FORD

CEO Jim Farley vows Ford Motor will not split in two — previews restructuring

Phoebe Wall Howard
Detroit Free Press

Ford CEO Jim Farley fed Wednesday what seemed to be an insatiable appetite among investor analysts clamoring to hear his latest thinking about the future of the 118-year-old automaker and whether he plans to create a second company for the rapidly evolving battery-electric vehicle business.

He stated unequivocally that recent speculation about Ford splitting its operation into two separate companies focused on traditional internal combustion engines and EVs was unfounded.

"We have no plans to spin off our electric business or our ICE business," Farley said. "It's really more around focus and capabilities, expertise and talent. Those are key for Ford, and this is what we're working on. ... We know our competition is (Chinese carmaker) Nio and (Texas-based) Tesla, and we have to beat them, not match them."

He told viewers of the Wolfe Research Global Auto, Auto Tech, and Mobility Conference webcast that Ford is grossly undervalued by Wall Street for all its vehicle operations but then went on to acknowledge that the company needs to make drastic changes to compete and win against rivals including Tesla. 

“We have too many people. We have too much investment. We have too much complexity and we don't have expertise in transitioning our assets. There’s waste," Farley said. 

Ford Motor Company CEO Jim Farley stands with a 2021 Mustang Mach-E 4X model outside of the Ford Piquette Avenue Plant in Detroit on Jan. 14, 2021.

But making the transition, separate from the supply chain disruption that has bruised the industry over the past two years, is not going to be easy, Farley said.

"ICE talent and the BEV digital talent are different. You can't ask ICE people to do certain things. It takes too long," he said. "The customers are different. The EV customers are not like our ICE customers."

As a result, Ford needs to slash inventory that sits on car lots, do more business online and remotely, Farley said. Success in the future demands a different approach, he said.

Big change ahead

"It requires different talent, different procurement strategies. And this difference is very important for us as a leadership team to get our heads around, which we have," Farley said. 

Everything is being reassessed as Ford moves ahead.

The company wants to "revitalize" its traditional business with "better quality, lower structural costs and a radical reduction in complexity," as well as invest in electric growth, Farley said.

He noted that the Ford Mustang Mach-E  was named top pick by Consumer Reports for 2022 in the electric vehicle space, beating the Tesla Model 3.

"We believe that both ICE and BEV portfolios are under-earning," Farley said. "Let me say that one more time. This management team firmly believes that our ICE and BEV portfolios are under-earning and that is not price. That is lower structural costs, improving our bill of material for our BEV vehicles and scaling."

Hiring new talent is a top priority and that means "making big changes in our compensation system," Farley said. "One size doesn't fit all anymore in a company like Ford with this transition."

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In addition to the dramatic changes ahead, he did not dismiss the magnitude of the semiconductor chip crisis.

"I was up until 11 last night, a normal night for an auto executive these days," Farley said. "It's transient, it's frustrating, it's painful but it too shall pass. And what we want to get across to all of you is that we have a long view of Ford."

GM vs. Ford

While crosstown competitor General Motors touted a plan in January to hire 8,000 tech-focused workers, Farley said Ford is taking a different approach.

"You're not going to get a press release from Ford saying we're hiring 20,000 software engineers, although we're hiring lots of software engineers," he said. "It's the quality of the talent. What's most important for us is that we need new talent, both on the ICE side and on the BEV side with that increased focus. And that talent doesn't exist at the company but it has to work very carefully with the core competencies of the company like body engineering, running our plant operations. And that talent, it's not the quantity. It's getting the very best at new capabilities that can scale with Ford's ambition."

He emphasized, "On the ICE side, we know we're going to have to be reducing our structural costs more, improving our quality and radically reducing our complexity at Ford. That takes some new talent and focus. It requires tension in the organization and that tension can't come with drama and politics. It has to be productive tension."

Beat Tesla

Ford is going to see a "restructuring" of its talent that can navigate the transition ahead, Farley said. Everything needs to be simplified.

Tesla sells just four vehicles: Model S, Model 3, Model X and Model Y.

And it has seen its market valuation climb beyond $1 trillion before dipping back down to $789.64 billion on Wednesday. Meanwhile, Ford market valuation hovered at $67.87 billion with GM at $67.39 billion.

Legacy automakers, including Ford, offer countless models and trim versions.

