty costs, said Ronald Tadross, auto analyst for Banc of America Securities.
"This doesn't gel with the quality initiatives and progress Ford claims to have made," he added in a research report late last week.
Tadross said he suspects poor supplier relations are to blame for many of the problems. He said Ford has outsourced too many of its parts, giving the automaker less control over quality.
Last month, Ford announced a major restructuring of its supply base aimed at dramatically reducing the number of suppliers that support its products and developing more collaborative relationships with those it keeps.
Under the plan, Ford will select suppliers that have demonstrated an ability to meet cost, quality and other targets.
Like other automakers, Ford requires that suppliers share warranty expenses in some instances.
Padilla expressed concern about warranty and other quality-related costs earlier this year.
In May, he addressed the issue in an online question-and-answer session with employees, according to a transcript obtained at the time by The Detroit News.
"Globally, our quality performance and improvement has not been satisfactory," Padilla said. "This applies to virtually all brands in all geographic regions. Our competitors are now moving faster than Ford to improve their quality and we need to TURN THIS AROUND NOW."
Padilla also addressed how lagging quality was hurting Ford's bottom line.
"The cost of poor quality is the single largest waste in our business," he stated.
"We need to make major strides in reducing our warranty repairs per thousand, cost per repair and things gone wrong."
Ford said it has now turned the corner and put its quality issues in the rearview mirror.
Leclair said quality costs are "headed in the right direction" and promised improvement in the fourth quarter and beyond.
"Our quality has been improving on our vehicles in the field, and our financial statements tend to lag that a little bit," Leclair said. "The issues are behind us now, in terms of current production. They have been for some time. The fixes are in place, and we've taken steps to help our customers along the way as we work through this."
At the beginning of this year, Ford set an internal goal of improving its showing in a key benchmark for quality -- J.D. Power & Associates' annual initial quality study. But the 2005 report out last spring showed the company's performance was essentially flat.
Ford's quality costs have been affected by problems involving the popular 6.0-liter Powerstroke diesel engine, which was introduced in 2003. It powers big trucks such as the Ford F-250 and F-550.
"The biggest issues we've had for 2004 were the diesel engines," said Jerry Reynolds, whose Prestige Ford in Garland, Texas, is one of the nation's highest volume Ford dealers. "We were spending a lot of money trying to fix them."
Reynolds said it took Ford some time to find the flaw, which turned out to be a problem with fuel injectors -- a component produced by an outside supplier. However, he said Ford took good care of customers whose trucks were affected by the glitch, giving some full-size pickups as loaners and covering some monthly payments.
"I was proud of how they stepped up," Reynolds said, adding that he has had no problems with the newer models.
While Ford does not publicly break down its quality costs by vehicle, it confirmed that the Powerstroke engine problems were a factor in its cost performance. Ford spokeswoman Angie Kozleski said that these problems, and other issues that took a toll on third-quarter earnings, are in the past.
"Bottom line: We have improved," Kozleski said. "(And) we will not be satisfied until we are No. 1."
