Why Ford didn’t abandon its electric vehicle business

Why Ford didn't abandon its electric vehicle business

Ford CEO Jim Farley poses with the Ford F-150 Lightning pickup truck in Dearborn, Michigan on May 19, 2021.

Rebecca Cook | Reuters

Ford Motor said Wednesday it would separate — but not separate — its electric vehicle business from its legacy automotive operations.

Many Wall Street analysts and investors have pressured traditional automakers such as Ford to exit their electric vehicle businesses, hoping to secure high valuations like those investors have attributed to some start-ups. -ups of electric vehicles.

While CEO Jim Farley and other Ford executives readily acknowledge that some separation between the company’s electric vehicle efforts and its legacy internal combustion engine business makes sense, they argue that a split complete would have put Ford at a disadvantage against both the old and the new. rivals.

“Today our corporate structure is holding us back,” Farley said. “It does not allow us to focus. We need the ICE business to generate cash and serve [Ford’s] iconic brands. We need our electrical business, the digital business, to be innovation driven. You can’t ask the team to do both at the same time.”

Why didn’t Ford just spin off its electric vehicle business?

The case for a spin-off is easy to see. In theory, a spin-off would allow the part of Ford likely to experience significant earnings growth — the EV business — to achieve a valuation comparable to that of other pure EV makers.

Currently, analysts say, the likely lack of growth in Ford’s mature ICE business is holding back the company’s overall valuation. Morgan Stanley analyst Adam Jonas argued in a November memo that ICE’s “de-adoption” could outpace Ford’s ability to ramp up production of electric vehicles, and that Ford should consider “non-traditional” actions. “, such as a spin-off, to attract the capital and talent needed to succeed with electric vehicles.

But Ford executives say the company — and its investors — will be better off with its EV and ICE businesses under one roof, albeit with far more separation than the two have so far.

Farley said Ford gets “leverage” in areas where both organizations, as well as the Ford Pro utility vehicle unit, can leverage each other’s strengths.

“” We are not going to create separate brands. We’re not going to compete with each other,” Farley said. “The magic in all of this is to focus both organizations on what they need to focus on, more than asking everyone to do everything like we do today…and getting that leverage between the two organizations . »

“If we distribute this to one or both entities, or all three, we are really risking this leverage.”

Separating units has advantages, up to a point

Ford’s plan is to run its new EV unit, called Ford Model e, like a start-up – with lean, flexible teams, a culture of innovation and the ability to create ‘clean sheet’ designs that don’t s necessarily rely on the existing Ford product line.

While Farley will serve as Model e’s chairman, his day-to-day leadership will fall to Doug Field, a former Apple and Tesla executive.

Field said unlike other electric vehicle start-ups, Model E has the benefit of an integrated relationship with a profitable legacy automaker – but he will also see the benefits of separation.

“We need a culture in some of these new technologies and for pristine EVs, the kind of culture that attracts top technical talent,” Field said. “We want the best people. I don’t care if they come to work in bunny slippers, but we have to have the best people.”

Making the EV business a standalone unit under the Ford umbrella will “absolutely” help attract new talent, Field said.

“We need a different way of working in a different environment and the flexibility to do things like remote work,” he said. “It’s part of Model e – to give us access to top talent.”

Ford doesn’t need to raise capital for its EV plan

Some analysts have argued that a spin-off of Ford’s EV unit would allow that company to take advantage of its new pure-play-EV valuation to raise low-cost capital. This capital could then be used to fund the company’s ambitious future product plan – or perhaps, to fund an even more ambitious plan.

But Ford executives say the company’s EV business plan doesn’t require raising capital from outside the company. Simply put, the substantial profits Ford makes from its ICE trucks and SUVs will be enough to fund the company’s EV plan.

Ford’s slot machine is currently its $42 billion F-Series truck franchise, which has been the best-selling vehicle in the United States for decades.

Keeping the two companies in-house allows Ford to internally fund the expansion of electric vehicles and other advanced technologies such as self-driving vehicles with profits from traditional operations.

“We’ve certainly considered spin-offs but, No. 1, we can fund them ourselves,” Farley said. “We don’t need access to capital markets.” Second, he said the company would lose synergies and leverage if either split.

A compromise that has appeased Wall Street – for now

To some extent, Ford’s restructuring plan is a compromise to appease these analysts and investors. It’s about separating the operations and providing greater transparency by breaking down their results by next year, while keeping the whole business, which Farley says is necessary to reduce the costs of both. operations.

“This change is not about the financial management of the business,” Farley said. “It’s about focus, capability, better products, better experience. That’s how we’re going to win as a company.”

Investors supported stocks, pushing shares up 8.4% on Wednesday to $18.10. The stock is down about 15% this year.

Analysts have widely welcomed the split, but some are still hopeful that Ford will divest operations in the future.

“We note that as the BEV business matures, strategic options may reappear later in the decade – just as multi-industrials continue to refine their portfolios,” Barclays analyst Brian Johnson wrote in Wednesday’s a note to investors.

Correction: Ford shares closed up 8.4% at $18.10 on Wednesday. An earlier version misstated the price.