FORD

Ford's plan to cut $3B in waste will funnel money from gas vehicles to fund electric, tech

Phoebe Wall Howard
Detroit Free Press

Ford Motor Co. sent its employees an email early Wednesday, inviting them to attend what many expected to be a routine town hall a few hours later at 10 a.m.

There was no mention of the agenda or preview of a major announcement.

But it would prove to be what analysts and industry watchers consider one of the most pivotal days in the history of the 118-year-old automaker. Ford CEO Jim Farley captured the attention of Wall Street and saw the stock price climb after announcing at 7 a.m. plans to split Ford into electric and gas-powered vehicle divisions. 

By the time Farley opened the town hall webcast, streamed globally from the Ford Experience Center on Village Road in Dearborn, news of the company's reorganization plan had gone viral. Flanked by executive chair Bill Ford and members of the executive team, Farley set out to reveal the news to employees.

"I am not satisfied with simply being a good company. I know Bill isn't. And I don't think any of you are, either," Farley said during the meeting, the Free Press was told. "We must aim higher."

During the question and answer period, an employee asked about the risk and worry associated with separating the established vehicle gas division from the electric and technology division. Bill Ford, the Free Press was told, replied that he thought the bigger risk would be to not make a bold change when the world is changing so fast.  

Under Farley's reorganization plan, "Ford Model e" would focus on developing the electric vehicle operations and software technology while "Ford Blue" would run the gas-powered operation — the bestselling F-Series trucks, Police Interceptors, Bronco, Maverick, and the iconic Mustang. 

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Farley told employees that efficiency and focus must improve for everyone and everything if Ford wants to succeed. 

During employee meetings and public remarks, he often praises Tesla as a benchmark of excellence for electric vehicles. On this day, Farley also mentioned Stellantis as a model for gas-operated vehicles, the company that builds Jeeps and Ram Trucks, a direct competitor for the Ford Bronco.

Stellantis announced a $15 billion net profit for 2021, which resulted in the highest profit sharing checks for its UAW members in 35 years at $14,670. By contrast, Ford would pay $7,377 checks and GM $10,250. 

Then Farley dropped the bombshell: Ford planned to slash $3 billion over the next two or three years from its gas-powered operation and funnel it into battery electric vehicle development and technology.

The tech side is getting a cash infusion.

The internal combustion engine (ICE) side will make it happen. 

Ford employees immediately started to post about the meeting on public chat boards over the next 24 hours and speculate what it means to them.

Are layoffs or buyouts pending? 

Anything is possible, executives said.

And last month, Farley said, "We have too many people."  

Spreading the word 

In the hours before the town hall, executives spelled out the details for the news media and Wall Street during webcasts and calls with the media, investors and industry analysts. Little detail was provided about personnel changes.

"In terms of cost, we don't have anything to announce today," said Kumar Galhotra, a mechanical engineer at Ford since 1988 now running "Ford Blue."

"Everything is on the table. It has to be. If we're going to take out $3 billion over the next two to three years ... we're going to work with all our partners to do this in a very integrated way," he told reporters.

As the industry evolves, there is natural reduction in some jobs and an increase in others, Galhotra said. 

Ford has formed two auto businesses, Ford Blue and Ford Model e, that are separate divisions but will work together to execute the Ford+ plan. Kumar Galhotra, president of Ford Blue, speaks while Ford CEO Jim Farley, left, and Doug Field, chief EV and digital systems officer for Ford Model e, listen. They're seen here during a webcast on Wednesday, March 2, 2022, in Dearborn.

Farley added, "There's a principle at Ford that runs through the place when it comes to change for our employees or our union partners: We will be transparent. We will be thorough. We will be inclusive and there won't be any surprises. That's how we approach these changes at Ford."

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This change is not about just cost savings, Farley said. This is about reinvestment to position Ford to compete for dominance in the future. If the company doesn't change how things work, it cannot attract the talent needed to build on its strengths and make the transition to all-electric. 

'We had to change'

Now he was going deeper to explain his plan, which would not spin off the electric vehicle (EV) operation into a stand-alone subsidiary but instead keep the operation under one roof as interdependent operations that harness engineering and industrial expertise while sharing technology, as well as saving costs by buying supplies such as glass, seats and sheet metal in bulk for electric and nonelectric vehicles.

"The reality is, our legacy organization has been holding us back. We had to change," Farley told reporters Wednesday.

