On August 21, 2024, Ford Motor Company announced updates to its electrification strategy to accelerate consumer adoption and improve profitability given evolving market dynamics as recent sales of electric vehicles (EVs) continue to underperform compared with expectations (notwithstanding ongoing absolute sales growth, albeit from still low levels). This has led to increasing uncertainty regarding EV sales growth going forward, notably in North America, to which Ford readily has the highest exposure and where EV adoption rates significantly lag those in Europe and, notably, China.

The Company's announced changes include (among other items) an all-new electric commercial van to begin production in 2026, a medium-size pickup truck based on a new affordable EV platform, and a next-generation truck with launch expected in 2027. The Company also announced the cancellation of Ford's previously planned three-row all electric sport utility vehicles (SUVs), to be ostensibly replaced by a family of three-row SUVs with propulsion options. Ford will also adjust the cadence of product launches and realign its battery sourcing as it targets cost reductions in its EV portfolio.

While associated charges and potential increases in expenses and capital expenditures (capex) are meaningful, currently estimated by Ford to total up to $1.9 billion, these are nonetheless readily absorbed by the Company's solid financial profile, with Ford's current credit ratings therefore remaining unaffected by its recent announcement.

EV Sales Momentum Slows; Mainstream Buyers Cite Higher Pricing, Charging Concerns

Initial EV sales were significantly attributable to early adopters eager to embrace the new vehicle propulsion technology. Accordingly, these early adopters were more amenable to the markedly higher pricing of EVs compared with internal combustion engine (ICE) vehicles (such pricing reflecting the substantially higher development costs of EVs). However, with EV sales to early adopters now seemingly significantly exhausted, EVs are struggling to maintain ongoing sales momentum among mainstream consumers.

Prospective purchasers cite numerous concerns involved with buying an EV. These include ongoing materially higher pricing vis-à-vis comparable ICE models (despite repeated and material price reductions implemented by several EV manufacturers in recent periods). Moreover, vehicle range (which can fluctuate considerably under various weather conditions) and concerns regarding the reliability of EV charging and the adequacy of the EV charging infrastructure (notably in rural areas) represent meaningful additional headwinds to the sales growth of EVs. Additionally, competitors from outside the U.S. and, in particular, China currently enjoy a marked cost advantage relative to Noth American original equipment manufacturers (OEMs) and seek to attract prospective buyers with fresh designs and new digital experiences at lower prices.

Losses of Ford's EV Segment Remain Substantial

We note that Ford remains the only legacy automotive OEM to have reporting segment (Ford Model e) that focuses on the sales of its EVs (as well as digital services) in addition to the associated development and production costs of such vehicles. We also note that incurred losses (in EBIT terms) of the Ford Model e segment are substantial, amounting to $4.7 billion and $2.5 billion in 2023 and the first half of 2024. These losses considerably offset the combined EBIT contributions of Ford Blue (ICE vehicles) and Ford Pro (commercial, government, and rental customers) of $14.7 billion and $7.7 billion over the similar time periods.

Ford Model e's current operating results underscore the current challenges (not only to Ford, but also to several mainstream automotive OEMs) of the EV landscape, which are further exacerbated by uncertainties over the future sales/adoption rates of EVs. Accordingly, Ford has also indicated that its mix of annual capex dedicated to pure EVs will decline to 30% from about 40%.

Ford Credit Ratings Unaffected

From a credit perspective, while Ford's announcement yesterday is credit negative, there are no changes to the Company's current credit ratings. In line with solid earnings/cash flow generation in recent years (reflecting not only Ford's positive operating performance but also somewhat favourable industry conditions), the Company's financial risk assessment and associated credit metrics have strengthened to levels that provide moderate cushion relative to the current ratings.

Additionally, Ford's liquidity position remains strong, with cash and available credit lines of its industrial operations amounting to $44.8 billion as of June 30, 2024, with the industrial operations also having a net cash position as of the same date. As such, while the financial burden of Ford's updated electrification strategy is readily absorbed the Company's solid financial profile, it underlines the challenges it, as well as its peers, face in transitioning product portfolios to alternative propulsion technologies while protecting earnings and cash flow.

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