Ford Motor Company (F) Morgan Stanley Sustainable Finance Summit Conference (Transcript)
Ford Motor Company (NYSE:F) Morgan Stanley Sustainable Finance Summit Conference Call May 25, 2023 10:15 AM ET
Company Participants
Jim Farley - President and Chief Executive Officer
Unidentified Analyst
Great. Welcome, everyone, and thank you for joining us all today for a conversation with one of the leaders in transformation of a critical piece of the real industrial economy. I'm thrilled to be joined this morning by Jim Farley, Ford Motor Company. Jim has been part of Ford since 2007, and assumed the role as President and CEO in October of 2020 as the company and the industry drove into its most significant transformation since the innovation of the Model T assembly line.
Under Jim’s leadership, Ford has introduced the Ford Mustang Mach-E and Ford F-150 Lightning, daring to lead the past for the electrification with two of Ford's most iconic and critical vehicles. Ford has also recently reorganized the company and its reporting along the lines of its traditional gasoline powertrain, electrification, and commercial vehicles, providing a pioneering transparency and accountability in the industry.
We're thrilled to have Jim with us today to discuss how he has approached revolutionizing a 120-year old purpose-driven company and an industry with its stakeholders. Before we dive into some questions, we'd like to share some background on Ford's mission and transformation journey with a short video.
[Video Presentation]
Great. So Jim, thanks for joining us today. Can you start by telling us a little bit about Ford’s journey to transform into a leader in electric vehicles, and how is your strategy unique amongst your peers?
Jim Farley
Sure. Well, first of all, I want to thank those of you who are partners for Ford and the Ford team for being here. We are the number one employer of Americans in our industry. We have about 60,000 hourly workers, about 20% higher than anyone else in our industry. And my grandfather was an hourly worker, started the company in 1913. So, this is a – and I worked at Toyota for 25 years. So, I came back to Ford as, kind of a volunteer really to make sure to do everything I can to make sure this American company makes it through the great recession and transformation.
I would say, we're entering the second inning of a nine inning baseball game. It's in execution now, kind of no longer are questioning what we need to do. We now know exactly what we have to do. The second order problems that we couldn't see in the first inning are now clear, like, the geopolitics or raw material processing for lithium and nickel, the labor overhang, vehicles that are 20% to 30% less labor content. Those kind of real issues are very clear now. Working through them. Everyone in my leadership team is new except for one person.
So, it's been very difficult on a personal level throughout the whole company. We've gotten out of India, gotten out of manufacturing in Brazil, which we were in for a 100 years. We've restructured Europe and we've restructured China. Tens of thousands of people have lost their jobs, hiring lots of new ones. And as we get into this, I guess, how we're different? We're leaning into what we're really good at. So, we don't want to do any more generic vehicles. We want to lean into work vehicles. We’re 41% share of commercial vehicles in the U.S.
So, if you have a health problem, you're probably going to be in a Ford ambulance. If you get pulled over, you're probably going to get pulled over by a police officer on a Ford, or if your house burns down, the fire department is probably going to show up in a Ford. And if you have a plumber, electrician, they're probably going to be in a Ford. That's the same in Europe.
So, we do really, really, really well in commercial vehicles, and they're very difficult, complex business. It requires physical service of the vehicle as it breakdown. And 95% of the market is small and medium-sized business, is very complicated.
We do very well with passionate products like Bronco’s and Mustang’s and F-150’s, and we do really well on trucks and large SUVs. So, that's what we're going to focus on our product strategy. Everyone thought that the transition is going to be to electric. It turns out that's actually not very interesting. It's necessary, but it's not interesting.
The most important change is to go from an analog to digital product. So, we now know we didn't a year ago of what the three shippable software will be for the car like your phone, it was like e-mail and listening to music in 2007, 2008. We now know it's like safety, security, productivity, software and partial autonomy.
