Audi and Ford drive two different roads

While Ford sputters to find a profitable level...

...Audi seems to be revving into a strong future.

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(Fortune) -- Ford CEO Alan Mulally met with a group of reporters in Detroit earlier this week and, based on reports in the local papers, he was not very encouraging.

When asked about Ford's financial health, he ignored the industry convention of talking up future models as a source of improved profitability. Instead, as he has before, he cited Ford's strong liquidity, i.e., its money in the bank. Since that money got there only after Mulally borrowed against most of Ford's assets - including, famously, its blue oval trade mark - his comments gave little hint about the company's future prospects.

Then, when Tom Walsh of the Detroit Free Press asked Mulally whether he would draw a line in the sand to prevent Ford from continuing to lose sales, he replied, "Absolutely not."

To be sure, Mulally's point - that Ford needs to find a level where it can operate profitably - is a good one. For too long, U.S. auto companies chased market share without regard for how much money they were losing on each marginal sale.

But companies, like people, thrive when they are given challenges to meet and goals to reach. This year, Ford finished behind Toyota (TM) as well as General Motors (GM, Fortune 500) in U.S. sales. If you work at Ford, what kind of incentive is it to be told that the company is trying to reach the bottom but doesn't know where the bottom is? Do you hold back on selling cars until you hit that point?

Contrast that with the swagger demonstrated by Audi Chairman Rupert Stadler and Johan de Nysschen, head of Audi of America, when they stopped by Fortune's New York office a day later. As they were more than happy to report, Audi recorded its 12th successive year of growth in 2007, with sales of 950,000 cars worldwide vs. 700,000 as recently as 2004. The Audi A6, its middle-of-the line sedan, outsells the BMW 5-series and the Mercedes E-class.

Moreover, despite cool economic conditions in the U.S., Audi expects to sell one million cars next year, as developing markets in China and Russia pick up the slack. And Audi has set sales goals all the way out until 2015, when it expects them to reach 1.5 million cars.

To be sure, there are significant differences between Audi and Ford. Audi, a division of Volkswagen, makes premium cars that compete on the strength of their brands and engineering. Ford has to compete as a volume brand on price and content.

But Audi, like Ford, builds cars in a high-wage country with powerful labor unions, and it has had to overcome serious setbacks. Audi's unintended acceleration controversy in the 1980s was in many ways similar to Ford's problems with distintegrating tires on Explorers in 2000.

Yet Audi has now established itself as a legitimate competitor to Mercedes and BMW by developing a line of cars from sport coupes to luxury sedans and SUVs that share a consistent philosophy about design and engineering. As Stadler puts it, they are "sophisticated, progressive, and understated."

Both Audi and Ford face enormous challenges in the near future. Audi will have to cope with the likely takeover of VW by Porsche and learn how to coexist with the premium sports car manufacturer. Ford has to get through the economic downturn in the U.S. that looks deeper by the day, and learn how to develop products globally.

Further out, both have to cope with increasingly strict regulations on CO2 emissions in Europe and corporate average fuel economy in the U.S. Audi executives are candid about the impact about the new green laws. As Stadler points out, there will be a cost. "Somebody has to pay for it," he says.

Stadler is also bracing for the global launch of Chinese luxury cars, and, in doing so, implicitly throws out a challenge to his organization. "We see the Chinese brands growing up," he says. "We see their ambitions. In another ten years, they will have the quality of European cars."

The automotive world isn't any easy place for anybody these days. But that kind of blunt, straight-from-the-gut talk goes a long way towards explaining where Audi gets its mojo - and why Ford needs to find some.