"Model e will nurture the talent and the culture and intensity of a high-tech startup. It will be a center of innovation ... free of convention, free of hierarchy that's so typical of corporate constraints," he said. "Disruption, risk-taking, experimentation, fast-cycle innovation will be encouraged. It will be expected."

Ford CEO Jim Farley talks about  the formation of two auto divisions, Ford Blue and Ford Model e, that work together to execute the Ford+ plan. He is seen here during a webcast on Wednesday, March 2, 2022 in Dearborn.

Consumer behavior has helped shape the new Ford strategy. There is no way gas-powered trucks are going away in the near term, Farley said. The F-series franchise was second in sales only to the iPhone in 2019. Cost reductions on one side just make the company stronger as it dives into the lucrative electric vehicle war. 

But preventing intracompany battles is a top priority, he said.

"We're not creating internal competition," Farley said. "If anything, you can see today there's been a commitment we have to each other on leveraging the expertise of the other businesses. We've been very intentional to do that. Today, the corporate structure is holding us back. It does not allow us to focus. We need the ICE business to be cash generating and serving the iconic brands. And we need our electric business to be about innovation. We cannot ask the team to do both at the same time."

He said, "We are not going to compete with each other. In fact, that's why I'm leading the electric business as CEO. I cannot allow any of that to happen at Ford."

Longtime employees are valued, executives said. But new recruits are crucial to success. And that means a continued culture change.

'Cash engine'

Farley pointed to the small-team success that led to development of the award-winning Mustang Mach-E and all-electric F-150 Lightning. The surprise Maverick compact pickup truck, which was released in 2021 and has seen production paused to meet demand, was created secretly in a single room with a team that surprised the world with its rapid design.

Jim Farley, CEO of Ford Motor Company, next to Ford's all electric F-150 Lightning at its world headquarters in Dearborn on May 19, 2021.

"Ford Blue team will wake up every day obsessed about how to deliver a more vibrant and profitable ICE business," Farley said. "Blue will be a profit and cash engine for the entire enterprise."

This is why he didn't spin out the electric vehicle business, because he wants the chemistry created by the best of the old and new to create a stronger and more resilient Ford, Farley said. 

"We're targeting annual production of more than 2 million EVs by 2026," he said. 

The company sold 27,140 Mustang Mach-E SUVs in 2021 and soon will start delivering the Lightning, which had reservations capped in December at 200,000.

Ford is planning to invest $5 billion in electric vehicles "just this year" and more than $50 billion in EVs and new technology by 2026, Farley said.

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In addition to Ford Blue and Ford Model e, the company also created Ford Pro, run by Ted Cannis, that specializes in catering to business customers.

Company executives emphasized the importance of Ford Blue cost savings and revenue.

"Simply put, nothing is off the table," Galhotra reiterated. "All parts of the income statement and a major attack on our structural costs."

So what's being targeted to save $3 billion at Ford Blue? 

  • Complexity costs: Perhaps Ford doesn't need to build so many different versions of its vehicles. 
  • Warranty costs: Ford continues to spend more than its competitors because of ongoing quality issues that must be addressed, Galhotra said.
  • Advertising: The budget is going to shrink.

As far as Ford is concerned at this point, less is more. Tesla builds four vehicles and Wall Street rewarded the Silicon Valley company with a $1 trillion valuation in 2021.

Lisa Drake, vice president of EV industrialization for Ford Model e, takes part in a town hall discussion with reporters on Wednesday, March 2, 2022 in Dearborn. The company revealed its plan to separate the gas and electric vehicle operations into divisions called Ford Blue and Ford Model e.

"I think it surprised even us that the F-150 Lightning generated ... 200,000 units of scale on one body style configuration," said Lisa Drake, vice president of EV industrialization for Ford e.

If you do the math on a paper napkin, estimating a conservative $50,000 per F-150 Lightning, that pencils out to roughly $10 billion.

Even Ford car dealers will be asked to choose whether they want to sell electric or gas-powered vehicles and specialize, Ford executives said.

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Recruiting the best people in the country will require a different environment and a different way of working, Farley said. Flexibility and remote work is essential in the competitive market now, he said.

"We're really trying for a distinct culture in Model e, a culture that cultivates a different kind of work ...  that attracts the best technical talent," Doug Field, an engineer who helped develop the Tesla Model 3 and moved to Ford from a top role at Apple, said Wednesday to reporters.

Ford CEO Jim Farley, front, talks to Kumar Galhotra, left, and Doug Field, center, as Hau Thai-Tang, right, and Lisa Drake, far right, listen. Ford is transforming its global automotive business with the formation of two auto businesses, Ford Blue and Ford Model e, that are separate divisions but work together to execute the Ford+ plan. The executive team is seen here during a webcast on Wednesday, March 2, 2022 in Dearborn.