That's complicated and costly.

Ford Motor Company CEO Jim Farley discusses electric Mustang Mach-E and future for electric vehicles.

"I can't turn to the ICE organization and say, 'Go beat Tesla,' " Farley said. "They may do it on the body. They may do it in plant operations, but that's not good enough. So I'm not going to make any announcements today but I will tell you that it's not as simple as shirts and skins."

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While analysts have predicted that electric vehicle buyers will cannibalize the buyers now in traditional vehicles, Farley pushed back on that theory. Maybe one day, he said. But not right away.

And buyers from other brands are gravitating to Ford for the first time in years, Farley said. "We are not going to just reinvent our ICE business in BEV terms. I want new customers ... I can see they're out there — 70% to 80% of our customers in our first BEVs haven't bought a Ford in a long time."

People who want to take a GT500 to the track or take a Bronco off road or haul horses or trailers with a Super Duty aren't going to replace those vehicles but they likely will add to their fleet, he said.

Whether its focusing on subscription models or data analytics, Ford sees untapped potential including expanded financing and growth for Ford Credit. It has been a strong revenue generator and saw a surge in 2021.

Car lots with fewer cars

Perceived weaknesses are being assessed and evolving into new policies, Farley said.

"The first big move is going to be to pull inventory out of the system. Whether it's dealers or us, no one likes to have finished inventory sitting around, it is ungodly expensive and our industry has put up with it for far too long," he said. "We're now in our biggest market, in the U.S., one-third of our sales are basically order-to-delivery now."

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The process of customers going "fully digital" and placing their reservations, watching them turn to orders, monitoring the build cycle and then move to distribution and delivery has been a success, he said.

"We're just getting started," Farley said. "This is a quite humbling part of our transition. I'm not the kind of CEO that will tell you, 'We've got it all figured out.' Right now, we've done a great job on batteries. I think we have competitive battery technology."

The company has not "fallen in love with one chemistry," he said.

"So one thing that hasn't been discussed is even within lithium-ion, the chemistry variation and what Ford's BEV will be," Farley said. "Our BEV will be maybe different than our competitors on the chemistry side. But I think we have the (joint venture) structures and the competitiveness on the quality and the scale of our batteries now, which we didn't have a year ago. So we made a lot of progress."

Everyone is a chemist now

The next "problem" is the raw materials needed for the batteries, not just the mining, but the processing and all of it.

"The most important thing that I've learned from the cellphone industry and others is when this transition happens, you have to be a leader in the supply chain. Just having leadership in product is not enough," Farley said. "So the supply chain for us is lithium, nickel, rare earth and copper. Copper for connectivity, rare earth for magnets. ... Yes, cobalt is important, but the lithium and nickel are the real key raw materials. We have to secure them. The problem is you can't protect against price, which we've seen certainly escalate."

Now Ford is focused on protecting its pipeline of materials for battery capacity as well as engineering the size of the battery. The company is working on braking systems that minimize the size of the battery needed for better range.

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"Once you lift your gaze from the fog of the chip crisis and supply process that we're all suffering from, that over the long term, when Ford executes correctly, we have an upside," Farley said at the end of the program. "We are a long way from peak earnings in the company. ... We will put equal pressure on our BEV profitability as our ICE, and both of them will give us leverage on the upside. That's all I'll say at this moment."

Ford family wishes

Earlier this week, analyst Emmanuel Rosner at Deutsche Bank put out an investor note alerting stockholders to the speculation that has swirled around Farley and Ford since the annual earnings report on Feb. 3 involving how the EV business will be run. 

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Rosner summarized the complicated landscape, citing a Feb. 18 Bloomberg report that said Farley had been "weighing options to spin off its EV business from the legacy operations in order to receive recognition in the market as a pure EV play."

The investor note added this perspective:

"A potential spin off could give the new EV division easier access to capital and generate multiples more in-line with pure EV players including Rivian and Tesla. While an entire spin off may be difficult to execute, Farley is also reportedly considering an internal reorganization which would split the businesses into separate segments within Ford. Sources close to the matter indicate that a major issue with the spin-off would be question of control for the Ford family, which has overseen the company for nearly 120 years."

Contact Phoebe Wall Howard:phoward@freepress.com or 313-618-1034.Follow her on Twitter@phoebesaid. Read more on Ford and sign up for our autos newsletter.