Ford Out for Greater Profitability Amid Fewer Product Segments
Ford has yet to impress Wall Street with its execution of fixing quality and establishing some leadership in EVs.
Ford CEO James Farley faces Wall Street this week amidst a tough environment for the automaker in which nettlesome problems ranging from quality control and warranty costs to supply chain issues are keeping Ford’s share price boxed in valuation of an old-line auto company.
Farley lays out a program of cost cutting, vertical investments in lithium for battery making, product and model simplification, commercial feet services and smarter investments in product categories that are highly competitive from the standpoint of rival companies and pricing.
Most of all, Ford executives are pushing the message they intend to be the fastest follower among older established car companies chasing Tesla Motors in battery-electric-vehicle sales into the next decade.
Farley knows he and Ford have underperformed. Ford has been “stuck in a box,” says Farley, with thin profit margins, weak growth and low stock valuation.
Besides quality problems that have the Dearborn, MI-based automaker lagging competitors in publicly available rankings and ratings, Farley confesses to stubborn waste in the system that teams are chasing. It’s good news to investors that Ford is going after costs that other automakers, especially Japanese brands, tackled years ago.
Manufacturing simplicity, for example, has been a problem at Ford for decades, and has been targeted by every one of its CEOs since the 1990s. Ford used the current Explorer SUV to illustrate its progress, reducing the number of configurations from hundreds when it launched to less than 40 now. Honda and Toyota, in particular, made those changes decades ago. Even Ford made some dents in absurd complexity a decade or more ago, but the organization let needless complexity creep back in.
Farley also calls into question the race to produce bigger, longer-range batteries now under way.
"I have no idea what's going on in this industry right now. All I hear is all these announcements of 450-mile (724-km) range, a 500-mile(805-km) range,” Farley says. “There was another one today about a 3-row crossover (that is) going to go electric. These batteries are huge. If you have those kinds of batteries, you will not make money. So we got to start talking about the size of batteries for the range, the efficiency."
Lisa Drake, the vice president in charge EV industrialization, also notes, “Battery capacity is expensive, and you don’t want to use it inefficiently.”
The fundamental message around battery capacity and efficiency is being driven down into the company so engineers and designers working on new vehicles grapple with one of the basic economic dimensions of the transition to electric vehicles, she adds. The goal is to produce smaller batteries with the equivalent performance of the larger batteries, according to Drake.
Highlights and Lowlights
Farley says the company will have a 7-seat BEV SUV by 2026, making it a vehicle along the lines of an Explorer or Ford Edge, but not necessarily carrying those familiar names. That leaves the Mach-E as the only crossover that is fully BEV. The Escape would be a logical BEV entry, but to date Ford only offers that 5-seater as a plug-in-hybrid in addition to a hybrid.
Don’t look for additional 5-seat crossovers or any small BEVs.
In an attempt to safeguard its future supply chain, Ford has secured alliances with two North American mining companies — Compass Minerals and EnergySource.
Farley is counting on life-of-the-vehicle subscription services as a major source of revenue into the next decade.
Ford announced that it will reverse a previous position to eliminate AM radio from its vehicles after negative reaction from customers, the media and even regulators.
Fewer configurations across the entire vehicle lineup to reduce complexity and hopefully increase quality.
The FordPro business unit, which supplies fleet management services to commercial customers, is also seen as a significant growth area despite the fact that Ford does not lead that sector and has a lot of competitors. The Ford Transit is the best selling commercial line of vans in the market, but many customers choose competing fleet management providers.
Farley describes Ford Pro, the company's new commercial arm, as Ford’s not so secret, secret weapon. Ford Pro today is a $50 billion revenue business. If a separate company, Ford Pro would land in the Fortune 100, just below the likes of John Deere, which is serving as a model for the changes at Ford.
Deere is great company whose market cap is twice Ford’s, Farley notes.
“Deere earned that valuation by capitalizing on that same intersection of hardware, software, and services, while providing tremendous value to their commercial customers,” he adds. “The Deere plan perfectly describes our master plan for Pro, and it won't be one easy to copy as some other automakers think.”
Suppliers Beware
Getting certified as a Ford supplier has always been difficult. It can take more than 30 months for a new supplier to jump through all the hoops to get to be a full-fledged volume supplier. But that could change as Ford looks for new suppliers with higher performance and quality rankings.
“We have some chronically inefficient Tier 1 and Tier 2 suppliers,” says Ford Blue chief Kumar Galhotra. Some have caused an unstable flow of parts, he says, adding that Ford has worked with 125 key suppliers to stabilize their operations. “If the present supplier is not on a path to a permanent solution, we’re re-sourcing the business,” he says.
Ford disappointed shareholders in 2022 with a $2.2 billion loss, owing to a spectacular $10.2 billion in write-downs on investments in BEV maker Rivian and Argo AI.
Ford updated its financial outlook this week, targeting 10% EBIT margins by 2026 from combined EV and ICE businesses, and a low double-digit EBIT margin for the ICE business alone. The target for the FordPro business is mid-teens EBIT margin by 2026. That explains why Farley is bullish on commercial fleet services. Ford is targeting 8% EBIT margin for its BEV business by 2026.
Farley is charting what he hopes is a leadership route in the transition from ICE to BEVs. But he and other Ford executives emphasized that cashflow from ICE vehicles, especially pickup trucks, will be critical to the company well into the next decade.
Despite speed bumps and a lack of progress on quality rankings, Farley is not viewed as being vulnerable in his CEO position. He is well liked and respected by Chairman Bill Ford and the board, and he is viewed internally and externally as perhaps the most well-rounded, complete CEOs in the auto business, with deep background in all facets of the business, from dealer relations to knowing product to the point of being able to wrench on his own car collection, managing a balance sheet and marketing. Plus, coming from Toyota where he spent the first half of his career, he is seen as having a critical outsider’s eye. He joined Ford in 2006.
“Show Me” says Wall Street
How did Wall Steet respond? “We liked what we heard...at the core, we believe Ford established two important foundations: (1) Ford Pro as a fundamentally different business with clear competitive moats… (2) Advancing the discussion around expanding revenue pools from today’s 1x sale to lifetime economics,” Itay Michaeli, auto analyst at Citi. wrote in a note to investors.
Barclays analyst Dan Levy in a research note on Tuesday called Ford ”a show-me story.”
At the current share price of $11.63 per share, the stock's dividend yield is 5.16%.
Ford shares were up 2.2% at $11.89 at midday on Tuesday, but the stock is still down 25% from its 52-week high last August.
– with Joe Szczesny
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