Ford is directly competing with electric vehicle and tech startups that have created a work environment that welcomes people who "never dreamed" of joining the auto industry, he said.

"We have to create that place as well. It's going to be a culture of rejecting constraints, never inheriting them from the past," said Field, chief EV and digital systems officer for Ford Model e and also lead development of software and embedded systems for all of Ford. "We want the best people. I don't care if they come to work in bunny slippers."

Challenging times

Professor Erik Gordon, a longtime observer of the auto industry and a business strategy expert based at the University of Michigan Ross School of Business, said these days may be exciting to Ford executives but they're grim for the average employee.

"Change scares employees and big change scares them big-time. They don’t know how exactly it’s going to affect them," he told the Free Press. "This is the worst hour to be a Ford employee. Once the details come out, some of the fears will go away."

Erik Gordon, University of Michigan Ross School of Business professor.

Still, unknowns will continue to create anxiety, Gordon said.

"If you’re under Ford Blue, is that a sign that maybe not only are you not a cool kid but, what does that mean for your career?" he said. "If the future of Ford is on the Model e side and you’re not on that side, well, if you're 50 and going to retire within 10 years it doesn't matter much, but if you’re 25 or 35 years old, it matters a lot." 

A longtime Ford employee told the Free Press on Thursday that employees are "anxious about where this is headed."

"There was a question (during the town hall) about being able to move between Ford Blue and Model e, and it sounded like that was generally not going to be possible," said the employee, who was not authorized to talk to the news media. "I have found from past re-orgs that most employees are told where they will be working without them being able to provide input. That causes anxiety." 

Ford team managers started meeting with their direct reports on Thursday to try to answer questions and alleviate stress during this time. 

Don't worry

Still, Ford employees worrying about job security now may be premature, said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.

"A lot of these quotes from auto executives are focused on making sure the stock market knows they're moving forward, transitioning from a legacy automaker to a modern tech company," he said. "It has to be ambitious because everybody else is being ambitious. You have to be very aggressive."

Ford announced created separate units for its gas and electric vehicle operations within the company. Doug Field, pictured here on Wednesday, March 2, 2022 during a webcast from Dearborn, will lead product creation as chief EV and digital systems officer for Ford Model e and also lead development of software and embedded systems for all of Ford.

Dramatic change is part of the "natural transition for the auto industry at this point," Fiorani said. "It's the current evolution. People will retire naturally and not get replaced."

Carla Bailo, CEO of the Center for Automotive Research in Ann Arbor, said cost savings goals shouldn't cause stress because they shouldn't be too hard to achieve. For example, companies often slightly modify powertrains and vehicle models rather than design total overhauls and this meets customer demands, she said. 

"Development of the engine requires significant engineering costs and manufacturing costs," she said. "They'll just stop or reduce spending on it."

Meanwhile, UAW President Ray Curry said nothing changes for its organized labor under the new structure at Ford, which employs the most hourly autoworkers in the U.S. 

"We embrace the challenge of new technology as an opportunity while we maintain our strong commitment to union jobs under the current and any future Ford collective bargaining agreements," he said in a prepared statement Wednesday.

UAW Vice President Chuck Browning said, "The best interests of our members remain at the forefront of discussions with Ford in order to assure job security and shared prosperity as Ford emerges as a leader in the manufacturing of electric vehicles."

Wall Street buzz

Meanwhile, Wall Street continues to reward Ford under Farley. Stock has grown since he took the helm in October 2020, going from $6.66 a share to a high of $25.87. This week, Ford has hovered around $18 as the Russian invasion of Ukraine continues to rattle the supply chain and disrupt global markets.

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On Wednesday, analyst Emmanuel Rosner of Deutsche Bank, sent an investor note that called Farley's strategy "a bold new plan which we believe could help the company operationally by focusing on growth for EVs but also cost optimization for the ICE business. The decision to distinctly separate the businesses could also provide investors with more transparency and visibility into the EV business growth and profitability over time, which could help unlock additional stock value."

The new Ford F-150 Lightning had received nearly 45,000 reservations in the first two days after its launch. The company capped reservations at 200,000 and deliveries are scheduled to begin in spring 2022.

He indicated a preference for spinning off the EV business into a separate company so it could be tracked by investors. And Rosner wasn't the only analyst who questioned whether Ford could actually achieve its optimistic financial targets. The term analysts use to describe these numbers is  "aspirational."

