Will your franchise win in the NEV wars? Part 6: Ford

This entry is part 6 of 9 in the series New Energy Vehicles
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This post is the sixth of a series reviewing the financial resilience of seven major auto makers and their ability to make profits during the transition from conventional to electric vehicles. The auto-makers reviewed are Daimler, BMW, Volkswagen, PSA, Ford, General Motors and Toyota. The first post asked where they might get the money to fund the transition to new energy vehicles (NEV’s). The second gave the financial results for each firm under three scenarios based on the speed of adoption of NEV’s: SLOW, MODERATE an FAST. The rest of the posts look at the outlook for each firm individually taking into account its publicly stated strategy for the transition. This post assesses Ford Motor Company.

Click on images or tables to enlarge.

Ford’s new research centre at Palo Alto, Silicon Valley.

Ford ranked #7, bottom in the Financial Forecasts and ranked #7 in financial resilience. Its poor performance results from a high operating leverage and a declining operating profit margin in recent years. It configured its cost structure around being a successful high volume producer. As a result it has a high break-even volume so, once above that level it makes profits very quickly. Unfortunately it is producing very close to the break even point and is still making money slowly. It’s not all the fault of Ford. To begin with, it’s China business has been adversely affected by the US-China trade spat of recent years. CEO Jim Hackett said in 2018 that tariffs on metals cost Ford $1 billion in profits. Another issue is that its European business is only marginally profitable, and has been marginal for some years. The key reasons are: first, its reliance on small, marginally profitable cars like the Fiesta and Focus. These will become even less saleable from 2020 as new EU emissions catalytic converter requirements push up their cost and reduce their affordability; second, the FX Rate US$/Euro €.  But the reduction in their China sales has been the main cause recently. Between 2016 and 2018 sales in China fell by 700,000 units, from 1.27MN   to 0.57MN. This brought the company much closer to its break-even point. As a result, starting from its 2018 position, our model forecasts break-even in the SLOW scenario and small cumulative profits in the other two – MODERATE and FAST

However, Ford has undoubted financial strengths.  Although it ranked #7 in financial resilience, Ford achieved the highest score in Cash Flow. Ford scored below average in all other categories. Liquidity & Debt were impaired by Ford’s improving, but still high leverage. Profitability scored poorly on volatile operating profits coupled with a falling global market share. It reflects the fact that Ford’s relatively high fixed costs – compared to their peers – make them vulnerable to market swings. Operating Efficiency was impacted by Ford’s limited ability to manage  debtors (payables) and, consequently, additional cash being required to finance working capital. Are shareholders on side? Long term investors should be. The share price is back to its pre-crash levels, though some may regret that they didn’t lock in their profits back in 2013 and 2014. Will they stump up more cash? That remains unlikely while the return on invested capital stays between 3% – 4%, and the cost of debt is above 6%.

What is Ford Motor Co.’s NEV Strategy?

With a new CEO in place in 2018, Jim Hackett’s strategy for $3BN in cost reduction while investing $11BN in new vehicles is still emerging. But it will be very different from his predecessor, Alan Mullally, widely praised for steering the firm through the financial crisis. Mr. Mullally’s vision was for Ford to build a full range of vehicles: sedan cars, cross-overs, SUV’s and Trucks. Mr. Hackett told the industry in 2018 that he plans to cease making sedan cars, as they’re unprofitable in the US. At least, Ford’s conventional ICE versions are. In 2018 he announced an $11BN investment spend on NEV development, more than double Mullally’s commitment of $4.5BN, and aims to produce 16 BEVs and 24PHEV’s by 2022. As the announcement led to a 7% fall in the share price, Mr. Hackett probably has no plans to tap shareholders for the money. Instead, cost reduction is expected to fund the transition. In 2019, 10% of Ford’s global white-collar staff were made redundant, saving $600MN a year. Axing the passenger car line-up is expected to generate $10BN in material cost savings by 2023 through slashing models and variants. For example, the number of buying combinations for a Ford Escape will fall from 35,000 to 96. Further deepening the ‘One Ford’ strategy of reducing vehicle platforms is expected to slim down design and engineering operations leading to a further $4BN in savings over the same period. ‘One Ford’ reduced the platforms in build from 35 to 9. Mr. Hackett’s plans will reduce them to 5. The commitment to both conventional and autonomous commercial vans and pick-ups was cemented in a partnering agreement with VW in early 2019.

