Investors have been hearing from more and more analysts lately that it’s time to change their strategy on electric vehicles (EVs). In fact, Bank of America Analyst John Murphy even went so far as to say that Detroit automakers such as Ford Motor Company (NYSE: F) should focus on highly profitable trucks, reduce its footprint in China, and avoid electric vehicles until it can launch vehicles with similar profitability to Tesla. Ouch.
While Ford probably can’t just stop its current EV strategy, we’re seeing some drastic moves that can hopefully turn around its EV losses, which could reach $5.5 billion by 2024. Here’s the latest smart move Ford is making.
A major exchange
Ford just announced plans to expand production of its highly profitable Super Duty pickup line at its Oakville, Ontario, plant. There’s a lot more to this announcement than the headlines suggest. Here’s why.
The Ontario plant was originally set to receive $1.3 billion in capital to transform it into a producer of two three-row electric crossovers in 2025. Ford abandoned that idea in favor of producing its Super Duty, for which it says it can no longer meet consumer demand. Management now plans to delay production of the two three-row electric crossovers by two years, to 2027, though it’s unclear exactly where that will happen.
Why is this so important?
“It will be essential for us to become competitive in terms of price and costs with You’re here” Murphy said, according to The Detroit Journal“Ramping up volume right now and losing money doesn’t make a lot of sense. You really need to focus on some of the next-generation platforms to have a profitable business.”
Take a quick look at Ford’s first-quarter results and you’ll see why the shift from increased EV production to the Super Duty, which is part of the Ford Pro business unit, makes perfect sense. Consider that in the first quarter, Ford’s Model e EV business unit lost a staggering $1.3 billion, while Ford Pro generated a healthy $3 billion in revenue. For context, Ford Blue, which is Ford’s traditional gas-powered vehicle business, generated $900 million.
One reason for Ford Pro’s strong profitability relative to the rest of its businesses is its impressive margins. Ford Pro’s EBIT margin in the first quarter was 16.7%, a level that traditional automakers dream of achieving. Ford Pro’s margins dwarf Ford Blue’s EBIT margin of 4.2%, which is about what traditional automakers can hope for.
Better yet, in Ford’s first-quarter press release, management specifically noted that Ford Pro’s results were driven by increased production of Super Duty trucks, the 2024 North American truck of the year. With this recent announcement, investors will see an additional 100,000 units per year of production capacity coming online, rather than EVs draining profits.
What all this means
The future of the auto industry is almost certainly electric vehicles, but it’s becoming increasingly clear that automakers jumped on the trend a little early and bought into the hype. The industry is going to grow much more slowly than expected.
This puts automakers in a tough spot right now, as they can choose to either implement massive incentives that drain profits or let inventory pile up at dealerships. For the folks at the Blue Oval, it’s clear that they’re holding back on electric vehicles until they can produce vehicles that can come out of production more profitably.
Ford has already delayed the launch of its new vehicles and adjusted its strategy to defer spending on electric vehicle projects to the tune of $12 billion. For investors, it is important to monitor these developments over the next 18 months. Ford must continue to invest in electric vehicle development to improve production efficiency and reduce costs, but also reduce its focus on the segment until it can produce a more affordable and profitable product.
It would be a big step forward if Ford could prove to investors that this year’s projected loss of up to $5.5 billion for its Model E division would be the peak of losses.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Daniel Miller holds positions at Ford Motor Company. The Motley Fool holds positions at and recommends Bank of America and Tesla. The Motley Fool has a disclosure policy.
Ford Makes Another Smart Move With Electric Vehicles was originally published by The Motley Fool