Analysts noted that Ford can make changes to cut costs but it also faces challenges squeezing the auto industry worldwide — including price hikes on transportation fuel, as well as a shortage of semiconductor chips.

Jeff Windau, senior equity analyst at Edward Jones, wrote in an investor note Wednesday, "We believe separating the business units should allow for better managerial focus, especially for electric vehicles that are still in the early stages of development. The company is also dealing with key infrastructure issues and making decisions now when electric vehicles volumes are low."

He said "spending and expenses remain high," citing a budget increase of $30 billion to $50 billion through 2026, and costs of aluminum and copper are climbing while production disruption based on factors outside Ford's control remain a concern.

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The company's financial position is "weaker than average" because Ford's credit ratings are deemed "non-investment grade" by Moody's, Windau wrote. "While we feel the company has the financial resources needed to run the business over the next several years, higher funding costs may weigh on Ford's profitability and ability to invest in all of its growth programs."

He recommended investors "hold" on Ford stock.

'Destroy Tesla plan'

Meanwhile, Garrett Nelson, vice president at CFRA Research, wrote in an investor note Wednesday that he moved Ford from a "buy" to a "strong buy" recommendation. 

"Ford quietly became the second bestselling U.S. EV manufacturer in 2021 thanks to the Mustang Mach-E and its EV sales are poised to accelerate further in the coming months with first deliveries of the F-150 Lightning," Nelson wrote, "... one of the industry's most compelling opportunities, in our view."

A Ford Mustang Mach-E parked next to F-150 pickup trucks before Ford unveils the electric F-150 Lightning at its world headquarters in Dearborn on May 19, 2021.

Jim Cramer told his CNBC Investing Club that Ford's strategy was a "destroy Tesla plan."

Employee morale

The day of the big announcement, on the investor call just before the employee town hall, an industry analyst asked about morale of Ford Blue, noting all cost reductions are expected to come from its operations.

Galhotra said his people are proud of building the Bronco, F-Series, Raptors and Mustangs, and Ford Blue will be the profit center for years to come.

"All of these teams, literally, not to be cliche, bleed Ford blue. So the morale is high," he said. "The team is looking forward to combining all that, the great products and the experiences with a culture that is going to be maniacal about being lean and reducing costs."

John Lawler, Ford chief financial officer, speaks on Wednesday from Dearborn as the automaker unveils its plan to create Ford Blue and Ford Model e, two divisions designed to fuel electric vehicle and technology development.

After three decades at Ford, chief financial officer John Lawler said he believes the ability to better focus on projects will be a "morale booster" because people will better understand their targets and what needs to be delivered.

"Many of our employees want that. They're spread too thin. They're trying to do too many things," he said. "Clarity, I think that's going to increase morale."

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Looking back, looking forward

After talking with the news media and investors and employees, Farley did national TV interviews with Fox and Bloomberg.

“You can’t compete against Tesla if people work from 9 to 10 on electric cars," he told Stuart Varney on FOX Business Network's Varney & Co. "You need the focus and expertise to be world class."

Within the past three weeks, Farley has worked to dissipate anger among employees about a recent bonus system Galhotra unveiled during a prior town hall. Then, after that, workers expressed alarm and confusion about a memo relating to unpaid leave related to vaccination.

"We don't have any time for drama at Ford. We have a huge transformation to make," Farley told the Free Press on Feb. 14.

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Stay calm

Farley dismisses anxiety associated with old versus new in the auto industry.

"It's kind of a transition that's been going on for many years already and it will go on," Farley told the Free Press in 2019, before he was chief operating officer or CEO. 

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More:Ford to use Model e name it blocked from Tesla in trademark fight

Sherif Marakby, then-CEO of Ford Autonomous Vehicles, called Farley in 2019 a provocative leader who pushes and makes people think.

Jim Farley, right, pictured here when he was Ford president of New Businesses, Technology & Strategy, talks with Sherif Marakby, then president and chief executive officer, Autonomous Vehicles LLC, in offices at The Factory at Corktown in Detroit on May 7, 2019.

"Projecting the future no one knows is something Jim is really good at," said Marakby, who worked at Uber prior to Ford

Farley is tireless and drives others no harder than he drives himself, employees say.

“In product planning, you have to make bets that aren’t clear to the competition and sometimes not even to the customers,” Farley said in 2019. “You have to make choices to go to parts of the market that either don’t exist or are very underdeveloped. At the time, there may not be evidence of why to do that. But those that do get handsomely rewarded.”

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