Pros And Cons Of Investing In Ford Stock (NYSE:F)

It is interesting to see how evaluating investment in legacy car makers is approached. Mostly the analysis involves traditional analysis of financial metrics like sales numbers, profit margin, and external factors like the economic situation and of course, the Russia/Ukraine crisis. All of these reflect a view that it is pretty much “business as usual” for investment in the car industry. When thinking about the car industry I can’t get past what confronts investors in plain sight: the end of manufacturing of the internal combustion engine (ICE) and the electrification of transport. When one uses this lens for investment, my take is that the core issue for investors to grapple with for legacy car makers is how they are approaching the transition. This perspective leads to less focus on typical sales metrics and more to dynamic change issues. Here I give some views about investment in Ford (NYSE:F) from this perspective.

Traditional metrics have meant falling share price after euphoria about Ford’s planned electrification

Ford CEO Jim Farley has garnered a lot of interest in his view that electrification is obvious and a must do. I’ve indicated in a recent article that how legacy auto CEOs vision and position their companies is going to be crucial to survival during the ICE to BEV transition. Jim Farley scores highly on this metric. Bill Zettler recently covered the Ford share price rise on BEV talk and execution concerning electrification, and recent fall back on reality check and also softness of recent car sales.

I think this area is well covered by other authors and refer investors to a number of recent Seeking Alpha articles concerning traditional issues concerning investment in Ford. For me this is of immediate interest and is relevant to how Ford manages near term issues, but it doesn’t have a huge relevance to longer term investment in Ford because it is all about a business (ICE manufacture) that is about to disappear.

So in this article I look at what Ford is doing about the transition. Ford’s approach to two areas gives some guidance.

1. Sharing the cost of core BEV infrastructure

When contemplating a major change in operations, one way to mitigate the costs is to partner with another player to share the cost of the shift. Ford has been exploring partnerships for some time and now two are becoming more concrete.

Ford manufacturing and battery partnership plans

For some time there have been rumours of a partnership between Ford and South Korean group SK On, which has strong expertise in BEV battery technology. Recently Ford announced a three way non-binding MOU with South Korean Group SK On and Turkish group Koc to form a JV to accelerate Ford’s electrification intentions in Europe, with particular focus on battery cell manufacture. The plan is to locate battery cell manufacture in Ankara, with Turkish Government support and to finalise the JV later this year.

The plan is to build major battery manufacturing capacity of 30-45 GWh in Turkey by ~2025. The JV will also strengthen Ford’s commercial electric vehicle services and distribution business in Europe. Ford’s E-Transit will be delivered in Europe within the next few months as the beginning of this electrification transition. While the JV is still being worked through, the goal is to continue Ford’s dominance of commercial vehicles in Europe (top selling commercial brand for the past 7 years) through this BEV push.

This proposed JV doesn’t come out of nowhere as Ford already has an electric vehicle JV (“BlueOval SK”) with SK Innovation (parent company of SK On) in the US. This partnership was entered into in Q3 2021 and involves $11.4 billion investment involving 11,000 new jobs in facilities in Tennessee and Kentucky. The Tennessee site (BlueOval City) involves Ford’s biggest and most advanced auto production complex in its 118-year history, while the Kentucky site (BlueOval SK Battery Park) involves twin battery parks to underpin Ford’s BEV plans in the US.

In the above announcement, Ford foreshadows the JV as the first of a number of other electrification and commercial vehicle partnerships to drive the transformation of the company in Europe.

Volkswagen/Ford partnership on MEB BEV platform

Ford and Volkswagen (OTCPK:VWAGY) first announced a partnership on BEV models built on Volkswagen’s MEB platform in 2019. There have been expansions of this partnership with another recent announcement that a second European model will be launched on the MEB platform. The plan is for Ford to release 1.2 million vehicles on the MEB platform over a 6-year period, which is double the initial intention. This represents Ford’s strategy to accelerate its BEV presence in Europe. The first Ford model will be an all-electric crossover to be launched in 2023 from the Ford Electrification Center in Cologne.

The collaboration with Volkswagen is all about profitability and speed for both companies. Thomas Schmall (Volkswagen Group Board of Management member) indicates that this kind of partnership is crucial for breakthrough of e-mobility in Europe. The Volkswagen MEB platform is flexible and allows a variety of BEV implementations. There are already 10 electric models from 5 brands using the platform. Perhaps the most exciting development for Volkswagen is the use of the MEB platform for the release of its iconic BEV version of the classic Kombi, the Volkswagen ID Buzz.

Ford’s big benefit is speed to market of a well priced, yet distinctive, Ford branded BEV.

2. Separating BEV from ICE business

Probably the biggest challenge a legacy ICE business has in approaching electrification is that the engine has been a major brand differentiator for car makers, and so there is a long tradition of excellence in the engine and drive technology. This can be a powerful drag on change because there is a big body of expertise in the company for technology that the company plans to exit. It is also an area where costs are high and future benefits essentially of no value. However, is it a cash cow to help fund the transition. Ford is no different from other legacy manufacturers in agonising about how to approach the change. For several months there has been speculation that Ford might spin out its BEV business to capture value that is not displayed in the Ford share price. In the end Ford chose not to separate the business, but instead to separate the business units within the overall company.