So, it's really exciting to have the teams build-out the software and upgrade all the electric architectures in-source all of that, all the software that controls the vehicle inside the company. And now we're in the midst of that. We come out with our second-generation products. We're number two in the U.S. in hybrid; and we're number two in the U.S. in EV sales behind Tesla and Toyota. And we come out with our second generation products, which will be radically different than the first in about two years. And we sell about 4 million to 4.5 million vehicles a year at Ford.
We're like a middle weight in our industry. We're heavyweight when you look at our overall revenue because we have very high expensive vehicles, priced. The average F-150 today is $63,000. When I joined the company 15 years ago, it was $25,000. So, actually, Ford's transaction price in the U.S. is just about $10,000 less in a BMW now. They sell 200,000, we sell 2 million. So things we sell very expensive vehicles now, and that's our strategy.
But our second cycle product will be 2 million units of incremental capacity. The company has never grown since my grandfather was at the company, 2 million vehicles. So, a 30% growth in revenue. And our software business will go – we have 600,000 subscriptions now in software, and that will grow by 10-fold. So, our revenue will start to be in the billions in software over the next couple of years.
So, we're building the platforms, both the consumer-facing platforms and the vehicle, electric architecture platforms for all that software and redoing our distribution. And at the same time, we have to fix our industrial system to make cost competitive and to restore competitive quality so we can fund it all. So, that's where we are. We're in the messy middle. Lots of hard work.
Unidentified Analyst
So, you're coming out of all these new products, consumers are going to be adopting them and help them, Ford is going to grow, but a lot of these are going to be EV products, and there's an infrastructure issue related to that. How do you think about improving the charging infrastructure to support your customers as you grow this part of your business?
Jim Farley
Yes. It's a good question. I think the – on the commercial side, it's not an issue – most of the commercial customers do depot charging. They know exactly what route they do and they do the same miles. They don't overbuy batteries. Anyone with EV in this room is probably over – way over bought your battery, but the commercial vehicle customers don't. And so, the commercial side, we've gotten this far with mostly home charging.
If you look at a place like Norway, which has been 50% electric for 10 years now, you can kind of find the answers to retail charging and how it will play out. The government tried to do it there, it didn't really work. It was really – Tesla did a great job building out the supercharging network. And then the building standards got serious and retailers started putting fast charges in front of their stores, like supermarkets. So, people can plug in and it took 2 seconds to fill up your car with electrons because people were shopping anyways.
So, I believe we're, again, like maybe in the first inning of the infrastructure. I think we're most concerned about the grid. On the infrastructure side, I think it's room for some collaboration between the auto companies, which is totally unnatural for us. I keep thinking like in the 1800s, which train – how did the train companies agree on the gauge.
The Western railroads had different narrow gauge to go around corners, and then the plains gauges were much broader, wider for cargo. Someone had to agree who what gauge you use. Right now, we have two different plugs, for example, [NACS] [ph], the Tesla invented; and then SAE that invented the CCS are completely different, and it seems totally ridiculous that we have an infrastructure problem, and we can't even agree on what plug to use.
So, I think we need to start – I mean I think the first step is to work together in a way we haven't probably with the new EV brands and the traditional old companies. That's one. For us, we have to take commercial charging into our own hands like Tesla do with Supercharger network. I need to do that for commercial vehicles. So, we create our own charging company, own charging software company. And now we have about 50% attach rates, which is really high.
So, 50% of people who buy EVs, pick-up trucks or commercial vans are buying our charging equipment. That was a good move, I think. On the retail side, there's no easy answer. It will take a long time. Of course, everyone wants an easy answer, but there is no one. It's going to be really difficult like it was in Norway.
Unidentified Analyst
Speaking of things, there's no easy answer, the big theme around the auto industry recently has been the price cuts around Tesla, the competitive landscape when we look at what the product…
Jim Farley
I have no idea why everyone is surprised in all that. Yes. Henry Ford did it in 1913 with the Model T. His intro price is $810. Four years later, it was $500.
