Ford Motor’s Transition To BEVs Gets A Showing At Chicago Auto Show (NYSE:F)

The Chicago Auto Show, an annual rite of early February for the upper Midwest, opens to the public on Saturday. Visitors will have a chance to see and touch many of the new models, colors and variants available at dealerships, though fewer than in past years due to the pandemic and to automakers’ declining interest in the large, costly investments for such extravaganzas.

This year, new battery-electric vehicles (BEVs) will be in the spotlight. Indoor tracks at Chicago’s McCormick exhibition hall will host short “driving experiences,” rides behind protected cement barriers to minimize the chance of accidents. Ford Motor Company (NYSE:F) will offer rides in its F150 Lightning pickup truck, a key model the automaker hopes will one day provide prodigious profit like its current F150 gasoline-powered pickup, the company’s mainstay.

In January, a jury of journalists overwhelmingly chose Ford’s new electric truck the North American Truck Of The Year.

Budding popularity

Ford sold 146,356 new vehicles in the U.S. last month. Of those sales, the large majority – 133,293, or 91% – came from internal combustion vehicles, sales of which were up 2.2%. Gas-electric hybrids accounted for 7,816 sales, a 26.3% drop from the same period last year. BEV sales from Ford’s Mustang Mach-E, F-150 Lightning and E-Transit totaled 5,247 units – up 104% from a year ago.

A big question mark for Ford, General Motors Co. (GM), Toyota Motor Corp. (TM) and other global automakers is how quickly mainstream consumers in the U.S. – the world’s most profitable automotive market – will choose BEVs over conventional models and gas-electric hybrids. Ford and GM are betting big, with huge investments that the transition to BEVs will be rapid over the next decade.

Toyota is taking a more measured and incremental approach to BEVs, introducing them more slowly in response to consumer demand rather than by stimulating demand with the introduction of many new models. Critics have urged Toyota to speed up its commitment to BEVs; the automaker remains unmoved, arguing that in light of shortages for the manufacture of batteries, a variety of powertrain options will reduce carbon emissions more effectively.

Ford already has introduced the Mustang Mach-E, an e-Transit commercial van and the F150 Lightning. GM BEVs include two versions of the Chevrolet Bolt, Cadillac Lyriq, GMC Hummer EV. Toyota is selling its bZ4X in small number in the U.S. and soon will add a Lexus version, RZ, which was on display in Chicago.

Investors should not underestimate the difficulty and magnitude of what Ford and GM are undertaking – especially Ford, which has long struggled to optimize its industrial systems to produce vehicles with world-class quality and efficiency. Now Ford also is uprooting its basic expertise in internal combustion models so as to bring BEVs on line. The strain on the organization is showing.

Strained financials

Last week, Ford’s fourth-quarter earnings missed analyst estimates by a wide margin, with CEO Jim Farley declaring that “to say I’m frustrated is an understatement.” The company must improve quality and lower costs, Farley said. It’s not the first time Farley has been directly and openly critical of Ford’s basic systems for designing, manufacturing and selling vehicles. He’s no longer new on the job, having served as CEO for two and a half years and as a senior executive since 2007, when he left Toyota.

“We have to change our cost profile,” Farley told CNBC after a call with analysts to discuss the quarter’s results. “We know what we have to go after. I’d love to give you all the metrics and all the specific gaps we see. But you know, whether it’s absenteeism, the number of sequencing centers, the number of wiring harnesses we have, we know what it is.”

As if to ratify Farley’s comments, JD Power issued its latest vehicle dependability study on Thursday. Toyota’s Lexus brand topped the list with 133 problems per 100 vehicles, while Ford and Ford’s Lincoln brand were near the bottom with 249 and 259 problems per 100 vehicles respectively.

A number of Ford models have fared poorly in reliability surveys conducted by Consumer Reports. Farley has recently stated that raising the quality of the company’s vehicles is his top priority, though he believes achieving the goal will take “several years.”

Fresh blood

Toyota early this month announced a changing of the guard, with family scion and CEO Akio Toyoda scheduled to become chairman on April 1, replacing the retiring Takeshi Uchiyamada. Koji Sato, who is in charge of Lexus, will take over as CEO. The automaker has tamped down speculation that the change of top executive might be accompanied by an acceleration of its BEV output, more in line with what some regulators and environmental activists have been urging.

The Japanese automaker’s headline news event at Chicago was the introduction of its Grand Highlander, a variant of Toyota’s popular midsize SUV assembled in Princeton, Indiana. Like its slightly smaller cousin, the Grand Highlander has no BEV version. Instead, Grand Highlander available with three powertrains: a conventional 2.4-liter turbo gas engine; a 2.5-liter gas-electric hybrid and a performance-oriented Hybrid Max gas-electric.

Toyota engineers added six inches of length to the existing Highlander to increase room for the Grand Highlander’s third row, making it comfortable for two adults. The Grand Highlander will be competitive with such models as the Hyundai Palisade, Jeep Grand Cherokee, Honda Pilot, and Ford Explorer.

A Lexus luxury version of the new model, to be called TX and manufactured in the same factory, will debut within the next year. In my opinion, models like the Grand Highlander and the TX will help Toyota within a few years to supplant GM as the top automaker in the U.S. in terms of market share.

If the exhibition in Chicago is a glimpse of the future – which I believe is a strong possibility – investors may consider hanging on to Ford shares but waiting to add to their stake. Ford’s Farley is leading a tremendously ambitious effort to fix endemic quality and efficiency problems in the company’s basic manufacturing systems – while simultaneously moving into a new world of BEVs.

The evidence of success will show quarter by quarter as Ford’s basic measures of performances: revenue, earnings, market share, profitability and so forth. Continued misses from analyst forecasts, which are based on what Ford has been promising, will weigh heavily on the stock. Ford remains a HOLD in my opinion.

As for Toyota Motor Corporation, I stand by my recommendation that TM is a BUY, the top global automaker in terms of investment potential. Toyota shares are well below their peak of January 2022, which provides an attractive entry point. Toyota Motor Corporation is steady, keeps growing, and pays a reasonable 2.74% dividend yield at its current share price.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.