Ford restructures to separate BEV (Ford Model e) and ICE (Ford Blue) operations but no spinout

When it comes to business restructure, no matter how things gets changed, the big question is how to get best value from a new BEV business, while successfully exiting the ICE business. My impression is that Ford is being careful about how it approaches this gnarly question, and while success is not yet guaranteed, the approach make sense. The key point is making sure that a huge reservoir of ICE expertise doesn’t get in the way of the switch to electrification, and keeping the cash cow that is an ICE business as long as possible.

Earlier this month Ford announced the change with formation of Ford Model e, and Ford Blue as distinct businesses, with each in turn supporting Ford Pro. Ford Drive will continue the new digitally connected mobility business and Ford Credit will continue its financial products and services (customer experience and loyalty) role.

Each of these internal businesses has clear roles and strengthened staffing to support them. In brief the businesses have the following responsibilities:

Ford Model e

A bullet point summary for the Model e business is as follows:

• Best software, engineering, design and UX talent; perfect new technologies and concepts that can be applied across the Ford enterprise;

• Clean-sheet approach to designing, launching and scaling breakthrough, high-volume electric and connected products and services for retail, commercial and shared mobility;

• Develop the key technologies and capabilities – such as EV platforms, batteries, e-motors, inverters, charging and recycling – to create ground-up, breakthrough electric vehicles; and

• Create the software platforms and fully networked vehicle architecture to support delightful, always-on and ever-improving vehicles and experiences.

Part of the Ford Model e business is to emulate Tesla’s sales strategy of simplified BEV purchase approach (not involving dealerships?). A new role of Chief Customer Officer will be filled by Marin Gjaja in the key area of Model e go-to-market, customer experience and new business initiatives.

Ford Motor Company President and CEO Jim Farley will assume the additional role of President of Ford Model e, which emphasises the crucial role of this business in Ford’s future. Doug Field will lead Ford Model e’s product creation as Chief EV and Digital Systems Officer, plus an overall role in Ford’s software and embedded systems development. The overall philosophy of the Ford Model e business is a clean-sheet approach to BEV and software driven vehicles, while benefiting from Ford’s deep know-how and capabilities, without the drag of tradition and past views.

Ford Blue

This is Ford’s traditional ICE business, but with new emphasis on efficiency, cost cutting and support for Ford Model e’s business.

The bullet point summary for this business is:

• Strengthen iconic Ford ICE vehicles (F-Series, Ranger and Maverick trucks, Bronco and Explorer SUVs, and Mustang) with investments in new models and services;

• Help ICE customers fulfill their passions especially for those situations when ICE capabilities are required;

• Deliver new, connected, personalized and always-on experiences for customers powered by Ford Model e’s software and embedded systems;

• Make industry-leading quality and exceptional service a reason to choose and stay with Ford;

• Root out waste and dramatically reduce product, manufacturing and quality costs; and

• Support Ford Model e and Ford Pro through proven, global-scale engineering, purchasing, manufacturing, and vehicle test and development capabilities for world-class safety, ride and handling, quiet and comfort, and durability.

Kumar Galhotra will become President of Ford Blue. He is clear that his role is to drive enthusiasm for Ford’s traditional ICE products to make this area a cash cow for the whole company.

It seems that Ford Blue will also adopt similar sales strategies to Ford Model e, although ICE sales traditionally involve a dealer network for ongoing servicing needs.

Ford Pro

The Ford Pro business is dedicated to support commercial and Government customers for both Ford Model e and Ford Blue products.

The above new structures seem well thought out to maximise flexibility, enabling speed and innovation, while maximising values of the legacy ICE business. Ford continues to make new hires to strengthen the new company structures.

The above still begs the question as to how the legacy ICE business (Ford Blue) will eventually be exited.

Pros and Cons of considering investment in Ford

So far I’ve stayed “big picture” about Pros and Cons of investment in Ford. Some readers want to cut to the chase, so here is a bullet point list of Pros and Cons that might help investors in deciding about whether or not to invest in Ford at this time.

Pros

• Managing costs and accelerating timing of BEV adoption through partnership
• Restructuring to sharpen the business with a big focus on costs and profitability of the ICE business
• Restructuring to strengthen management and accelerate Ford Model e (the BEV business) growth

Cons

• CHIP shortages
• Falling new car sales in Europe
• THE BIG ONE: Ford reveals no indication as to how Ford Blue (the ICE business) will be wound up, while at the same time being clear that it plans to fully electrify the business

Conclusion: Keep Ford stock on your watch list

It is a time of enormous transition in the wheeled transport industry and investment in this space is not for the faint hearted. There is little doubt that there will be a number of successful pure BEV plays and Tesla (TSLA) is clearly the standout company. It is pretty clear that there are going to be a lot of legacy ICE manufacturers that, while having well established brands, are not going to transition to full electrification successfully. Here I’ve focused on Ford’s prospects and paid attention to their approach to the ICE to BEV transition, which I regard as the most critical barrier to success going forwards. It is too early to be certain about success, but Ford has a number of initiatives as highlighted here that seem promising. Of course, the company needs to navigate short term issues that transcend the transition, such as a major current sales barrier involving CHIP shortages. Manufacture of both ICE and BEV vehicles is impacted by these supply issues.

Perhaps it is a time to stay on the side and observe, as Ford still hasn’t revealed a plan for exit from its now well identified ICE business, Ford Blue. However, Ford seems like a legacy ICE company well worth having on your watch list because the company has become quite clear about the different businesses that live within the Ford brand.