Ford has attempted to allay investor concerns that its electric vehicle production targets are unachievable during its Capital Markets Day in Detroit Michigan on Monday (US time).
CEO Jim Farley laid out his vision for how Ford will navigate the transition to EVs, a manoeuvre that no legacy auto brand has been able to make so far.
The company that developed the world’s first mass produced automobile 120 years ago is facing a seismic shakeup as the world transitions to electric vehicles. Ford has been slow to move on EVs and its global market share is being eaten away by companies like Tesla and China’s BYD.
During his speech, Farley identified the problems facing the company.
“Now some say history shows that companies like Ford can’t win an era of technology and new competition.” said Farley.
“There’s too many legacy issues. Too much resistance to change inside the company. Over the past two years, this team has confronted each of those very real challenges head on. We created a compelling plan.
“The fact is auto valuations have been constrained for decades, and Ford has been stuck in a box. The industry is crowded, it’s mature, and to stand out, we let complexity overrun our business as we tried to be all things to all people.
“We jockey against our competition over slivers of share in markets where growth long ago stagnated and where demand evaporated. Every time we had an economic downturn.
“Well, this is a new era. We’re playing the game differently. And we now have new tools.” said Farley.
Ford’s overarching strategy has been to split off its EV business Ford e, from its ICE vehicle business Ford Blue.
“We’ll take you inside Model e which is focused on three mission critical priorities,” said Farley.
“First, developing incredible EVs and software platforms for all of our vehicle businesses. Number two, launching a new consumer experience with our dealers. And number three, building our industrial system to deliver millions of EVs super efficiently.” said Farley during the Capital Markets Day event.
Ford’s strategy to decouple its EV business from its ICE business was praised by Tesla CEO Elon Musk earlier this month but Musk warned that Ford will face a tough period.
“Always tough with margins for new vehicle lines, especially when there are major technology shifts” said Musk on twitter after Ford’s Q1 earnings showed huge losses in Ford’s EV business.
“I think Ford’s overall strategy with EVs is smart.”
Always tough with margins for new vehicle lines, especially when there are major technology shifts.
I think Ford’s overall strategy with EVs is smart.
The electric F-150 (Lightning) has high demand.
— Elon Musk (@elonmusk) May 3, 2023
Ford e business model moving to replicate Tesla
The Ford e business appears to align with Tesla’s overall strategy in multiple ways.
Ford has correctly identified the dealership model as a huge obstacle for legacy automotive. While Tesla sells direct to end consumers, traditional auto companies sell to independently owned dealerships and dealers then sell to customers. This results in additional sales margins for dealers increasing the overall cost to the consumer.
It can also mean an unpleasant experience for consumers who need to haggle on price with commission hungry salespeople.
High inventory rates and true sales data are also a problem with the dealership model as inventory can fluctuate significantly. Farley indicated that the Model e business model seeks to change this.
“Our dealers can be a competitive advantage as we work together to lower distribution costs,” said Farley.
“We’re going to reduce physical inventories dramatically for Model e and deploy a new marketing model that focuses on loyalty, customer communication and building a community rather than spending billions on TV advertising and broadcast media.”
How Ford navigates theses changes with its dealership network remains to be seen.
Ford will need to break production growth record three-fold to achieve target
The third part of Ford’s EV strategy is to scale its EV manufacturing at growth rates never before seen in the automotive industry.
“Now all this is on building an industrial machine that can produce 2 million EVs a year and just a few years from now,” said Farley.
Ford says it’s investing more than $50 billion from 2022 through 2026 in electric vehicles and battery components.
Despite building just under 11,000 EVs in the first quarter of this year the company says it is “on track” to reach an annual targeted production run rate of 600,000 electric vehicles globally by the end of 2023.
Ford has also says it will reach its stated goal of an annualised production rate of 2 million EVs by the end of 2026.
Many analysts have been sceptical of Ford’s stated targets around EV production growth.
“I just get a little nervous with the 2 million unit capacity target that you have hanging out there for the second half of 2026, which, just in my opinion is a crazy high number.” said Morgan Stanley analyst Adam Jonas during Ford’s earnings call earlier this month.
Jonas has good reason to question Ford’s ability to reach its EV targets.
It took Tesla 9 years to scale production from around 20,000 to one million EVs, a growth rate that no other automotive manufacturer has achieved in history.
When discussing production growth during an interview with Financial Times in May 2022, Tesla CEO Elon Musk said “Our growth rates are faster than any large manufacture production in the history of the earth, We’re faster than the (Ford) Model T”
Although Ford sold just 10,866 EVs in Q1 2023, it did reach 30,000 in Q4 of 2023.
Based on last years sales numbers, Ford produced around 100,000 EVs over the year. Tesla produced 103,000 EVs in 2017. It took Tesla another 5 years to reach 1.3 million.
Ford is planning on growing production from 100,000 to 2 million in 3.5 years. A production growth rate double the speed of Tesla.
Ford has said that factory shutdowns are the reason for the drop in sales between Q3 2022 and Q1 2022 however with the dealership model blurring true sales data its unclear if demand for Ford’s EVs is outstripping supply.
Achieving record breaking production growth is a monumental task. If Ford’s EV supply is outstripping demand, Ford has even an even bigger problem to deal with.
On top of this challenge, Ford will be taking big losses on EVs for years to come.
Ford’s Q1 financial report from earlier this month showed that its Model e electric vehicle business had a negative EBIT margin of 102.1% meaning that it on average, Ford’s EV cost of production per vehicle was effectively double the selling price.
In Q1 Ford’s EV business made a loss of $US700 million which equates to loss on each vehicle of $58,992.
The transition to electric vehicles will be the largest industrial transformation in human history and legacy automotive companies are in uncharted territory as they attempt to completely revamp their designs, supply chains and business models.
Ford’s plan seems to be a good one and has the endorsement of Tesla’s CEO.
If Ford is able to weather the storm and execute its bold plan remains to be seen.
Daniel Bleakley is a clean technology researcher and advocate with a background in engineering and business. He has a strong interest in electric vehicles, renewable energy, manufacturing and public policy.