Ford’s plan for EV profitability by 2026

Ford Motor announced Thursday that its electric vehicle unit, called the Ford Model e, will lose $2.1 billion in 2022 – and could lose as much as $3 billion in 2023.

But the company is also predicting a drastic turnaround, stating that it expects its EV business to be strongly profitable by the end of 2026. So how can that be achieved?

The car’s answer began with a single slide presented during a “teach-in” for analysts and investors in New York on Thursday.

As the figure shows, on an earnings before interest and tax (EBIT) basis, Ford Model e has a profit margin of approximately negative 40% in 2022. Ford is targeting a positive EBIT margin of 8% for the unit by the end of 2026. .

“We have seen green shoots of improvement in the profitability of the Model e,” Ford CFO John Lawler said on Friday during the investor event. “From a contribution margin perspective, we expect Model e to approach breakeven by the end of this year, and, by 2024, we believe our first generation product can be EBIT margin positive.”

But the overall Model e won’t be profitable for some time, Lawler said, because of the huge investments Ford will make to expand production and launch new EV models. Here, step by step, is how Lawler says Ford expects the Model e to achieve an 8% EBIT margin in under four years:

• The scale. Simply put, building more EVs and allowing the supply chain to mature will yield greater economies of scale. Ford expects to have the capacity to build EVs at a rate of 2 million per year by the end of 2026. This will only provide about 20 points of margin improvement, according to Ford’s projections.
• Design and Engineering. Lawler said Ford is “talking about an energy-efficient design because it will allow us to significantly reduce the size and cost of the battery.” They say the design will lead to “supreme manufacturing simplicity and a platform that maximizes commonality and reusability,” which will result in an additional 15 points of margin improvement.
• Battery. While costs have come down, batteries are still the most expensive part of an EV, especially if automakers buy from third-party manufacturers, like Ford. To make matters worse (or at least more expensive), Ford’s EVs so far use relatively expensive lithium-ion cells, rather than the cheaper lithium iron phosphate (LFP) cells used by Tesla on the lower model. Ford’s plan to reduce these costs focuses more on the production of battery cells in-house, either directly or through joint ventures with battery manufacturers. In addition, it will start offering LFP as a low-cost option in some EVs – starting later this year with cells purchased from the Chinese battery giant CATL, and from a new Michigan plant that will come online in 2026. As such efforts. size up, Ford expects to gain another 10 points improvement margin.
• Apart. Ford also expects to find additional revenue by selling software and services (such as the BlueCruise driver assistance system) to EV owners, through benefits in the Inflation Reduction Act, through improvements in raw material costs, and with other tweaks here and there. But the price – specifically, the need to stay competitive with the rapidly growing EV competition – may offset all of that. Ford thinks that the result will be about 3 points of margin gain, just enough to bring it to the positive target of 8% by the end of 2026 – if everything goes according to plan.

Not all of these profits take years. Lawler said Ford thinks it can still lower the cost of making the current first-generation EVs — the Mustang Mach-E crossover, the F-150 Lightning pickup and the E-Transit van — by incorporating the lessons learned when designing the second generation. model, which will be launched in the next few years.

Despite the details provided by Ford on Thursday, some Wall Street analysts still doubt that Ford can achieve an 8% EBIT margin on EVs by 2026.

“We believe investors will remain skeptical of the path to appropriate margins, particularly amid inflationary pressures and falling prices,” Barclays’ Dan Levy said in a note after the event.

Wells Fargo analyst Colin Langan shared similar thoughts in an investor note Thursday morning: “It’s unclear how Ford expects to meet its 8% 2026 target for the Model e” as long as sales expectations remain the same.

Part of the near-term help could come from the Inflation Reduction Act, which provides corporate-level credits for making batteries and vehicles in North America, as Ford plans to do with EVs sold here. But as Deutsche Bank analyst Emmanuel Rosner pointed out on Thursday, Ford’s 8% margin target was announced “before the IRA.” That means any benefit realized from the legislation must be in addition to that purpose, he said in an investor note while Ford presentation.

Rosner, ahead of Thursday’s event, called the 8% margin target “particularly optimistic” when compared to crosstown rivals. General Motorswhich is only targeting mid-single digit margins in its EV business by 2026, excluding IRA benefits.

Lawler said the company will provide more details on the Model e’s path to profitability during Ford’s annual capital markets day on May 22.

“We are laser-focused on building an industry-leading portfolio of highly differentiated EVs that inspire our customers and play to Ford’s strengths in pickup trucks, vans and SUVs,” said Lawler.