In Ford’s transition to EVs, cost-cutting takes center stage

Ford has made cost-cutting a key piece of its EV strategy as the company works to improve profit margins while meeting what CEO Jim Farley has called “incredible demand” of its new electric vehicle models.

During the company’s fourth-quarter and full-year earnings call on Thursday, Farley said Ford has set up a task force dedicated to lowering the bill of materials for its battery-electric vehicles (BEV) “above and beyond just the usual declines in material costs.”

“For example, on the Mustang Mach-E in just the last month, our team found $1,000 of opportunity per vehicle, and that’s deliberate through design simplification, vertical integration and leveraging our scale with supply chain as we ramp up production,” Farley said. “And that team is just getting started.”

Notably, Ford isn’t waiting for a second generation vehicle to make changes that will lead to cost reductions or better efficiency.

Through the process of producing Mach-E’s, Farley said the company has learned how to source profit opportunities by better integrating its engineering, supply chain and manufacturing segments. For example, Farley noted that the Mach-E’s cooling system has four motors when it probably only needs to have two; it has 60 or 70 hoses, when it can probably function well on a third of that.

“Those are the opportunities we’re going after and we are not going to wait for next year,” he said. “We’re not going to wait for a minor change. We are going to reengineer that vehicle now and then use that expertise for the Lightning and the E-Transit and of course, all our electric platforms.”

Ford CFO John Lawler noted that the company’s BEV margins need to improve.

“We have an opportunity but we need to do that through scaling them,” Lawler said. “We’re going to want to have a strong lineup where we can lean into it with key vehicles in high-volume segments like we are today with Mustang Mach-E and the Lightning, and in our commercial vehicles, with the E-Transit, we’re going to reduce complexity.”

The Ford F-150 Lightning truck and the E-Transit van are not yet out to market, although deliveries of the van are expected to begin later this month. For now, Ford’s BEV portfolio consists of one vehicle: the Mustang Mach-E. Sales of the crossover EV has accelerated since it came to market last year. In January alone, the Mach-E sold 2,370 units, as opposed to 238 in the same month the previous year.

Scaling operations is one obvious way to lower costs, but that can come with a lot of upfront investment.

Ford and battery manufacturer SK Innovation plan to spend $11.4 billion to build two campuses in Tennessee and Kentucky that will produce batteries as well as the next generation of electric F-Series trucks — a project the companies said will create 11,000 new jobs. Ford is contributing $7 billion to the project, the largest single manufacturing investment in its 118-year history. The investment is part of Ford’s previously announced plan to put $30 billion toward electric vehicles by 2025.

Ford is prioritizing bringing down costs in its internal combustion engine vehicle business, as well, which Farley distinguished as a separate business from the company’s blossoming EV business, despite having models like the Transit van that will span both fuel segments. This is an important distinction to make, as Ford’s profitability still mainly comes from its ICE models.

“On the ICE business, we’re gonna leverage the compute on the vehicles to really lower manufacturing costs and leverage that compute to simplify what we do coming down the line and bring that down to the bottom line of the vehicle,” said Lawler, noting that the company is also investigating ways to work with partners to lower distribution costs with manufacturers.

The stated goal behind continuing to invest in a healthy ICE business is to fuel the growth of a healthy BEV business, said Farley, noting that the future manufacturing of ICE vehicles has a main focus in optimizing cash returns that can then be injected back into the electrification of Ford.

Ford reported a net income $12.3 billion in the fourth quarter, a reversal from the $2.8 billion loss it reported in the period in 2020. Ford’s profit included $8.2 billion in gains from its investment in EV startup Rivian, which went public in November. Once the gains from its Rivian holdings were removed, the company had an adjusted profit of $2 billion in the fourth quarter. Revenue for the fourth quarter rose 5%, to $37.7 billion.

For the full year, Ford reported a net income of $17.9 billion, up from a $1.27 billion loss in 2020.

Ford shares are down 4.37% in after-hours trading because the company’s results did not meet analyst expectations.