Ford Model e at price breaking point

Legacy Detroit automaker Ford has shelved $12bn in EV investments after what CEO Jim Farley calls a “mixed” quarter in Q3.” Farley bemoans “overcapacity in the middle of the market” for EVs but his firm is unwilling to continue lowering its prices.

“While our Gen 2 EVs were targeting to deliver an Ebit margin comparable to ICE by 2026, the dynamic changes in the market — pricing, adoption rates — regulations are forcing us to further reduce the cost of our EVs,” Farley says, and this “incredible downward pressure on pricing” is crushing margins and deepening losses at the Model e business unit Ford has created as a dedicated e-mobility arm.

“Regarding Model e, our EV start-up incurred $1.3bn of losses in the quarter, reflecting continued investment in our next-generation products and a more challenging market for our Gen 1 products. Given the dynamic EV environment, we are being judicious about our production and adjusting future capacity to better match market demand,” says CFO John Lawler.

These losses are 15pc up from last quarter, at which time Ford was absorbing -58.9pc Ebit margins on EVs. Management did not disclose Model e’s third quarter operating margin, but they acknowledge that material cutbacks are needed.

“We have taken out some Mustang Mach-E production, and we are also slowing down several investments, including making a decision with SK On to delay the second Blue Oval SK JV battery plant in Kentucky. And we have also said we are evaluating our Blue Oval Battery Park Michigan plant to determine the best path forward,” Lawler continues.

No detail was given on the extent of production cutbacks, and no commitment was given to ultimately taking any of the postponed investments. “We have made this decision to push out $12bin of capital expenditures, but it does not mean that we will actually go ahead and pull the trigger on it if we do not need to,” Lawler continues.

Second generation

The company is now biding its time until its second generation EVs can be scaled, at which point profitable production is targeted. And Farley is effusive about the upcoming products, detailing an upcoming pick-up in particular.

“Our Gen 2 all-new full-size pickup truck, for example, is one of the most thrilling vehicles I have ever seen in my career,” he says. “I would take this truck seven days of the week over a Cybertruck.”

Farley has form for needling his Tesla counterpart Elon Musk on Ford's better understanding of how to sell e-pickups. But he is upfront about the challenges facing it second-generation EVs in both selling at scale and with a healthy margin between production cost and sales price, and what it can learn from its Californian rival.

“A great product is not enough in the EV business anymore. We have to be totally competitive on cost.

"Tesla actually gave us a huge gift with a laser-focus on cost and scaling the Model Y. They set the standard, and we are now making real progress on our second- and third-cycle EVs that are in the midst of being developed today.”

Management also emphasises that finding an efficiency sweet spot for batteries is targeted as the main downward driver of costs. “With our LFP batteries, we will have the lowest or one of the lowest cost batteries assembled in the U.S,” Farley says.

And Lawler explains that the company is looking for a profitable balance in battery size and wattage, while vertically integrating battery production. But, with plans for the firm’s SK On battery JV under review, this may only get more difficult.

“It is a combination of the battery size and the efficiency of the vehicle to get the lowest watts possible to hit the ranges that we are looking to hit. It is the vertical integration across the vehicle, the vertical integration across the battery, as well as the chemistries,” Lawler says.

Sales demographics

The reliance on revenue from the Ford Blue ICE division and Ford Plus fleet and software services is a lifeline for Ford’s struggling EV business. In fact, even Farley’s choice of metaphor is evocative of where the company’s short-term priorities lie.

“I am so thankful we have kept our foot on the gas to freshen our ICE and HEV products as we enter a changing market,” he says. “We have made really good bets on the ICE and HEV side, in case the EV market is not as fast as we thought.”

Farley tries to maintain that, for his firm, “our EV strategy and our ICE strategy is to go after customers we know really well”. But this still leads to market dynamics in which ICE and hybrids sales are “very much a loyalty target”, Farley admits, whereas EVs are “a conquest strategy”.

Is there an issue where the type of customers that have gravitated to Ford over recent decades are the ‘wrong’ demographic for growing EV sales? Pick-ups and seven-seater SUVs are US markets that “will not go EV any time soon”, Farley concedes.

And its even bigger trucks, the F-150 and Super Duty, are possibly even less fertile EV ground, while Ford has “really fresh product” on the ICE side for these segments.

“So, our bet is maybe different than others who just said, ‘Look, we are going to get rid of an ICE Explorer [mid-size crossover SUV] and go to an EV Explorer.’ That is not our strategy,” Farley concludes.