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8 June 2022

Ford supremo preaches Jam tomorrow, after coming EV bloodbath

If you wanted a clear sighted view of how Ford Motors now sees electric vehicles, listening to CEO Jim Farley’s address at the Bernstein Conference last week gave some candid answers.

Under Farley (since August 2020) Ford is clearly changing – and he rounded out this thoughts on becoming an EV company with the comment, “If you ever see Ford Motor company doing a Super Bowl ad on our electric vehicle, sell the stock,” a direct reference to an entire discussion about the cost advertising puts onto traditional car firms, who sell through the dealer model.

Naturally his belief is that Ford can make it into the EV era and that the second level of the market will occur sometime around 2026, by which time his strategies will have a chance to unroll and the money will roll in. The good ol’ philosophy of “don’t measure me by this year’s profits,” when you are down, as Ford and US car-makers have to survive on a market that has been down on volumes for the past three years.

He address the sub $25,000 car, the rising Chinese car-makers, further consolidation, the car-maker as a software company, which focuses on knowing its markets really well and providing precisely what its customers want in a car, even if it is something like a “pickup as a service,” and says that this will be the biggest landgrab market since the Model T Ford came out. No Really!

Farley naturally thinks that Tesla is over-valued, and the real rivals, the Chinese, under-valued, and talks up new companies in the space such as Mobileye, who few understand have genuine power in this market, under the rule where leadership of a specific function equals value.

The ensuing shake-out will as much favor Chinese new EV only players, as US traditional car-makers, and he warns that many smaller EV-only car-markers (in the US) won’t have the cash to see them through. I’m sure he would not include Tesla among them.

But Tesla has this week announced a few lay-offs – not perhaps as dramatic as some have observed – laying off 10% of salaried posts without touching production staff at all – this purely looks like house cleaning before a difficult year ahead, rather than anything else, but much Tesla bashing was done on the announcement. It comes down to Elon Musk seeing a difficult time ahead for the US economy as a whole.

Passenger car sales to May have plummeted yet again in 2022, down 25.8% in the US, and perhaps even Tesla is beginning to think there is going to be a major market stall. Anyway Musk spooked the market by announcing layoffs, so it would be natural for Farley to poke fun at him, but that happened after Farley’s talk.

Farley made the point that not enough EV makers are fully investing in

embedded software and electric architectures, which he feels is at the heart of the transition – not motors and gearboxes – but gateway modules, and software which controls the vehicle.

Different categories, different outcomes said Farley – the move to EV accelerates consolidation, and those who do not have the confidence of the market, so that in turn they can have easy access to raising capital, will have to look to cut corners by looking for partnerships or some other route.

He says software is key and likened the Internal Combustion Engine (ICE) vehicles today to the phones before they had apps – suggesting that what he calls ADAS (Advanced driver assistance systems) will form the basis of a whole new charging system and business model. He has seen Tesla charging for Full Self Driving and feels anyone not ready to make that step soon, will be left behind, because it is something that “customers are really willing to pay a lot of money for.” We have heard the same from the GM leadership – and panned it as overly optimistic.

He makes the point, “If we can get people to fall asleep in their car, give them 45 minutes back on their commute, they can go to work 45 minutes later, they can go home 45 minutes earlier,” that would be worth tens of thousands of dollars. Clearly he sees Ford as just like Apple, on the verge of launching the App Store.

And it is true, some people today take language lessons, order food, bank, and buy clothes on their phone – Farley feels that people will soon do all of that from the safety of their car.

He also pre-announced a product from Ford for the likes of Lyft and Uber, reminding us that “no one has ever built a product for them,” or shaped their cars for them, especially with self-driving. But we have to remember, it is Tesla, not Ford which has said it will deliver self-driving next year, after initially saying this year.

And what about people who have mobility problems today “Older people, single moms who’re working for their kids, disabled people. There will be more people to move, a lot more, where they do not have to own a car,” and he predicted a shift to “a per-mile business model.” Not the first and he won’t be the last – can everyone take advantage of ridesharing?

He reminded us that Ford Pro already has success here with fleet services – where they distribute commercial vehicles and make all their money on services like integrated system telematics, fleet management, energy management, charging for EVs, prognostics and predictive failure, for the plumber, the electrician, the police and for ambulance fleets.

But Farley is not planning to make the same mistakes that car-makers made when they tried to control navigation and entertainment – “I told my team stop writing navigation systems and buying maps, let’s just go to Google or Apple and make it easy for customers.”

But the main theme of his speech was to highlight the huge price war on the way to launching $25,000 vehicles – so the build materials will be just $18,000 and that’s already happening in China, and of course he cited the ever popular Wuling $8,000 van (see pic below).

The answer will not be the lowest build material it will be the lowest cost of ownership, he said.

If EVs go through a different distribution model they lose $2,000 per unit on distribution, some of which is inventory sitting around in dealerships; advertising makes up $500 to $600 on the price; and the price shift from NCM battery cells to LFP will cut perhaps another $2,000 by cutting nickel and cobalt out of the mix.

The biggest design change is manufacturing to simplify the labor content, by cutting the fixtures, the number of manufacturing workstations, and the number of welds and fasteners. That will cut another $2,000 off the costs.

And the company that can do all of this, will also need to be able to track those costs through their supply chain and be sure each car will make a profit, before any cars are built (which he was sure Ford could do, but not so sure of everyone else).

If you do all this and can then charge more and more for software at multiple times through the lifetime of the vehicle, the total cost of ownership comes way down.

And the key to driving down the cost of sale is to have more than 10% go out to buy a new car with your brand on their lips, because they bought one last time and they felt looked after. But not a word was said about what this might cost.

On first-generation products US car makers need to get into positive margins and on 2nd gen products they need to discover A+ margins, and that’s the generation of vehicles that Ford has planned four years from now – in 2026 and he added, “We’ve already found $2,000 of cost that can go out of the Mach-E and it was only recently launched,” and then the discussion about advertising. The Mach-E sold out for two years as soon as it launched, but Ford was still advertising it – that has simply got to stop and the thorny question of how do you go to market with similar costs to Tesla without losing your dealership advocates? It was not something he went into in detail.

But he had his message across, “We can make these EVs and in next generation designs, we can make them for more profit than we do in ICE cars.” Well we’ll see because at Rethink Energy we agree with a lot of this, the price war especially, but see US manufacturers losing home and global market share every year in the next five until they are forced to consolidate, before Chinese brands open the doors for global export.