Ford Splits EV Business - Not Really

Job Chapter 23 verses 10-11 state, "But he knows the way that I take; when he has tested me. I will come forth as gold. My feet have closely followed his steps; I have kept to his way without turning aside."

What do I think of when I hear the word test? In my younger days, I thought of literal tests from school, and as I've grown older, I relate more to this verse above. Life is filled with tests and some are an expected process while others are unforeseen. Regardless, if I continue to abide in God's word following Jesus Christ, I will come through any test stronger.

The EV revolution is going to be a very big test for many companies. These companies range from vertically integrated EV leaders, to traditional automotive OEMs, to what I like to call EV pretenders. Unlike the Christian who will go through any test and emerge stronger, not all of the companies within these categories will win, let alone survive.

The news swirled on Wednesday, March 2nd with Ford Motor Company's (F) SP surging over 8% - F will be splitting out its EV business to attempt to "unlock" the the opportunity for this market. Let's be clear, this is no spin-off and in my opinion F finds itself in a similar position despite the move. Here's the highlights:

Ford Accelerating Transformation: Forming Distinct Auto Units to Scale EVs, Strengthen Operations, Unlock Value

  • Creates distinct electric vehicle and internal combustion businesses poised to compete and win against both new EV competitors and established automakers

  • Organizes Ford to deliver for customers with the focus and speed of a startup at the leading edge of technology, supported by deep expertise in engineering and high-volume production

  • Ford Blue will build out company’s iconic portfolio of ICE vehicles to drive growth and profitability – relentlessly attacking costs, simplifying operations and improving quality; will provide world-class hardware engineering and manufacturing capabilities for all of Ford

  • Ford Model e will accelerate innovation and delivery of breakthrough electric vehicles at scale, and develop software and connected vehicle technologies and services for all of Ford

  • Ford Blue and Ford Model e will operate as distinct businesses, but share relevant technology and best practices to leverage scale and drive operating improvements; along with Ford Pro, all three businesses are expected to have discrete P&Ls by 2023

  • Accelerates Ford+ plan to unlock growth and create value for Ford’s shareholders: total company adjusted EBIT margin of 10% and annual production of more than 2 million EVs by 2026; expect EVs to represent half of global volume by 2030

I understand that this restructuring will segregate and organize F's Model e and Blue revamped segments. The leadership changes also organize F's bifurcated approach with respect to human capital. But I remain highly skeptical that this will address core issues that F is facing.

F continues to tout its focus areas of competing on two key fronts for both ICE and EV markets. I've always felt that key issues for F stemming from their foray (accelerated at that) into the EV revolution were competition and cannibalization against itself. This was with respect to human capital, capital expenditures, consumer acceptance of EV versus ICE products, direct-to-consumer and used vehicle sales, supply chain resource allocation and constraints, among others.

The fact that F has separated its two core business segments doesn't really change many of these issues. F will still be competing against itself for all these issues and through each step of the way for the company's progression. The counter arguments against this are that the company will have two clear paths now, and human capital will be better organized, leading to improved performance respectively over time. However, the culture at F will not be easily reestablished through the division of this restructuring. It will also not be seamless and there will be learning curves and time taken to truly get each segment working optimally.

The most important factor will be that F will still be balancing ICE and EV technologies, regardless of this approach. My opinion is that companies like Tesla, Inc. (TSLA), Lucid Group, Inc. (LCID), and Rivian Automotive, Inc. (RIVN) will be in stronger positions as vertically integrated EV leaders. F would have been better suited to do a capital raise and to completely spin-off the EV segment to truly unlock shareholder value and be a risk-taker to go after the EV market. I view the recent move not entirely as too conservative, as F is in a tough position to be able to spin-off its EV business, but rather a function of barriers that are typical for legacy incumbents. And I continue to believe that traditional automotive OEMs will learn the hard way as many legacy incumbents have, that more innovative risk takers are tougher to beat than they truly recognize.

A good example here is Amazon, Inc. (AMZN). Everyone knows the story, and companies like Target Corporation (TGT) and Walmart, Inc. (WMT) have learned the hard way that they are incapable of competing at the same level. TGT has explicitly admitted this as they are not willing to compete on an SKU basis, and WMT has touted their abilities to grow their 1P and 3P E-commerce business, and yet have fallen behind a newer entrant in Shopify, Inc. (SHOP), now being the third largest E-commerce company in the U.S. by GMV.

I believe that both F and General Motors Co. (GM) will discover that their ambitions to pivot to the EV revolution, while still maintaining their ICE businesses will not pan out as promised, taking much longer to come to fruition.

I am disappointed that F has yet to publicize their February 2022 U.S. vehicle statistics this week as is typical each month. It will be the first apples-to-apples year-over-year comparison for the Mach-E and I am not optimistic that F will see robust growth in 2022. In fact, while F continues to tout how great of a market leader the Mach-E is, it may end up fizzling completely out over the mid-term. Additionally, the Ford Lightning EV also will be held to a high standard against its ICE counterpart. As I've said, F is competing mostly against itself and has much to lose if it cannot create equivalent and/or sustainable products.

The EV revolution is going to burn many investors. First, the EV Pretenders like Lordstown Motors, Inc. (RIDE) and Electric Last Mile Solutions, Inc. (ELMS) among many others will be going bankrupt sooner than later. RIDE will likely be one of the first this year and most de-SPACed public companies will be at risk. Traditional automotive OEMs will struggle as well from their insurmountable legacy disfunctions. While there are risks for all competitors, I continue to believe that vertically integrated EV leaders will be the mid- and long-term winners from an investment perspective.

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