But, does James Hackett’s plan truly add up to a strategy for transition to NEV’s or just to greater overall profitability? I suspect the latter, but that it’s a necessary first step given Ford’s decline in sales, share price and profitability. The strategic questions of what type of cars Ford wants to be selling in which markets are not yet clear. Mr. Hackett will be painfully aware that Ford has missed strategic opportunities before. It failed to enter the China market quickly enough. VW arrived in 1978. GM in 1999. Ford in 2003. By 2012, VW had a market share of 18.2%, GM reached 14.8% while Ford reached 3.6%. Ford’s late market entry forced it to recruit less-well financed dealers in Tier 3 cities. The early entrants had the main sites with the biggest dealers in the Tier 1 and 2 cities. Its recent sales losses in China may be due as much to improving domestically-built Chines brand cars as to Ford’s dated model line-up. To regain its global position, Ford must decide soon how to produce a compelling range of products for three major markets, two of which, Europe and China, are moving in a separate direction and at a separate pace than the third, the US.

Can Ford Win The NEV Wars?

Driving into 2025 2018 Report J P Morgan

There are four ‘must-have’ elements for a conventional auto-maker who want a central role with new energy vehicles: First, the senior management must be committed and aligned with the strategy. Second, they need the money to fund the technology and the transition. Third, the OEM requires control of battery and fuel cell production and technology. Otherwise, much of the potential profit is in the hands of the cell or battery supplier.  Finally, a dedicated NEV platform is required. It costs more but, without it, the vehicles produced are, at best,  an acceptable compromise. For a manufacturer aiming at the mass-market, such as Ford, two additional factors are critical: the know-how to build low cost vehicles and access to a volume NEV market.

There’s little doubt that Ford will be able to fund the transition to NEV’s using their internal cost cutting programme but that begs the questions, where will they sell them and what will they sell? Clearly, China is in their sights. Ford has a two decades-old joint venture, Chang’an Automobile Ford, producing non-premium passenger vehicles, in which it has a 50% equity investment. It also has two similar joint ventures, Jiangling Motors Group (JMC),a Chinese State Owned Enterprise (SOE), and CFME, which produce trucks and commercial vehicles, and engines, respectively. Ford has a 32% equity investment in JMC and a 25% equity investment in CFME. However, in 2017 Zotye Ford Automobile Co., Ltd., a new 50:50 joint venture was established that will offer a range of affordable all-electric vehicles for consumers in China under a new indigenous brand by 2023. Ford has not issued any volume aspirations for this new venture apart from,”The all-electric vehicles produced by the JV will be sold under a new Chinese brand designed to meet Chinese consumers’ aspirations for electric vehicles”. So why add another JV? Perhaps their existing relationships truly were breaking down under the pressure of mounting sales losses, as reported by Reuters in 2018. Ford have not made it clear whether they  only intend to switch existing sales to electric or grow dramatically. In any event, China accounted for under 600,000 units for Ford in 2018. But, if not China, its hard to believe Ford can take a significant share of the US NEV market. In 2018 361,000 NEV’s were sold in the US. Tesla sold 190,000 or 52% of the market. Ford only had one vehicle in the Top 12, the Ford Fusion, selling 8,074 units. Of course, Ford has a substantial – if marginally profitable – European business, which gives it two forms of flexibility. If Ford is able to develop successful EV’s, they have the potential to be successful in Europe; If not, Europe may provide a home for its ICE powered vehicles. These are options no longer open to its historic rival, GM.

Skateboard Platform by Rivian Technology to be used by Ford Motor Co.

While Ford has a 115 year history of building conventional low cost vehicles, they still appear lukewarm about NEV’s. Admittedly, in 2018, Ford tied up with Volvo and Baidu to test Autonomous Vehicles and in 2019 they put $500MN into Rivian, an electric pick-up start-up  and an undisclosed amount into a battery start-up, Solid Power, following investments by BMW and Hyundai, but these relatively tentative investments suggest senior management is not ready to embrace NEV’s just yet.

Of course, Ford need an EV platform…and don’t have one of their own yet. However,Rivian have confirmed that they will sell a version of their ‘skateboard’ pick up platform to Ford and VW has agreed to sell them versions of its scaleable MEB toolkit platform

VW NEV Chassis based on MEB Toolkit

So, while Ford could make the transition to NEV’s, if they needed to, there’s no evidence that they will be a leader in the race. The strategic dilemma they face – and their US counterpart, GM, is the absence of a clear timetable for a market for NEV’s in the US. The consequence is that they are deprived of a predictable domestic EV market in which they can achieve scale economies. Instead they must compete in the most dynamic and competitive EV market available, China, or Europe, where Ford is loss-making with conventional vehicles. If US auto-makers switch too early to NEV’s, they risk losing volume and profitability at home. If they switch too late, they risk losing volume to newcomers, such as Tesla, or exporters, such as VW or Toyota, whose products may be more competitive by the time Ford arrives.

 

 

 

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Series Navigation<< Will your franchise win in the NEV wars? Part 5: Volkswagen GroupWill your franchise win in the NEV wars? Part 7: General Motors >>
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