While I no longer own Ford shares (a shareholder from Dec. 2008 to Sep. 2017), I still closely follow the company as the automotive industry transitions to a world of electric vehicles. CEO, Jim Farley, announced this week that Ford will establish three separate automotive business units. Ford Blue will focus on the traditional internal combustion engine business. Ford Model e will be in the business of developing EVs (electric vehicles). The third business is an existing one, Ford Pro, which will continue to target the company’s commercial customers.
Our legacy business was holding us back - Jim Farley
Barron’s described the reorganization as, “Ford not wanting to be disrupted by Tesla, so the company is disrupting itself.” On the surface, this seems very accurate. In creating the three business units, Farley hopes to speed up innovation, cut costs, and scale faster than EV startup companies, while also cutting into Tesla’s EV leadership. When digging deeper into what Farley is trying to accomplish, however, it seems the CEO is trying to quickly turnaround a stuck corporate culture.
By admitting that the company’s legacy business is slowing the transition to an EV automotive future, Farley actually telegraphs that it’s the culture at Ford he’s trying to change. Companies like Ford are not just a collection of products and services that run on an automatic, profit-producing autopilot. It takes focused leadership to drive companies forward. For example, the only difference between Ford on June 1, 2009 and General Motors on that same date was the CEO leadership of Ford’s Alan Mulally at that time. While GM filed for bankruptcy that day, Ford avoided the same fate and saw its share price grow over 200 percent from the date of GM’s bankruptcy until Mulally retired in June 2014. In fact, Mulally’s leadership was the primary reason I acquired Ford shares in 2008 (when Mulally retired, I should have sold Ford stock then).
Jim Farley versus Alan Mulally
Jim Farley is trying to be the leader that Ford hasn’t had since Alan Mulally (Farley joined Ford in 2010, hired by Mulally). In many ways Farley’s job is even more challenging than Mulally navigating the company through The Great Recession, which drove both GM and Chrysler into bankruptcy. Today, the entire industry is in a state of disruption not seen since the days of Henry Ford ushering in mass production with the invention of the assembly line in 1913. Those automakers that could make the mass production transition, thrived. Those that could not transition, died. Between 1908 and 1929, the number of automotive manufacturers declined from 253 to only 44. Many of the 44 that remained were wiped out during the Great Depression. This era’s disruption will have similar industry consequences.
I applaud Farley for trying to kick Ford in the corporate rear-end. I’m just not sure this solution is optimal. Ford’s legacy business funds all of the investment in its future EV business. Thus, today, the legacy business is as important as the EV business. Farley believes talent specialization is required by explaining, “you can’t ask an ICE [internal combustion engine] person to work on the sourcing of raw material for battery EVs.” Yet, much of the development for future EVs is common with ICE vehicles as well. For example the development for sheet metal, wheels, tires, seating, instrument panels, lighting, suspension systems, even software are all similar between EVs and ICE models. Why not allow important ICE expertise to be utilized directly for EV product development where appropriate? This should be a competitive advantage for legacy automakers like Ford. Surely much of the experience developing the suspension for F-150 can be directly utilized for the EV F-150 Lightning pickup truck. But under this new structure, what employee will be motivated to work for the legacy, “old” Ford Blue knowing that it’s a dying business, while others are working in what the Financial Times called, “the innovative half” of the company.
I recognize the creation of these business units also is done to entice Wall Street. It’s why Farley stressed during the announcement that each unit will have profit and loss reporting lines. Farley is desperate to push Ford’s stock price higher as well. While Tesla is valued at $884 billions, Ford only has a $72 billion valuation. This is a frustrating comparison most legacy automakers continue to endure. But will this restructuring be enough for investors? Only time will tell.
I will continue to cheer for Ford and its EV future. While the company is not one of my taGMan portfolio stocks, the global market for EVs will be large enough for many companies to win. I question the wisdom of this latest reorganization announcement. Yet, I also applaud Jim Farley for trying to swiftly push Ford to its inevitable future.
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TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur