Ford specialist has plan to overhaul culture, stop warranty claim finger-pointing
Ford Motor Co., faced with billions in warranty claims while at the same time needing billions to develop electric vehicles, has hired an expert to slash costs, the Free Press has learned.
Josh Halliburton, who brings nearly two decades of experience as a quality turnaround specialist, explained why he was hired, how he plans to make cuts, and how consumers will be directly affected.
"I was brought in to help lead massive improvements in our quality level," Halliburton said.
Vehicle design. Product development. Engineering. Manufacturing. Consumer experience on the road and with service after they own Ford trucks and SUVs.
Dramatic improvement is crucial to the future of Ford because it not only affects profits but will keep customers essential to growth during this dynamic period of cutthroat competition.
Ford CEO Jim Farley has said consistently during earnings calls since taking the helm in October 2020 that warranty costs must come down. More recently, he and Ford Blue President Kumar Galhotra reiterated the priority in terms of funding the Ford Model e mission to develop software and technology for future products.
The company is known within the auto industry for having warranty costs higher than its crosstown rival General Motors and others. These are costs the company pays to fix mistakes that may be the subject of recalls for safety reasons or otherwise recognized by the company as problems that merit repair by any reasonable standard.
Ford employees have described a culture that reinforces finger pointing rather than identifying and fixing problems.
"That's very much an observation I brought in early," Halliburton said. "We've got a history of — we spent a lot of time figuring out who to blame. So, is it a supplier issue? Is it a manufacturing issue? Is it a design issue? ... I no longer care who caused the issue. It's not important in my metrics and not important in how I look at quality."
He added, "What I've told the team is that they are all responsible for the same target, whether you're a supplier quality person, whether you're a product development person or whether you're a manufacturing person."
These people are required now to sit "side by side" and work together to "attack" the issues, Halliburton said. "So they all succeed or they all fail together. That's really important because it speeds the time to start working on the issue ... they can't point fingers at each other. They're on the same team."
'Do Not Drive This Vehicle'
The company has had a pattern of warranty issues related to product development, engineering and manufacturing flaws that have led to vehicle launch problems in recent years, as well as safety recalls required by federal regulators who assess a potential threat of death or injury.
A quick snapshot reveals problems with these high-profile vehicles:
2020 Ford Explorer has 12 recalls
2020 Lincoln Aviator, 11 recalls
2021 Mustang Mach-E, four
2021 Ford Bronco Sport, seven
2021 Ford F-150, nine
The 2021 Ford F-150 has warnings for possible nonworking windshield wipers, a driveshaft subject to fracture, damaged steering gear, a nonworking seatbelt and faulty windshield bonding.
When a consumer goes to the website hosted by the National Highway Traffic Safety Administration, and searches the 2021 F-150, an alert reads, "URGENT: DO NOT DRIVE THIS VEHICLE."
There were already multiple recalls on 2022 vehicles by March, including three for the Bronco Sport, three for the Maverick compact pickup truck, two for F-150 and one each for the Mustang Mach-E, Ford Explorer, Lincoln Aviator and Transit van.
Halliburton said he is committed to overhauling the culture and expected to see some immediate results but warned that product development is a multiyear process and significant changes may take a few years.
New oil leaks, braking woes
And Ford just announced two new recalls Friday for more than 737,000 vehicles to fix oil leaks and trailer braking systems.
The Ford Escape SUVs model year 2020 through 2022 and the 2021 Bronco Sport with 1.5-liter engines have been built with a part that may crack and leak oil onto the engine, creating a fire risk.
The trailer braking recall includes 2021 and 2022 F-150 pickups, as well as the 2022 F-250, F-350, F-450 and F-550. Also included is the 2022 Maverick, Ford Expedition and Lincoln Navigator. A software error can stop trailers from braking, increasing the risk of a crash. Dealers can update this software at no cost to the consumer.
Owners will be notified by Ford in mid-April, the company told federal regulators.
Halliburton knows the situation needs fixing.
He spent 17 years at J.D. Power, a globally respected data analytics company that studies consumer behavior, and left his role as vice president to become executive director of quality at Ford in January.
"If you look back in time, Ford knows how to do quality well. And it became complacent," Halliburton said.
"Bad launches" in 2020 and 2021 — involving Explorer and Aviator and F-150 — put the problem in the headlines, he noted.
The Free Press first documented the botched Explorer launch, problems which the company initially described as not out of the ordinary. Earnings impact revealed a different story.
"I think when I came in, there was already acknowledgement that quality needed to be improved," Halliburton said. "I would say there was a good framework that had been laid in the past, roughly six to nine months prior to me joining."
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The goal is to avoid alienating customers and to maintain loyalty.
People don't want to book repair appointments and, these days, the wait to get recall repairs done lasts months and sometimes more than a year — because parts simply aren't available.
Automakers know it's cheaper to keep current customers than woo new ones.
"They chose you. They're already loyal to you. It's easier to keep them the next go-round if you give them an intensely great experience than if you disappoint them," Halliburton said.
But why change things now?
Well, numbers tell the story.
Ford saw higher warranty claims in 2018 and 2019 than at any time since at least 2003, with $4.36 billion and $4.56 billion respectively, according to federal filings. And while things have improved over the past two years for the company, they're still racking up huge costs seen as unforced errors.
During the past five years, Ford has seen the highest warranty claims in more than a decade while sales have gone down globally:
$3.457 billion in 2017; 6.61 million cars sold
$4.360 billion in 2018; 5.98 million cars sold
$4.561 billion in 2019; 5.39 million cars sold
$3.923 billion in 2020; 4.19 million cars sold
$3.952 billion in 2021; 3.94 million cars sold
It's important to note that warranty claims cover problems on new vehicles as well as those that may be a few years old. Sales bring in money that helps offset costs. So if sales are going down and warranty costs are going up, that's not ideal.
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"Most warranty issues come from failure in product development discipline," said market analyst Jon Gabrielsen. "GM got better while Ford got worse over the past 10 years."
GM has seen its warranty claims come in lower than Ford while selling more vehicles, according to its filings with the Securities and Exchange Commission compiled by industry authority Warranty Week:
$3.129 billion in 2017; and 9.6 million cars sold
$2.903 billion in 2018; and 8.39 million cars sold
$3.012 billion in 2019; and 7.72 million cars sold
$2.986 billion in 2020; and 6.83 million cars sold
$3.249 billion in 2021; and 6.29 million cars sold
'What the hell is going on?'
Industry analysts say they've watched warranty costs grow steadily at Ford, and Farley is the first chief executive in awhile to try to change established practices at the 118-year-old company.
"Look, warranty cost is the greatest profit opportunity that Ford has," said John McElroy, a longtime industry observer and host of "Autoline After Hours" webcast and podcast.
"If they could just get to GM’s level, they’d free up a couple billion dollars on the bottom line," he said. "The question is, why are Ford’s warranty costs so much higher than anybody else? Not because suppliers sort out the bad parts and ship those to Ford. I think this gets back to the way Ford conducts its purchasing policies."
Ford traditionally has run its product programs on strict individual budgets, McElroy said.
"The powertrain people do their thing. Same with the suspension people. Same with instrument panel designers," he said. "So what Ford has ended up with, in my opinion, is optimized components but not an optimized system."
Another issue has been a reputation for purchasing cheaper components to meet vehicle program cost targets while companies such as Toyota and Honda may invest a little more up front on higher quality parts and save in the long run, McElroy said.
"Ford, heretofore, would not admit it was part of the problem. It wanted to blame suppliers," he said. "Ford has been pointing fingers at everybody. ... Until Farley comes along and says, 'What the hell is going on?' He's more willing to admit there are problems at the company and do something about it."
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Farley has earned a reputation for aggressively trying to fix things, McElroy said.
"I believe it’s a systematic problem at Ford, the way the company is structured organizationally. Not that they have stupid engineers. The system is forcing them to make mistakes, which they don't recognize as mistakes. They’re delivering what their bosses want," he said. "Until now."
Carla Bailo, CEO of the Center for Automotive Research, an industry think tank, said Ford must better manage quality, as illustrated by the company's problem launches.
"They haven't been silent about that," she said. "There's obviously improvements needed in their design and development processes."
The Holy Grail is to avoid disrupting start of production but sometimes that's necessary when companies just aren't ready, Bailo said, noting that Tesla often slows things down.
"Sometimes you take a deep, serious look and ask, 'Should we have taken a couple more weeks?' "
Automakers such as Toyota, which is where Farley worked before he joined Ford in 2007, encourage workers to speak up and fix problems, Bailo said. "They take everybody's input. People on the line can easily make recommendations for improvements. Everybody's job is quality. It's embedded in the corporate culture."
At Nissan in Aguascalientes, Mexico, there's a mirror at the entrance that says, "Quality starts here," she said. "It's embedded in the culture there, too. It's amazing. Not only does it create cost savings but it creates brand loyalty. People don't want problems with their car."
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Rosemary Shahan, president of Consumers for Auto Reliability and Safety, applauds the idea of Ford cutting warranty costs if it means improving the product.
"It's often hard for consumers who have already bought their cars to get the problems fixed," she said. "There's a huge shortage of auto mechanics to do the repairs. And it's getting worse and worse."
What does change look like?
Ford is in the process of overhauling everything — from how it develops cars to how it handles quality issues as they unfold with consumers.
Halliburton, an electrical engineer by training, did a stint as a launch engineer at Ford from 2000 to 2004, according to his LinkedIn profile. But since then, he has worked with just about every automaker globally while at J.D. Power, observing what works and what doesn't.
He said he has a clear plan for Ford.
That means Halliburton will bring in quality control techniques that are new, a fresh perspective that "modernizes" the approach and creates oversight and communication at all times within product development, manufacturing and supply quality to prevent unexpected changes that could result in small but costly problems.
He calls this technique "cross functional."
"What has changed since I’ve come on board is, Jim’s done a great job of refocusing the team, to be able to break up the (battery electric vehicle) team from the traditional products team," Halliburton said, noting Farley's role in the process.
Instead of waiting for problems to snowball, Ford is reacting sooner. For example, the automaker has recently implemented teams within each vehicle line that monitor social media sites looking for trends, he said.
The Mustang Mach-E team noticed customers talking on social media sites about hiccups related to using the cellphone as a key, Halliburton said. Based on that discussion, the team sat down to figure out how to improve responsiveness and consistency of how the phone as a key app functioned, and did a software update over the air to remedy the issue, he said.
Use of technology and connected vehicles play an important role.
"We can see if we’re seeing early battery drains at a level that’s not normal, we can react to that, change software ... before the customer ever experiences a dead battery," Halliburton said.
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Ford had early success with Mach-E home charging systems and F-150 zone lighting, as well as performance upgrades for better Mach-E brake pedal feel, Ford spokesperson Said Deep told the Free Press.
"More than 100,000 F-150 customers received a Ford Power-Up quality enhancement for the zone lighting feature," he said. "We identified a battery drain issue using vehicle data, we solved the issue faster using digital tools, and we deployed a fix very quickly to customers, totally remotely, no dealer visit required."
The result: happier customers and a "potential savings to Ford of some $20 million." Deep said.
As far as factory improvements, Ford is in the process of adopting a practice of videotaping the assembly process of a vehicle during the early launch builds. That way, the company can analyze the process with the team and identify opportunities to improve the process before volume is ramped up.
"That's really a strong best practice that I've seen done," Halliburton said.
"Several automakers today focus on warranty in terms of costs instead of focusing on how it impacts the customer," he said. "That limits how you prioritize and attack the problems. … So that’s one of the things we’ve changed."
The idea of "high cost" can be misleading when the impact on loyalty, satisfaction and customer advocacy is not factored into the equation, Halliburton said.
"Investing in quality early may mean improved loyalty that generates more revenue in the end," he said. "By focusing our efforts on our customers first, we will improve both customer advocacy and shareholder value."
Overall change often isn't evident immediately because products have already been designed and sent to market, he warned.
"We’ve set up tools and processes to help us identify the issues as fast as possible, ideally before the customers actually see them," Halliburton said. "We’re learning from our commercial team, from Ford Pro, that really has to make sure the customer's vehiclesare always up, how to leverage those diagnostic tools to know the customer has a problem before they do and react to that."
Company leaders are confident the plan is working.
At the end of last month, Bill Ford, executive chair, purchased another 267,697 shares of stock at $16.81 apiece or about $4.5 million, according to a Seeking Alpha alert based on regulatory filings.
Ford is also changing how vehicles are inspected prior to leaving the factories in hopes of catching potential defects sooner. For example, the company has added extra steps for scanning parts and creating secondary checks at the end of the line.
Old ways didn't lend themselves to working together to fix problems, Halliburton said.
"The one thing that I’ve been extremely impressed with is the amount of support I’m getting from the executive leadership team. That’s critical to building a quality culture. Jim (Farley) pings me several times a week, so do most of his direct reports, all asking how they can support and how they can engage to make sure that we have a culture focused around quality," Halliburton said.
"When you work with companies on fixing quality, it’s often an uphill battle. ... If the whole company isn’t aligned, it’s really inefficient and it’s a struggle to get momentum," he said. "Here, I see the momentum’s in place. It’s now harnessing that momentum to guide it down the right path."
'Because it broke'
Charles Elson, a professor of corporate governance at the University of Delaware, said warranty claims simply mean products need repair. And he can't understand why it has taken Ford so long to come to this realization and take action on behalf of consumers.
"Quality is job one," he said. "The key to lower warranty expenses is to make a better product. You're paying for it because it broke. It's funny to say, 'We want to bring warranty costs down because it's costing too much.' Build a better vehicle and you will."
Ford pays fewer costs to dealers doing repairs and customers avoid the hassle, Elson said. "So everyone wins."
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Eric Arnum, editor of Warranty Week, aggregates all warranty data for companies globally based on their federal regulatory filings.
"Ford was the largest claims payer of all in the U.S. last year," he said, "bigger than Apple, IBM, HP, Raytheon or even GM."
Analyst Dan Levy of Credit Suisse said a new focus on cutting these costs is crucial to the overall strategy at Ford.
"Warranty is one of the costs they have to lean on to have a more efficient organization, which can then be used to better fund electric vehicles," he said.
In 2018 and 2019, under then-CEO Jim Hackett, some quarterly earnings slide presentations did not list warranty costs. Over the past two years, all quarterly earnings have included itemized dollar amounts for warranty costs.
When top executives publicly discuss problems and vow to address them, they earn trust from investors and customers, said Joe McCabe, CEO of AutoForecast Solutions.
"Farley is getting in front of the issue. He's the captain of the ship. It's his job to take responsibility and say how he'll make it better," McCabe said. "Anytime transparency is there, it improves the optics for Wall Street."
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Contact Phoebe Wall Howard: 313-618-1034 or email@example.com. Follow her on Twitter @phoebesaid. Read more on Ford and sign up for our autos newsletter.
This article originally appeared on Detroit Free Press: Ford's Josh Halliburton wants to fix high warranty costs