Ford is facing challenges in the electric vehicle (EV) market as the demand for higher priced premium electric vehicles softens. The automaker has decided to delay about $12 billion in planned investments on EVs, including the construction of a second battery plant with its joint venture partner SK On. While Ford is still profitable overall, its EV business, known as Model e, reported a loss of $1.3 billion in the third quarter. CEO Jim Farley acknowledged that consumers are not willing to pay a premium for an EV over a gas or hybrid vehicle, putting pressure on profits. To address this, Ford aims to reduce the sticker price on electric vehicles and make structural changes to achieve cost parity with internal combustion engine vehicles. The company is also planning to introduce lower-priced EV models to attract more customers. While Ford is making progress in its EV strategy, it has yet to achieve a profitable EV business and is focusing on cost competitiveness to succeed in the evolving EV market.
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Ford Delays $12B in EV Investments
Ford Motor Company has announced that it will be delaying approximately $12 billion in planned investments on electric vehicles (EVs) due to a softening demand for higher priced premium EVs. This decision includes the postponement of the construction of a second battery plant, which was a joint venture with partner SK On. Despite this delay, Ford executives have made it clear that the company remains committed to its next-generation EV vehicles.
CFO John Lawler emphasized during the company’s third-quarter earnings call that while EV sales have experienced growth, consumers are hesitant to pay a premium for an EV over a gas or hybrid vehicle. As a result, the profitability of Ford’s EV business has been affected. In the third quarter, Ford reported a $1.3 billion loss on its Model e unit, an increase from the previous quarter. In contrast, Ford’s commercial product and services business, known as Ford Pro, and sales of its gas and hybrid vehicles continue to be profitable.
Ford has set a goal of achieving an 8% margin on EVs, with a cost structure that reflects price parity with internal combustion engine (ICE) vehicles. To reach this goal, Ford recognizes the need for structural changes. CEO Jim Farley highlighted the importance of reducing the sticker price on electric vehicles in order to compete effectively in the evolving EV market. Ford aims to follow the lead of Tesla, which has successfully focused on cost and scaling with its Model Y.
In line with this cost strategy, Ford recently introduced the F-150 Lightning Flash pickup, a cheaper version of the F-150 Lightning that includes advanced technology features. The company is also planning to introduce second and third-generation EVs at lower price points, such as a new full-sized pickup truck. Ford understands that in the current EV business landscape, having a great product is not enough; cost competitiveness is crucial.
Next-Gen EVs and Market Demand
Ford’s next-generation EVs will be cost-optimized and guided by the learnings from its first-generation vehicles that are currently in the market. These future EVs will play a vital role in the success of Ford’s EV transition. The automaker is strategically shifting production and adjusting capacity to better align with market demand. This includes reducing Mustang Mach e production and implementing changes in collaboration with Korean battery maker SK On. One of these changes involves the postponement of a second joint venture battery plant in Kentucky.
In addition, Ford is evaluating its global Battery Park Michigan plant to determine if any adjustments are needed. Overall, Ford has pushed approximately $12 billion of EV spending, including capex, direct investment, and expenses. The company is committed to making prudent decisions based on market conditions and will only proceed with these investments if necessary.
Impact of UAW Deal
Ford recently reached a tentative agreement with the United Auto Workers (UAW) union, signaling the end of a six-week strike. The strike had an EBIT impact of around $100 million in the third quarter and resulted in a reduction of approximately 80,000 units from Ford’s plan. If the agreement is ratified, it is expected to lead to a reduction of around $1.3 billion in EBIT for 2023.
Ford had previously provided guidance for 2023, with adjusted earnings expected to fall between $11 billion and $12 billion. The company also anticipated free cash flow of $6.5 billion to $7 billion. As of the third quarter, Ford had achieved adjusted EBIT of $9.4 billion. The agreement with the UAW includes significant pay increases for union members over the next four and a half years, which will impact Ford’s financials moving forward.
Ford’s Q3 2023 Financials
In the third quarter of 2023, Ford reported a net income of $1.2 billion, a significant improvement from the $827 million loss in the previous year. Automotive revenue for the quarter reached $41.19 billion, slightly below the Wall Street expectation of $41.22 billion. Ford’s ICE business operations, known as Ford Blue, earned $1.72 billion in the quarter, while the Ford Pro commercial business brought in $1.65 billion. However, the Model e unit experienced a loss of $1.3 billion in the same period.
The company finished the quarter with cash flow from operations of $4.6 billion and adjusted free cash flow of $1.2 billion. Ford currently has over $29 billion in cash and $51 billion in liquidity as of September 30, positioning the company well for future investments and growth opportunities.
Cash Flow and Financial Position
Ford’s cash flow from operations for the third quarter amounted to $4.6 billion, showcasing the company’s strong financial position. Additionally, the adjusted free cash flow reached $1.2 billion during the same period. With a cash balance of over $29 billion and liquidity of $51 billion as of September 30, Ford has the necessary resources to support its operations and pursue strategic initiatives.
The decision to delay $12 billion in EV investments demonstrates Ford’s commitment to adapt to market conditions and take a cost-conscious approach in the EV landscape. By focusing on reducing sticker prices, producing cost-optimized next-generation EVs, and adjusting production to match market demand, Ford aims to enhance its competitiveness and achieve its margin goals. With a solid financial foundation, the automaker is well-positioned to navigate the evolving EV market and secure future success.