Electric vehicle batteries are in short supply, and the cost of materials like nickel and cobalt is skyrocketing. However heritage car manufacturer Ford Motor says it plans to profitably build millions of electric cars a year in just four years.
This week, the Detroit automaker gave investors a little more clarity on how it plans to achieve that goal and transform its business based on gas-guzzling cars.
As electric vehicles form a growing part of the global auto market, Ford announced in March that it would restructure its business and separate its internal combustion engine and electric vehicle efforts. It said it plans to build more than 2 million electric vehicles a year by 2026, about a third of its total global output, while increasing its operating profit margin.
Wall Street analysts were generally positive about the plan, but some expressed skepticism about how the company plans to overcome the market’s supply problems. Adam Jonas, head of Morgan Stanley, called it a stretch goal and said he had no faith in Ford’s ability to acquire enough raw materials and tooling to produce batteries to even come close to that projection.
Ford addressed some of those issues in another presentation on July 21, when it told investors it has secured enough batteries to reach its near-term goal of 600,000 electric cars a year by the end of 2023. has secured around 70% of what it needs to reach its 2026 target.
Ford promised to share more about how it plans to achieve its goals during its annual Capital Markets Day next year. But during last week’s second-quarter earnings call, CEO Jim Farley dropped a few more hints about the automaker’s strategy.
The ability to simplify
Instead of simply swapping out internal combustion engines for batteries and electric motors, Farley has said the company is completely rethinking how it develops its vehicles and how it keeps them fresh over time.
The company sees a new era where it can update its electric vehicles with updates to software, batteries and electric motors. Tesla does. This means that the vehicle’s most expensive parts—the sheet metal body panels and underpinnings that make up its overall proportions—don’t need to be replaced as often.
“We have an opportunity to go digital with these electric vehicles to simplify our body building and put engineers where the customers really care,” Farley said last week. “And this is no different fender. It’s software. This is digital display technology. It is a self-driving system and [autonomous vehicle] technique. And of course it’s a more powerful engine in some cases.”
Ford typically redesigns its traditional vehicle models every five to seven years. If it can extend that time by relying on software updates to keep its vehicles fresh, rather than body redesigns, it could save fortunes.
This is part of how Ford hopes to increase its operating margin to 10% by 2026. In the second quarter, the company’s adjusted operating margin was 9.3%. Those results were helped by a tight inventory of new vehicles, which has allowed Ford to raise prices.
Fitting dealers for the future
Ford is at a disadvantage to companies like Tesla and EV startups that sell directly to consumers without intermediaries acting as middlemen.
The company has no plans to eliminate its franchise dealers, who have strong legal protections in many US states that effectively prohibit Ford from selling directly to its customers, as Tesla does. But Farley said Ford sees a way to reduce that disadvantageous cost — which he estimates is about $2,000 per vehicle — by keeping dealer inventories very low and changing the way Ford markets its products.
One key to that effort: Ford plans to let customers order its electric vehicles online instead of buying a vehicle from a dealer’s warehouse.
Farley estimates that dealers only have a few new vehicles, just enough to give customers test drives before they order. Customers can order from a dealership or online “in their own bunny’s shoes,” Farley said, with the dealer delivering and providing after-sales service.
Farley estimates that small dealer inventories and online ordering make up about $1,200 to $1,300 of that $2,000 per vehicle shortfall, while keeping Ford dealers profitable. The plan frees dealers from carrying expensive inventory, allowing them — at least in theory — to focus more on service and customer education. That could give Ford an advantage that direct-selling electric vehicle manufacturers can’t easily match.
“I think it’s a different play than pure EV companies,” Farley said.