Ford's plans to make EVs profitable within four years

On Thursday, Ford Motor revealed that its Ford Model e electric vehicle division lost $2.1 billion in 2022 and could lose as much as $3 billion in 2023.

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The company, however, also foresaw a dramatic reversal, repeating that it anticipates its EV business to be firmly profitable by the end of 2026. How does it intend to accomplish that?

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During a Thursday "teach-in" for analysts and investors in New York, the automaker's response was introduced on a single slide.

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According to the graphic, the Ford Model e's profit margin in 2022 was approximate - 40% on earnings before interest and tax (EBIT) basis. By the end of 2026, Ford wants the division to have a positive EBIT margin of 8%.

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Ford CFO John Lawler remarked during the investor event on Thursday that "we're already seeing green shoots of the improvements in the profitability of Model e." "From a contribution margin viewpoint, we anticipate Model e to reach breakeven at the end of this year, and we believe our first-generation products can be EBIT margin positive in 2024," the company said.

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However, due to the significant investments, Ford would need to scale up production and introduce additional new EV variants, Lawler predicted that the Model e as a whole won't be profitable for some time. According to Lawler, Ford anticipates that the Model e will reach a positive 8% EBIT profit margin in less than four years by taking the following steps:

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• Scale. Simply put, more economies of scale will result from producing more electric vehicles and allowing the supply chain to develop. By the end of 2026, Ford anticipates having the capacity to produce 2 million electric vehicles annually. Ford estimates that alone will result in a margin improvement of about 20 points.

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• Engineering design. Energy-efficient designs, according to Lawler, would enable Ford to dramatically cut battery size and cost and will result in "ultra-high manufacturing simplicity and platforms that maximize commonality and reuse," which will result in an additional 15 points of margin increase.

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• Battery. Even if prices have decreased, batteries are still the most expensive component of an EV, particularly if the car manufacturer purchases them from outside suppliers, as Ford has done. Ford's EVs now use rather expensive lithium-ion cells, rather than the less expensive lithium iron phosphate (LFP) cells used by Tesla in its less expensive models, which only serves to make things worse (or at least more expensive). Ford's strategy to further reduce those costs focuses on bringing the production of battery cells in-house, either directly or through partnerships with battery manufacturers. In addition, starting later this year with cells purchased from Chinese battery giant CATL, it will shortly start providing LFP as a less expensive alternative on certain of its EVs, and from a new facility in Michigan that will start operating in 2026. Ford anticipates gaining another 10 points of margin improvement once those initiatives are scaled up.

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• Other. Ford also anticipates making small advantages by offering software and services to EV owners, as well as through benefits from the Inflation Reduction Act, decreases in the price of raw materials, and other minor adjustments. But, pricing, notably the necessity to maintain competition with a rapidly expanding number of EV rivals, may somewhat negate all of that. If all goes according to plan, Ford anticipates an increase in the margin of around 3 points, just enough to reach the desired positive 8% by the end of 2026.

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The realization of some of those margin advantages won't take years. Ford, according to Lawler, believes it can still cut the cost of producing its first-generation EVs, which include the Mustang Mach-E crossover, F-150 Lightning pickup, and E-Transit van, by applying the lessons it learns as it develops its second-generation models, which are scheduled to go on sale in the coming years.

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Ford gave a lot of information on Thursday, but some Wall Street analysts are still doubtful that Ford would be able to attain an 8% EBIT margin on EVs by 2026.

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Following the event, Dan Levy of Barclays wrote in a note, "We believe investors are likely to remain dubious on the route to adequate margins, especially with inflationary headwinds and pricing decreases."

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Similar opinions were expressed in an investment note published by Wells Fargo analyst Colin Langan on Thursday morning: "It's unclear how Ford expects to get to its 8% 2026 goal margin for Model e" as long as sales projections stay the same."

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The Inflation Reduction Act, which offers business-level incentives for producing batteries and vehicles in North America, as Ford wants to do with the EVs it sells here, may contribute to some of that short-term assistance. Nevertheless, Ford's 8% margin target was published "long before IRA," as Deutsche Bank analyst Emmanuel Rosner noted on Thursday, so any benefit from the legislation should be in addition to that target, he said in an investor note during Ford's presentation.

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When compared to crosstown rival General Motors, which is only aiming for low- to mid-single digit margins on its EV business by 2026, discounting any IRA benefits, Rosner dubbed the 8% margin target "particularly optimistic" prior to Thursday's presentation.

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At Ford's annual capital markets day on May 22, further information about the Model e's route to profitability will be disclosed, according to Lawler.

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To play to Ford's strengths in pickup trucks, vans, and SUVs, Lawler added, "We are laser-focused on producing an industry-leading portfolio of highly unique EVs that inspire our customers."