Ford, traditionally linked with large vehicles like the F-150 and the Expedition SUV, is shifting its strategy under CEO Jim Farley’s leadership. In a recent earnings call, Farley emphasized the potential of smaller, more affordable electric vehicles (EVs) for future market growth. He stated that the company aims to achieve profitability through these smaller models, a significant pivot from its usual lineup.
Reports from earlier this year highlighted the heavy weight of new vehicles sold in the U.S., averaging over 4,300 pounds—much higher than in previous decades. Despite this trend, Farley believes EVs present a different business model where smaller sizes may prove more efficient and profitable. This contrasts with the high-margin, large internal combustion engine vehicles that have been Ford’s mainstay for years.
Rationale Behind the Shift
The American auto market has historically favored large vehicles, with SUVs and trucks comprising 80% of new car sales in 2022. This trend has generally benefited automakers, as larger vehicles often yield higher profit margins. “The bigger the vehicle, the higher the profit margin,” stated Farley. However, this principle does not apply to EVs, where the cost of larger batteries can erode profit margins.
In Ford’s current EV lineup, models like the Mustang Mach-E and F-150 Lightning are relatively heavy and pricey. These vehicles range from around 4,400 to nearly 7,000 pounds, with prices considerably higher than $40,000. As Ford pivots to smaller EV models, it aims for price points below $40,000, and ideally even below $30,000.
Competition and Market Challenges
Farley’s push for smaller EVs comes as Ford faces stiff competition from companies like Tesla (NASDAQ:TSLA) and BYD, both of which have plans to introduce more affordable electric vehicles. Farley has previously voiced the need for America to re-embrace smaller vehicles, noting their importance for societal and environmental benefits. The CEO has also mentioned that high battery costs for larger vehicles like Ford’s Super Duty make them economically unviable as EVs.
Ford’s recent financial performance highlights the urgency of this transition. The company’s EV division posted a significant loss of $1.14 billion between April and June, while its gas-powered vehicle sales remained profitable. Overall, Ford reported a quarterly profit of $1.8 billion on revenues of $47.8 billion, underscoring the financial challenges of scaling up its EV business.
The shift to smaller, more affordable EVs marks a strategic pivot for Ford as it navigates an evolving market landscape. While large vehicles have been highly profitable, the same approach doesn’t translate to electric models due to battery costs. Farley’s vision for compact EVs aims to balance profitability with the growing demand for sustainable transportation options. This move could position Ford competitively against other automakers pushing for smaller electric models, potentially reshaping consumer preferences and market dynamics in the electric vehicle sector.
