How Ford plans to win the Tesla price war

How Ford plans to win the Tesla price war

Ford Tesla TSLA

  • Tesla’s pricing strategy isn’t a secret anymore.
  • Ford has also opened up on how it plans to take on Tesla.
  • Improving margin in its legacy businesses will be key to successfully grow the EV segment.

Ford reported some strong profit margins, but not in its EV business.

Tesla (TSLA) has been cutting prices in all of its major global markets since late last year. Some investors thought that decision was forced due to weakening demand for electric vehicles (EVs). Others believed it was a strategy to hold its dominant market share as other automotive companies bring new EV models to market.

The truth has been somewhere in between. Regardless, it’s something companies entering the market have to deal with. Ford (F) just announced its first-quarter earnings and offered a glimpse of how it plans to challenge Tesla’s dominance in the EV sector. With the stock valued at only 10% of the market cap of Tesla, investors could be handsomely rewarded if Ford succeeds.

Different strategies

Tesla CEO Elon Musk spilled the beans on his pricing strategy in the company’s recent first-quarter earnings call. Musk basically said the company wants to focus on volume over profit margin right now to put as many Tesla vehicles on the road as possible. The company has already dropped vehicle prices in the U.S. six times this year. That’s only a realistic approach because of how profitable Tesla already is.

The ultimate goal, however, is to become even more profitable. Elon Musk sees his company successfully implementing autonomous driving in the future and believes existing customers will add that and other new technology features. That would be very high margin income if it comes to fruition.

Ford is also working on autonomous driving technology, but it has a more pressing need to scale up its EV production and do it profitably. Now that Ford is breaking out its three operational business segments, investors can see how it intends to do that.

Path to succeed

It is still early in the EV business for Ford, but it has struggled recently. In the first quarter, production of its popular F-150 Lightening was halted for several weeks due to battery safety issues. Also, shipments of the Mustang Mach-E SUV were limited as the company made manufacturing changes that it believes will allow it to nearly double production capacity of that vehicle.

The result was a 27% drop in revenue in its EV segment versus the prior year period. Even worse, though, is the fact that the company is losing money on every EV it sells. While it brought in $700 million from those products in the quarterly period, it lost $722 million on those sales.

That’s not unexpected at this stage, though, and there’s another area for investors to focus to see if Ford can ultimately succeed with its EV business. That is with its legacy internal combustion engine (ICE) products and its commercial truck and van offerings. Ford said operating margin in each of those segments — now dubbed Ford Blue and Ford Pro, respectively — was over 10% in the first quarter. For its Ford Blue segment, the company said that was “sharply” higher than one year ago. Ford needs strong profitability from those segments to help it become profitable in its EV business.

Margin focus

Ford didn’t break out profit margins by segment last year, but its overall operating margin was well below that of Tesla.

That’s why Tesla has room to lower prices to grow its sales volume. For now, Ford really has no choice but to offer competitive pricing. Along with its business update, Ford announced it was lowering prices on all of its Mustang Mach-E models by as much as 8%. The base model will now be listed at $42,995 before the full tax credit from the Inflation Reduction Act.

It seems counterintuitive that the company would drop prices even as it reported negative margins on its EV offerings. But Ford said it is sharing lower costs with customers. Realistically, it is being forced to compete and support increasing its production volume.

But Ford is also focusing on reducing costs in its operations and supply chain. The company previously said in its fourth-quarter 2022 conference call it had up to 30% inefficiency in its production and engineering process. Ford CEO Jim Farley told investors it “left about $2 billion of profit on the table due to cost and especially continued supply chain issues” in 2022.

Fixing those issues is how Ford plans to catch Tesla. Investors can monitor the company’s progress by watching operating margin in Ford’s Blue and Pro businesses over the course of the year. Focusing on the EV segment itself will be something to watch later, but if it can’t improve profitability in its other segments, it’s probably not an investment that will pay off.

News source

Leave a Reply

Your email address will not be published. Required fields are marked *

Pin It on Pinterest