What Does This Headline Really Mean? “Ford Will Lose Billions on Electric Vehicles.”

Often there are two main camps that arise when legacy automakers experience challenges in the development of electric vehicles. In one camp sits the Tesla-fanatics who believe every EV development hiccup by any legacy automaker is an obvious indication that legacy car companies will never compete with Tesla. The other camp contains the automotive old-timers who seem to have an “I told you so” attitude about the struggles legacy automakers may have in their transition to EVs. For the old-timers, the rush to develop electric vehicles by automakers is a misguided effort that should be dramatically slowed, if not halted entirely.

Last week Ford projected that it expects to lose $3 billion from its EV business unit this year. Logic would seem to dictate that early losses within an entirely new product business like EVs should be expected. In fact, Ford’s CFO, John Lawler, recently described the company’s EV efforts as a “startup company within Ford.” Lawler essentially suggested that like other startup companies, Ford expects to lose money while building out its EV business.

Yet, the Tesla-fanatics insist that Ford’s losses are evidence the company will never be profitably competitive with Tesla in the business of EVs. And predictably, the automotive old-timers insist the company should slow its EV investment, and allocate resources toward expanding its internal combustion engine (ICE) business.

The Tesla-fanatics have forgotten that the company they love is only recently profitable. Tesla generated negative operating losses every year from 2010 through 2019 before it successfully learned to scales its EV production and sales. Conversely, the old-timers frequently ignore the business opportunities presented by the global transition to electric vehicles. In fact, Tesla is the best example of these opportunities presented by the EV category.

The company will sell nearly 2 million cars globally this year. In 2022, its Model Y vehicle was the sixth best selling automobile in the US, and the fourth most sold vehicle in the world. The company’s operating margin last year was nearly 17%, which dwarfs most other volume automakers. As battery costs continue to decline, the old-timers also ignore that an EV is much more efficient to produce and will eventually be significantly more profitable than most ICE models.

Both camps (the Tesla-fanatics and the old-timers) ignore how Ford and other legacy automakers might weather their transition to an EV future. While Ford will lose $3 billion on its EV business this year, the company has other profitable segments that help finance the transition to an EV world. Ford will generate $13 billion in earnings before interest and taxes this year from its consumer ICE and commercial vehicle business units. Essentially, Ford’s ICE profits today are financing the EV profits of tomorrow.

I worry more about the survival of the pure play EV companies that are not named Tesla. Unlike legacy automakers, these companies have no “other business profits” to prop up the losses generated by their EV businesses. For example, Rivian losses increased sixty-three percent last year, with negative operating income growing to $-6.9 billion. Lucid’s operating income losses grew nearly seventy percent in 2022 to $-2.6 billion.

How long can EV automakers like this survive these levels of losses? As their share prices have cratered, the environment for raising capital using their stock now seems remote. And with interest rates rising, their ability to finance their business expansion now is more challenging.

Disclaimer

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.