It’s difficult to believe it’s been about 16 years since the Great Recession that nearly brought the automotive industry to its knees. It was a massive wake-up call, and executives at Ford Motor Company (NYSE: F) and General Motors (NYSE: GM) drastically adjusted their organizations and strategies from top to bottom.
While Ford was lauded for how it funded its way through the rough times, and the company has done so much correctly over the years, it could be about to make the same mistake that got it into trouble years ago.
More affordable, less desirable
Over the past few years, Ford did something that was considered controversial when it phased out all passenger cars other than the Mustang in North America, its primary profit engine. The idea was simple: Trucks and SUVs only cost marginally more to produce than passenger cars and can sell for two or three times as much.
You don’t have to be a finance major to figure out that math, and neither did Ford. The margins on SUVs and trucks keep the lights on and the profits rolling. So, here’s the rub: At a time when the automotive industry is in overdrive on transitioning to electric vehicles (EVs), Ford is refocusing on delivering a low-cost and highly affordable EV platform with a price target of $25,000.
The problem is that bigger vehicles require larger batteries, which are generally the highest-cost component of the vehicle. For now, that means some of those delicious margins are deteriorating — and amid a race to more affordable EVs to attract a mainstream consumer, Ford’s Model-e division is drowning and is projected to lose as much as $5.5 billion in 2024 alone.
As Ford reverses its vehicle strategy — at least as far as EVs go — not only will it cost a pretty penny to adjust, it could be a repeat of all those years ago when the company failed to generate profits on passenger cars.
What’s Ford doing?
Ford announced this week that it’s canceling plans for three-row electric crossovers entirely, and delaying its full-size electric pickup by 18 months as it pulls back on billions in EV spending to help curb losses. It’s a move that could cost up to $1.9 billion, including a $400 million noncash charge. EVs will now account for 30% of Ford’s capital expenditure, down from a planned 40%.
Ford finds itself between a rock and a hard place. It could ignore EVs until costs come down and be ostracized for arrogance and a lack of vision for the future — similar to when foreign automakers introduced more fuel-efficient vehicles into the U.S. market. Or, the company can suffer losses with EVs with an eye on the future, and subsidize EV development with its traditional lineup of gasoline-powered SUVs and trucks.
The iconic Detroit automaker has chosen the latter, but the risk for investors is that the longtime gravy train of juicy SUV and truck margins will never be the same once the transition to EVs gains massive traction. That’s a major problem for a company that in recent years has produced record profits and gained zero traction with a lagging stock price.
What’s an investor to do?
For Ford, delaying some of its EV projects, and replacing EVs with its massively popular and lucrative Super Duty trucks at its Canada plant, is the right move. But for investors, it’s imperative for the automaker to prove a checklist of things before it can be considered a long-term holding.
Ford must prove it can curb losses from the profit black hole that its EV division currently is. It also must prove it can develop a low-cost EV platform and make money on the vehicles — or get close to breakeven, as EVs at that price point may always be a money loser. Then it must prove the juicy margins on SUVs and trucks can exist as battery costs are reduced. And then, perhaps most importantly, it must prove it can take those low-cost EV customers and step them into the more profitable vehicles.
As the world transitions to EVs, it’s clear the company can’t operate the way it did recently when it phased out nearly all passenger cars. But if it can’t generate profits on those affordable EVs, it could be déjà vu all over again. Investors would be wise to keep track of those boxes Ford needs to check before buying shares for the long haul. Ford’s entire investing thesis is changing.
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Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
Déjà Vu: Is Ford Repeating One of Its Biggest Mistakes? was originally published by The Motley Fool
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