Ford Motor Co. executives on Wednesday provided greater insight into costs that are weighing on the Dearborn automaker's financial results, with CEO Jim Farley saying "fundamental change" is needed, especially around how vehicles are engineered, sourced and built.
Those costs add up to a $7 billion to $8 billion disadvantage for Ford compared with its traditional rivals, Chief Financial Officer John Lawler said; those expenses will be the target of reductions in the coming years amid the costly shift to electric vehicles.
During the company's fourth quarter and full-year 2022 earnings report earlier this month, Farley referenced "dysfunctionality" within the company's legacy business that was dragging down results. He also expressed frustration about Ford leaving some $2 billion in profits on the table last year, largely because of lost production volumes in the fourth quarter. The automaker reported a net loss for the year and missed its earnings guidance.
For 2023, Ford expects to earn between $9 billion and $11 billion in adjusted operating profits.
Speaking Wednesday at the Wolfe Global Auto, Auto Tech, and Auto Consumer Conference, Farley and Lawler elaborated on the "dysfunctionality" and how Ford plans to fix it.
"I've watched several leadership teams at Ford. My perspective is, we can cut the cost and cut people," Farley said. But "the reality is, if you don't change the efficiency of engineering, supply chain and manufacturing ... it'll grow back. ... My job as CEO is to make sure far after I'm gone that it doesn't grow back."
Farley last year split the Blue Oval into three separate business units focused, respectively, on internal combustion engine and hybrid vehicles, commercial vehicles, and electric vehicles and software. The new EV and software business, executives have said, is progressing more smoothly than they had expected — but they say that problems remain within the legacy business, which must fund the costly transition to electric and digitally-connected vehicles. Ford is investing $50 billion through 2026 on electrification.
"This is really about redesigning what we do in the 120-year-old part of the company," Farley said Wednesday.
Lawler said up to half of the Ford's cost disadvantage — some $3 billion to $4 billion — sems from higher material costs. Warranty costs, a nagging issue for Ford, also contribute.
Lawler said Wednesday that Ford's warranty costs were essentially flat last year after the company achieved about $1 billion in improvements in 2021. That leaves about $1 billion in improvements left to take out by mid-decade.
Ford is already acting to slash costs. On Tuesday, the automaker said it would cut 3,800 jobs in Europe in engineering, administrative, marketing, sales and distribution functions.
Company executives said Wednesday said they expect to see efficiencies driven by improvements to the development of Ford's second cycle of EVs — and they said engineers already are working on a third product cycle.
"What's even more important is the third cycle, because no one's going to stand still," said Farley. "We have to think about the next breakthrough, beyond what we've already learned."
Cost improvements tied to battery chemistries, taking a clean-sheet design approach to its next cycle of Evs, targeting the right segments to compete in, and lowering distribution costs will be some of the drivers of Ford's push to achieve an 8% operating profit margin on EVs and a 10% companywide operating profit margin by 2026, Lawler said.
For 2022, Ford's adjusted operating profit margin was 6.6%.
Already, Farley said, the company has taken lessons from the development of products like the Mustang Mach-E electric crossover and used them to improve the engineering on future products.
"What you'll see is a vehicle with like half the labor content, half the fasteners — not just lower parts, but radical simplicity. And every watt of energy is measured," he said. "Our prejudice will never get us to 8% profit. We have to design the vehicle totally differently. We have to manufacture it, we have to source it, and we have to sell it totally differently."
Ford's stock was trading down about 1% to $12.84 per share Wednesday afternoon.
