Ford’s (F) transformation into three business units —focusing on gas-powered cars, electric vehicles, and commercial customers — is less than two quarters old. And investors still have a lot of questions for the 120-year-old automaker and how CEO Jim Farley intends to push profitability.
“I think this is a chance for investors to go deep on our strategy,” Farley told Yahoo Finance from Ford’s Capital Markets Day event, dubbed “Delivering Ford+,” at the company’s headquarters in Dearborn, Michigan. “The main message is that Ford and a lot of the OEMs have been stuck in a valuation box with a lot of capital, low margins, fighting for slivers of market share, and what this investor day is about is explaining how that’s changed.”
Ford updated it’s financial outlook to include “financial bridges” that it says will allow it to hit company adjusted EBIT margin of 10% in 2026, “a waypoint” to higher subsequent profitability.
Ford Blue, the traditional gas-powered business, is expected to hit low double-digits in terms of EBIT margin percentage by 2026; Ford Pro is targeting mid-teens, and by late 2026, and Ford’s EV business – Model e – is targeting 8% EBIT margins.
Wall Street has been particularly skeptical of that EV profit margin. But Farley said Ford’s product portfolio and focus on new EVs — including a 3-row SUV that he calls a “personal bullet train” — will take the company there.
“I think you should realize that everyone’s product strategy is not a monolith. We have a very unique strategy compared to our competitors. We’re going after larger [electric] vehicles where we know the customers really well, three row crossovers with a lot of room in the rear seat, a personal bullet train, a second-generation Lightning [EV],” Farley said.
At the event, Ford said that the 3-row SUV will have 350 miles of range, plus a smaller battery, better aerodynamics, and a lower manufacturing cost than most current EVs.
Farley said its second-gen EVs will have totally different architectures and be software update-able (meaning higher-margin services). That and electrifying its commercial pro fleet will lead to more “durable” returns in the future, he said.
“The main message is we had to design these second generation products completely different than the first-gen products,” Farley says.
A big part of cost control for EVs is making cheaper batteries. To that end, Ford announced deals today in order to gain the materials necessary to hit its 2 million EV run rate by 2026.
Ford’s deal with China’s CATL to build LFP batteries, which are cheaper, and can be charged more frequently with fewer degradation, will be key. However, working with a Chinese partner has not come without criticisms.
“It turns out that the [battery] processing is the most important thing for us,” Farley said. “We’re going to build the batteries ourselves. So it’s our factory, we’re building the factory, it will be our workers in a plant. We’re not going to import the batteries that Tesla has been doing.”
Of course, Tesla (TSLA) is front and center in any discussion of EVs, and Farley has been consistent in his praise of the pure-play EV-maker’s efficiency, though he believes Ford is catching up. Tesla’s massive price cuts have put huge pressure on the industry to respond, and Ford answered with Mustang Mach-E price cuts. Farley believes the cuts are here to stay, and those who aren’t prepared may be doomed.
“We are going to see pricing pressure and if you have not put that in your business plan and you haven’t designed second-cycle products with discounting included in your run rate to get to an 8% margin in our case, then it’s not going to work out,” Farley said.
“That’s why we put so much pressure even on the first-gen products, the Mustang [Mach-E] that is, that faces off of the model Y, we’ve reduced the price of the bill material by $5000,” Farley said. “We have to go deeper to face off with the Model Y and Tesla, and they’re discounting; we knew we had to totally redesign the vehicle.”
Despite Ford’s recent focus on the EV transformation, it is the iconic gas powered cars like the F-150 pickup, Ford Bronco, Mustang, and Expedition SUVs that are still the strong sellers that make the company the money that it is plowing into transformation investments.
Farley noted special edition vehicles like the F-150 Raptor, Bronco Raptor, and the upcoming Dark Horse Mustang not only excite customers, but also bring in higher margins. Ford calls these “derivative vehicles”— special vehicles that highlight the brand’s iconic status whose popularity hopefully trickles down to the higher volume vehicles.
Henry Ford, the namesake of the facility here for Capital Markets day, wanted to build cars for everyone. Farley has a different path for the future.
“We don’t want to do generic vehicles anymore,” he said. “We don’t want to be all things to all people.”
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Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.
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Source: https://finance.yahoo.com/news/ford-no-longer-stuck-in-valuation-box-2nd-gen-evs-will-unlock-profitability-ceo-says-141155636.html