A banner advertises the Ford Mustang Mach-E electric vehicle at a Ford dealership on August 21, 2024 in Glendale, California.
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DETROIT – Ford MotorIts profit engine for decades has been large trucks and SUVs in the US. So it may surprise investors that the automaker believes its new path to EV profitability will be driven first by smaller, more affordable vehicles.
The new plan is an “insurance policy” for the automaker to expand its increasingly popular hybrid models and create more affordable EVs that it believes will deliver a more capital-efficient and profitable EV business for the company. and investors, according to Marin Gjaja, Ford’s chief operating officer for the Model e EV unit.
“We’re pretty confident that the highest adoption rates for electric vehicles will be in the affordable segment at the lower end of the range,” he told CNBC on Thursday. “We have to play there to compete with the participants that are coming.”
These expected new entrants are largely Chinese automakers, such as Warren Buffett-backed BYD, that are growing rapidly from their home market in Europe and other countries.
Gjaja’s comments came a day after the automaker announced updates to its EV strategy that will cost up to $1.9 billion. This includes approximately $400 million in impairment of manufacturing assets, as well as additional expenses and cash expenditures of up to $1.5 billion.
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Ford’s new plans for North America include canceling a large, three-row electric SUV that was already in development, delaying production of the next-generation “T3” full-size electric truck by about 18 months to late 2027, and refocusing battery manufacturing and sourcing in the US
Instead of the three-row SUV or large pickup, the company’s first new EV is expected to be a commercial truck in 2026, followed by a midsize pickup next year and then the full-size T3 pickup.
Gjaja said the decision was not taken lightly, especially the cancellation of the upcoming three-series vehicle, which Ford CEO Jim Farley and other executives had been touting as a game changer for several years.
The commercial truck comes as Ford’s “Pro” commercial vehicle and fleet business, which includes Super Duty trucks and large trucks, has stood out for the company and offset billions of dollars in EV losses.
And the midsize pickup is slated to be the first vehicle from a specialty “skunkworks” team in California. The company commissioned the team two years ago to develop a new small EV platform.
“We believe that smaller, more affordable vehicles are the way to volume EVs. Why? Because the math is completely different from [internal combustion engine (ICE) vehicles]Farley told investors last month. “At ICE, a business we’ve been in for 120 years, the bigger the vehicle, the bigger the margin. But it’s just the opposite for EVs.”
Farley said the weight and cost of battery packs required for large vehicles, such as a three-row SUV, that many families buy for road trips, towing and hauling, are a limitation for EVs because of current range and charging networks.
Ford’s current electric vehicles — the Mustang Mach-E crossover, the F-150 Lightning and a commercial truck in the U.S. — aren’t profitable overall. Model e operations lost nearly $2.5 billion in the first half of this year and will lose $4.7 billion in 2023.
The losses, along with changing market conditions and business plans, forced Ford earlier this year to withdraw an ambitious 8% profit margin for its EV unit through 2026.
Investors and Wall Street analysts have been largely supportive of the EV changes, with the company’s shares most recently up about 2.3% since the announcement earlier this week, despite the expected costs.
“Overall, these changes will allow Ford to take advantage of growing demand for EVs while also focusing on areas where it has a key competitive advantage,” BofA’s John Murphy wrote Wednesday in an investment note. “Given the size of the charge, this is clearly a difficult decision in the short term, but we believe it makes sense in the medium to long term given the likely lower level of economy in the three-row CUV/SUV segment.”
More hybrids, fewer EVs
The updates are the latest for Ford’s electrification plans, which now include a heavy focus on hybrids and plug-in hybrid electric vehicles, or PHEVs, to help meet stricter fuel economy regulations in addition to fully electric vehicles.
Ford CFO John Lawler said Wednesday that the company’s future capital spending plans will shift from spending about 40 percent on all-electric vehicles to 30 percent. He didn’t give a timeline for the change, but it’s a huge swing from when the company announced it plans in 2021 to spend more than $30 billion on EVs by 2025.
Hybrid plans include offering such options across the entire North American lineup by 2030, including three-series SUVs, to help meet stricter emissions and fuel economy requirements. Lawler said that to improve profitability, Ford is also accelerating its production mix of batteries in the U.S. that will qualify for tax incentives and credits.
A Ford F-150 Lariat PowerBoost hybrid pickup is displayed for sale at a Ford dealership on August 21, 2024 in Glendale, California.
Mario Tama | Getty Images
The shift in Ford’s plans is consistent with the overall auto industry facing growing but slower-than-expected adoption of electric vehicles, as well as automakers failing to achieve expected profitability in vehicles.
“What we saw in ’21 and ’22 was a temporary spike in the market where demand for EVs really took off,” Gjaja told CNBC during an interview earlier this year. “It’s still growing, but not nearly as fast as we thought it might in ’21, ’22.”
There is also an industry-wide fear that Chinese automakers could flood markets with cheaper, more profitable EVs. Chinese automakers such as BYD are rapidly increasing vehicle exports to Europe and other countries.
Lawler on Wednesday pushed back against the idea that the Chinese have overtaken American automakers. He said Ford, in part, developed the skunkworks team to prove Ford could compete with Chinese automakers.
“As we’ve watched over the last 18 to 24 months, the emergence of incredible products and formidable competitors in China has really been, I think, the story for us,” Gjaja said. “And now, when we look at the competitive landscape, we have to go up against the most competitive companies in China.”
Ford vs. GM
Ford’s new designs are the polar opposite of its nearest rival, General Motors.
America’s largest automaker has pulled back on spending and delayed many of its electric vehicles, but it has several large all-electric vehicles for sale soon.
GM was among the first to go “all in” on EVs, including by creating a vertically integrated, proprietary electric vehicle platform and supporting technologies such as batteries and motors.
2025 Cadillac Escalade IQ
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Except TeslaGM was the first automaker to start making battery cells in the U.S. through a joint venture of scale, which the company continues to tout as a cost advantage
GM’s current lineup includes three all-electric large pickup trucks, a Hummer SUV, two recently released Chevrolet crossovers, a luxury Cadillac crossover and the $300,000 Celestiq car. Several more crossover models and an all-electric Escalade SUV are expected to join the lineup this year as well.
Just last month, GM reaffirmed expectations for its electric vehicles to be profitable on a production or contribution margin basis once it reaches production of 200,000 units by the fourth quarter.
A GM spokesman on Thursday said the automaker continues to “work to reach variable positive earnings in the fourth quarter.”
Gjaja declined to comment on GM’s goal or operations, but said Ford is doing what’s best for the company.
“We’re focusing on what we think are the right technologies to serve our customers that can also be affordable for them and profitable for us,” he said.