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Jim Farley Ford Motor Co.’s Jim Farley was recently informed of a survey that found investors overwhelmingly believe automakers can’t afford to be competitive with Tesla Inc.
I’m with them,” the chief executive responded in an industry interview last month. “That’s why we’re doing business.”
Ford’s radical reorganization last year — involving electric, gas-powered and commercial vehicle operations in quasi-independent businesses — was designed to focus on more targeted growth areas, showing how committed the automaker is to capturing the EV market.
The company is now preparing to unveil the next step in that process, whether it will announce a financial structure for the redesigned company that tracks the profit and loss of each business. The management will “teach-in” analysts and investors on Wall Street on Thursday, before offering full results in its first-quarter earnings report on May 2.
Read more: Ford’s CEO takes long road to rebuilding old automaker
The newly-revised balance sheet will give investors a more complete view of Ford’s nascent EV business, including expenses and revenues, and how much money it is losing.
“Our battery electric business vehicle startup is buried within Ford,” John Lawler, the automaker’s chief financial officer, said in an interview. “Now we will show the transparency of what is the start of that. And like the beginning, they hesitate at the beginning.
The goal of what Ford insiders call a “re-funding” of the 120-year-old company is to chase Tesla’s strong margins, which are three times higher than Ford’s highest hopes for its EV business. Farley also said he wants to command the kind of investor respect that Elon Musk has at the world’s most valuable automaker.
Ford is currently the No. 2 seller of EVs in America, on the strength of its F-150 bolt-on pickup and battery-powered Mustang Mach-E. But it is miles behind Tesla, which has two parts of the US market.
Separating Ford’s EV operations into its own unit – dubbed the Model E – appears to be a move to achieve those ambitions while being financially rewarding for the first time.
“There’s a lot of curiosity about the model and how much money it’s losing,” David Whiston, an analyst at Morningstar in Chicago, said in an interview. “It may be expected, therefore, when it will succeed, and how useful it will be.”
While Ford is increasing visibility in its EV unit, it is also moving away from the regional events that have been a staple of its financial reporting. It will no longer report geography figures for North America, Europe, South America and China. That could make it harder to compare its performance directly to some peers, such as crosstown rival General Motors Co.
“Whenever you take away the transparency, it’s negative,” Joel Levington, director of credit research for Bloomberg Intelligence, said in an interview. “They add some here, but they also take some away, and they get frustrated about it.”
Ford says the reporting changes are necessary and reflect a new approach to running its business, focusing more on product categories than geographic markets. The company will still provide “color” as needed to explain trends in specific regions, Lawler said.
The cash flow through the business is also allowing Ford to rethink how it allocates resources.
Sharper Focus
“Our focus will be on who gets what capital,” Cathy O’Callaghan, a Ford executive, said in an interview. “There will be an element of competition between the three different parties as to who is going to make the biggest return on that investment.”
The change in outlook may give Ford a return to investment-grade credit after its early 2020 junk ratings fell.
Expectations were building that an upgrade to blue-chip status could happen this year before Ford reported a disappointing earnings cut. S&P Global auto ratings analyst Nishit Madlani believes there is a one in three chance Ford will be upgraded this year if the company makes the necessary cost improvements. The automaker’s ability to reach margin and financial targets will be key.
see also: Tesla Exits Junk-Rated World After Moody’s Upgrade
Ford has pledged that it will return its EV losses to an 8% margin in earnings before interest and taxes by 2026. For the full company, Ford aims for a 10% EBIT margin from then.
The company currently holds a BB+ rating on S&P and Fitch Ratings, one notch shy of investment grade. Moody’s rates the company at Ba2, or two levels from blue-chip status.
The lawmaker hopes that by clarifying the results for each of its business units, it will give more value to the gnawing than to estimate when the automaker will upgrade.
“Show how you deliver to each of these businesses and how we position ourselves.”
