AUTOMOTIVE OUTLOOK

by Lawrence Makagon Ford Fights

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Ford is predicting heavy losses for its electric vehicle business this year, forecasting they will grow to $3 billion as the company spends on new models and factories. This deficit matches its accumulated EV losses over the past two years. Ford is starting to report financial results by business unit rather than by region. It also restated its results for the last two years, showing its budding E.V. business lost $2.1 billion last year.

Chief Executive Officer Jim Farley is radically reorganizing the 120-yearold automaker by dividing it into three units — one for EVs, or Model e; another for internal combustion engine vehicles, or Ford Blue; and a third for commercial trucks and vans, Ford Pro. Ford is the number 2 seller of EVs in America on the strength of its F-150 Lightning plug-in pickup and the battery-powered Mustang Mach-E but is still miles behind

Tesla, which controls two-thirds of the U.S. EV market.

Farley’s aim is to eventually overtake Elon Musk’s company, which is the world’s most valuable automaker. This is the same promise G.M.’s Mary Barra made a couple of years ago. Ford is investing $50 billion to develop and build EVs through 2026, and its goal is to manufacture 2 million battery-powered vehicles annually by then. EV losses will expand 43% this year as Ford spends heavily to develop a second generation of battery-powered models, with their attendant factories.

“There’s a lot of investment that’s going into Model e for the growth that we’ll be seeing,” according to CFO John Lawler. Ford reiterated its goal to reach an 8% EBIT margin (Earnings Before Interest and Taxes) on E.V.s by late 2026. Last year, electric vehicles generated a negative 40% margin, Lawler said. But he said that Ford’s EV business will be “approaching breakeven” on a contribution-margin basis by the end of this year, excluding research and development costs. Lawler said that the road to profitability will come from increased sales volume, more efficient designs, lower battery costs, and more competitive distribution and pricing. Ford’s EV losses last year were less than Deutsche Bank analyst Emmanuel Rosner expected. Rosner stated that Ford had likely generated operating losses of $6 billion for the Model e™ unit in 2022 when factoring in significant research and development costs.

Ford more than made up for EV losses with profits from traditional gasoline-fueled vehicles, such as the top-selling F-Series pickups and Bronco sport utility vehicles. According to the automaker’s restated results, the Ford Blue business had $6.8 billion in EBIT last year. This year, Ford projects its combustionengine vehicles to generate about $7 billion in earnings before interest and taxes, characterized as a “modest improvement.” Farley has been critical of the performance of Ford’s traditional operations and is targeting $2.5 billion in cost cuts this year.

This year, Ford’s commercial vehicle business is expected to nearly double earnings before interest and taxes to almost $6 billion. Last year, Ford Pro had EBIT of $3.2 billion, up from $2.7 billion in 2021. Ford is launching a new transit van this year. Lawler notes an “incredible pent-up demand in the commercial business.”

The company reiterated its full-year guidance of $9 billion to $11 billion in adjusted EBIT. Shares have been under pressure after two consecutive quarters of disappointing earnings. Farley is counting on his companywide overhaul to reinvigorate and refocus Ford. “This is far more than an accounting exercise,” Lawler said. “After 120 years, we’ve essentially re-founded Ford.” In 2022 Ford sold 61,575 EVs, up 126% for the year. Ford has a tough row to hoe if it is to produce 2 million battery-powered vehicles annually by 2026.

At the other end of the scale, the EV startup Canoo is moving from R&D to focus more on manufacturing in 2023, hoping to cut operating expenses. The company is looking to produce 20,000 units and has an order book of $2.8 billion, including 4,500 delivery vans from Walmart. The company’s not making any money. Q4 of last year saw Canoo settle an SEC investigation into whether former senior executives had misled investors, and the company will pay a $1.5 million fine as a result.

Despite the lows of the year, executives remained optimistic about the big picture. They delivered Canoo’s first light tactical vehicle (LTV) to the U.S. Army and entered a partnership with a Saudi Arabian distribution company. With the investigation wrapped up, its CEO said Canoo can now apply for government programs such as the “Department of Energy loan program and things of that nature.”

If Canoo’s LTV does its job, and Saudi Arabia can persuade Saudi Arabians to buy the product, this company might stand a chance.

The Outlook - EVs will continue to be a substantial investment to reach profitability. Beyond that, the key to EV success will be in recycling component parts, and ways to prevent an entire vehicle from being ‘totaled’ by insurance companies, even with minor damage, because any damage to the battery makes it too costly to repair. This will drive up insurance costs. n