Unidentified Analyst
How do you think about – you've talked about how Ford is focused on the things that you're really good at and I'd like to find that first. How do you think about preserving that in the face of new competitive products coming from China? And how do you think about Ford's position relative to, sort of that transformation and the competitive landscape?
Jim Farley
Thank you. First of all, the most important thing that we're learning about electrification is that some of the most appealing parts of the vehicle aren't actually the propulsion system. One of the main reasons why 50% of the Lightning customers are new to pickup truck and new to Ford is because you can power your house for 3 days with the truck. It has nothing to do with the fact that the truck goes 0 to 60 in 4 seconds, which the President loved. But it's actually the grid in the U.S., in Florida, in Texas and California has lots of problems, and people don't want to buy big expensive generators or if you're on a job site, and you don't want to have 6 Honda generators humming away to build a new home.
The Lightning is a portable battery system, and a lot of Americans really want portable energy to power the house or job site or a giants tailgate or whatever. So, we're learning that, that actually, we have to challenge ourselves to use the battery more creatively than just move the vehicle. I think that's really important. And I don't think the competitors have figured that out yet. The other thing is that our industry is obsessed with large batteries because the customers are worried about range anxiety. And really, we think the solution is actually not a big battery. It's a small as possible battery for competitive range.
The humans normally taking a long trip are going to stop after 200 miles to 300 miles. So, actually, if you can fast charge and get another 200 miles in 10 minutes, that would be better than having a 500-mile range battery, which costs like $30,000 extra. As the batteries are heavy, you actually have to put more batteries in to power the batteries, to move the batteries because they're so heavy.
So, I think as far as the Chinese is concerned, it's going to be really humbling. They produce 70% of electric vehicles in the world in China, 70. And the winners are BYD, Geely, Changan, SAIC, Great Wall. And if you add the Western brands up in China on the internal combustion engine, a 60% share. But not one name I've given you is a Western company.
BYD's scale is way bigger than Tesla now. And they developed LFP technology, which is a better battery, no fire risk basically doesn't use – we use a little lithium, but it does not use cobalt or nickel, and it has twice the charging cycle of iron of lithium-ion battery. So, the Chinese are going to be the powerhouse, I think, we think. To be then, you either have to have a very distinct brands, which we think we do by [leaner icons] [ph] or you have to beat them on cost. But how do you beat them on cost if their scale is 5x yours? So, I don't know.
The Europeans let them in. So, now they're selling in high volume in Europe. We have a decision to make here in the U.S. And they have some of the best battery technology, as I said. So, if the politics of the battery get caught up, the battery localizing their technology in the U.S. it's caught up in politics, the customer is really going to get screwed. So, we have to work through that in our country. And I think they're really interesting companies. So, I think we see the Chinese as the main competitor, not GM or Toyota.
Unidentified Analyst
You're talking about the batteries and just how important it is to secure the supply. Your targets require a lot of batteries, right?
Jim Farley
Yes, 70 kilotons of lithium and nickel in the next 4 years.
Unidentified Analyst
How do you work with your suppliers and the supply base to make sure that the building of those batteries is aligned with your values and your ESG commitments?
Jim Farley
So, Bob and the team are here, it's not easy. We have requirements. Ford was one of the first
auto companies to have a sustainability policy, whether it's zero or use or 100% carbon-free electrons to power our plants in the U.S., we were one of the first. So, child labor, corruption, all those basic things we feel like we have to not only go secure the offtake agreements, we have to physically be at the sites where the processing takes place and the mining takes place. And we'll have an audit validation process to make sure that this is done right.
It's going to be very difficult because the scale mining and processing of raw materials is very complicated supply chain. The processing of lithium and nickel is boats go across the ocean multiple times just to develop the raw materials for battery, cathode nano materials. So, it's going to be very challenging to say hand on heart, we're good, but I think we have as good a process as anyone in the industry, but it's going to require physical oversight.
Unidentified Analyst
So, you talk about that value chain. You guys have recently announced this JV to procure nickel in Indonesia, which we helped advise you on. And you've made it covered earlier this week related to lithium, how important is it for you to go upstream? And are you done?
