On March 23, Ford walked investors and analysts through how the company is now organized and operating based on three new global business segments that are divided by customer types rather than geographic regions. The event, which Ford called a “teach-in,” was held at the New York Stock Exchange and streamed live.
The teach-in was presented by Ford CFO John Lawler and Cathy O’Callaghan, vice president and controller. Ford CEO Jim Farley did not present on the call.
Those automotive business segments are Ford Blue, Ford Model e, and Ford Pro. (The others are Ford Next, formerly its mobility segment, Ford Credit, and Corporate Other, which reflects pensions and employee costs.)
Lawler summarized how the new segments shake out: Ford Blue covers the automaker’s gas and hybrid vehicles, Ford Model e concerns its digital capabilities and electric vehicles, and Ford Pro covers the commercial segment.
Ford Pro: Asset Light & Revenue Champ
More on Ford Pro from O’Callaghan: The unit operates in North America and Europe today and has been set up as an “asset-light services and distribution business.” It does not take into account manufacturing facilities; rather, it is defined by any vehicle that is sold to a commercial customer, whether they’re ICE or electric.
Ford Pro will also realize revenues from software, service, and EV charging solutions, though these are only starting to come to fruition.
On the call, Ford reiterated it anticipates full year adjusted EBIT for 2023 to be $9 billion to $11 billion and is still targeting a 10% margin for EBIT by the end of 2026. Ford Blue is expected to garner about $7 billion for 2023, while Ford Pro will approach $6 billion in EBIT, nearly twice its 2022 earnings.
Ford Pro and Blue are “both solidly profitable,” and “well-positioned for growth,” Lawler said in a pre-call press release.
Ford Model e: Profitability When?
Ford Model e, on the other hand, is not yet profitable. Ford’s electric vehicle unit posted a loss of $3 billion EBIT in 2022. The new unit expects to be margin negative again this year by $1 billion to $3 billion.
Ford stuck to its previously stated goal of an 8% EBIT margin objective by late 2026 for Ford Model e. The goal is dependent on planned global electric vehicle production run rates of 600,000 units by the end of 2023 and 2 million by the end of 2026.
Drilling down on Ford Model e’s 8% EBIT target by the end of 2026, Lawler said, “Again, you should think of this as an EV startup that's embedded in Ford. And like all EV startups, Model e is initially operating at a loss as we invest to build scale. We were intentional in being early to market with our first generation EVs to develop knowledge, volume, and share, and it's working.”
Lawler said Ford expects Model e to approach breakeven at the end of 2023 and expects to be EBIT margin positive in 2024.
How Ford Model e Expects to Hit EBIT Margin
Lawler explained how this margin target would be met:
- Benefits of scale assuming production of 2 million vehicles a year by the end of 2026 and more optimized manufacturing footprint. (20 basis points improvement)
- Design and engineering: Energy-efficient designs that reduce battery size and cost; simplification of manufacturing and platforms that maximize commonality and reuse. (15 points)
- Batteries: New battery plants will come online allowing Ford to insource key components. We're also diversifying chemistries by adding newer lithium iron phosphate (LFP) technology to its existing lithium (NCM) battery lineup. (10 points)
- Improvements in distribution, benefits of software and services, and incentives associated with the U.S. Inflation Reduction Act.
Lawler said that competitive pricing for EVs will be a headwind, partly on the expectation that raw production prices will fall.
Analysts Question Ford’s Margin Assumptions
The goal of the teach-in was “to orientate you on the business rationale and scope of our new reporting structure, and to the key changes in our financial materials and SEC documents,” said O’Callaghan.
However, queries from analysts in the meeting called into question many of the assumptions.
One line of reasoning: Ford produced fewer than 100,00 Model e units in 2022. So, producing 600,000 units in 2023 and 2 million by the end of 2026 seems to be a stretch goal. How can Ford project a break-even for Model e “by the end of 2023” when the full year losses are expected to be $1 to $3 billion?
One analyst calculated “back of napkin” that Ford is running an $11,000 loss per vehicle without scale and would need to find $15,000 of cost savings to get to an 8% margin at current pricing. Will Ford be able to take that much cost out of its EVs?
An analyst went further to point out that last year, Farley said Ford spends about $25,000 more to build a Mach-E than the equivalent ICE SUV, and now, six months later, Ford is talking about approaching breakeven, “which seems like a very favorable walk for unit economics.”
According to Lawler, Ford moved quickly on its first-generation EVs, which are “basically ICE vehicles, ICE designs that were converted to EVs.” The transition to a pure EV line will result in cost reductions. Still, will they be enough to reach the targets?
Ford was also asked how Ford Pro’s $6 billion in earnings will fare as the mix shifts more towards EV. Following the ratios laid out, about 30% of Model e’s vehicles will be sold to Ford Pro.
Lawler responded that “There's good margin in the electric vehicles on the commercial basis” and that the software service, telematics, fleet management, and charging software will give Ford Pro the ability to grow.
Ford Blue — traditional ICE engines — will be carrying earnings on its shoulders in the near term as Model e ramps up. An analyst pointed out that Ford Blue’s margin in 2022 of 7% would have to increase into double digits to have Ford reach its 10% overall goal by the end of 2026.
When asked how Blue gets to that double-digit EBIT margin, Lawler responded that “We still believe it's a growth business,” with the unprofitable vehicles gone and Ford concentrating solely on core iconic vehicles. “Low capital investment, very good margins,” he said.
A Tough Road to EV Profitability — for Any OEM
While this blueprint to EV profitability is Ford specific, it presents context to the overall timeline to EV profitability for other OEMs and the industry at large, which have similar issues to overcome.
Keep in mind that Ford has $50 billion of investment going into its EV business. Ford was a first mover in the incumbent OEM space with EVs, but the market gets crowded in the latter half of this year.
Lawler said there’s good margin in EVs with commercial customers, though traditionally, those margins are lot better on the consumer side. The question remains on how that will really change with EVs. And will commercial customers — particularly mixed fleets — pay for Ford’s new telematics and charging services in an already mature telematics market?
No longer an independent OEM, it took Tesla years to yield positive operating margins — with severe cost cutting along the way. Perhaps now, the accelerated pace of production today should be to Ford’s advantage. In this accelerated market, we’ll also have answers quicker on how soon Ford, and the rest of the industry, will get to EV profitability.