Warranty Costs Again Chip Away at Ford’s Q2 Earnings

Ford Motor Co.’s second-quarter earnings, with a solid showing by its commercial business, reflect a bright path forward supported by technology and promising new sources of revenue, says the company’s top executive.

“We are absolutely a different company than we were three years ago. And our pace of change is intensifying,” CEO Jim Farley says during a conference call with analysts. The reorganization of the company into Ford Pro (commercial), Blue (ICE powertrains) and Model e (electrified powertrains) is serving as a catalyst for transparency, accountability and more efficient capital allocation, he says.

However, some old problems persist.

Ford’s second-quarter revenue totaled $47.8 billion, topping expectations of $46.6 billion. Net income dropped more than 4% to $1.83 billion, which the company attributes in part to an increase in warranty reserves. Warranty costs, which cover the expense of repairing vehicles that leave the factory with defects of various kinds, continued to rise in the second quarter, Ford executives acknowledge.

“We did see warranty costs increase in the second quarter, of course, tied to new technologies,” says Farley. Inflationary pressure also contributed to the higher warranty costs, but Ford’s quality is improving, he says.

Ford claims Blue Cruise has enabled over 3 million miles of hands-free driving.

Looking ahead, Ford maintained its full-year guidance range of $10 billion to $12 billion in adjusted earnings. The Ford Model e division is expected to post a full-year loss of between $5 billion and $5.5 billion.

Ford’s EV business concentrated in Ford Model e lost $1.1 billion in the second quarter. The loss, however, was offset by about $400 million in savings through reductions in material costs, improved battery economics and lower engineering costs. 

Farley says: “On electrification, we’ve been very vocal about why electric vehicles are so important and a great choice for customers and businesses. Customers’ usage data and cost-of-ownership data would indicate about 50 percent of customers who buy automobiles would be better served buying an electric vehicle.”

Ford’s experience with EVs is revealing insights about the size of future EVs, the CEO says. “We believe smaller, more affordable vehicles are the way to go for EV in volume. Why? Because the math is completely different than ICE.

“In ICE, the business we’ve been in for 120 years, the bigger the vehicle, the higher the margin. But it’s exactly the opposite for EVs. The larger the vehicle, the bigger the battery, the more pressure on margin because customers will not pay a premium for those larger batteries,” Farley says.

The company’s commercial business, which Ford has nurtured for years, is also producing solid results and pointing to new sources of revenue, according to Farley.

“The Ford Pro business is amazing,” he says. “It’s a high-margin business tracking towards $70 billion in revenue this year with further opportunities for profitable growth outside of vehicle sales, in parts and service and software.”

Ford’s decision earlier this month to invest $3 billion in an Ontario assembly plant belonging to Ford of Canada will give the commercial business a significant boost by adding 100,000 units of capacity of Super Duty pickup trucks, which are in short supply. “It not only serves our customers, but it’s capital-efficient and has very high returns for many years to come,” Farley says.

The Canadian Super Duty pickup trucks will come with a “diverse set” of powertrains. “The real part of our Super Duty is the chassis business bucket trucks and ambulances,” the CEO says.  “The average age of ambulances is 15 years. It will be a great play. We would not be doing it if we didn’t think it would last for many years.”

Overall, Ford Pro services a “very robust and diverse customer range,” according to Farley. “We dominate in small business and medium business with tradesmen, but we have very large customers. We have state, local and national governments. And we have rental, which is very profitable for Pro. In fact, in the U.S., one out of four of these fleets, mom-and-pop tradesmen all the way to large companies, one out of four of those fleets in the U.S. are Ford only.”