Jim Farley
Well, the issue is, like, lithium is super plentiful. The problem is, it takes – like there's not enough now. And so, it takes time. Does anyone know the average permitting in the U.S. for a mine? Who wants to have a mine in your neighborhood? It's like 12 years to 15 years just to get permitted. So, there's plenty of lithium. But to actually get it out of the ground and then processing it, there's zero processing capability in North America other than Tesla's Corpus Christi site.
So yes, it's critical. I mean this is just like what happened in mobile phones. You have to have the best product strategy, and you have to have the best strategy. But if you don't control the supply chain, you won't win. You have to secure the raw materials, but that's necessary, it’s not sufficiency. Sufficiency is back to your product strategy and your cost competitiveness, all the basics. But it's – so it's – there's a land rush right now for us, working with you and many others to secure 100% of the raw materials.
We need for 2 million vehicles growth. We're building the assembly plants and go down to [Tennessee] [ph] right now. We have our largest industrial site ever. It's 6 miles by 6 miles. And we have like 4 battery plants in construction right now. So, we got to have raw materials in all that. So, it's absolutely essential. And there'll be losers. Some people won't – they'll rely on their JV partners, the battery companies, the battery companies, ‘Oh, sorry, we just didn't get it or it's too expensive.’
So, there will be winners and losers in the supply chain as we go – let's put, and again, I just want to say the most important thing is not the batteries. It's not the electric motors or the inverters, it's the electric architecture that's what's going to transform our customers' experience. It's going to be shipping software to them.
Unidentified Analyst
So, on the software theme, I mean software has the ability to make these vehicles safer, better over time, flexible, but you have to build that architecture in, and it brings in all these new concerns that you haven't had to traditionally deal with data privacy protection. How are you maximizing the benefits of that software and managing those risks that are new and how you've approached your business?
Jim Farley
It’ll all come down to getting the [8 players] [ph] on the town side because they attract [8 players] [ph], which our industry doesn't really get, kind of think of a mechanical engineer, like they're all kind of the same. But software is so different. And if you can get the best person, it's a force multiplier. And those – but then you have to have company values around privacy. And you have to, kind of pick your brand positioning. I think we really like not because apples-to-apples we really like their idea around privacy.
You can imagine how personal data is on a vehicle like where you've been, how would you get there? Who are you with? So, it's really intimate data. So, we think for our commercial customers, too, like their clients, like we really want to be on the right side of that. But we have to use the data off the car to make the experience really good to make the software better. So, it's a huge tension. I'll give you an example, real one.
So, how many of you rented cars and lied about the amount of gas that was in it when you turn it in. Like all of us, right? Yes. So the rental cars company comes to us and says, ‘Hey, that little float in the gas tank, don't you know exactly how much is in there? Yes. Why don't you just sell us the data, and then we'll charge people based on how much fuel is actually in their car.’ So, what do you do then?
Now, we can sell the data to the rent-a-car company, but if they're driving a Ford, what's our contract with the renter of that Ford. Should we sell their data because we happen to know how much fuel is in there, even though it's actually, frankly, their data. That's like trillion examples like that of vehicle data coming off the car, how do you handle it practically from a privacy standpoint. I think we have the right details and values, but we almost, kind of don't know what we don't know yet.
So, we'll get into it. I don't want to be entrepreneurial about consumers' data after looking what happened with Facebook and a lot of social media, I don't want to be too entrepreneurial with my team. On the other hand, I definitely need the data to make predictive failure of the components better for a plumber because if I can sell them a car that never goes down, it's very valuable to them. If you're a plumber in [indiscernible] Manhattan, you lose that van, you're going to lose the revenue for that day.
So, if you have a vehicle that can self-diagnose itself and send warning signals to the owner two weeks before it fails, that's really valuable to them. So, I have to use the data to make it better, but I can't – there's a line.
Unidentified Analyst
You talked about in this, how important Ford's values are. And you've also mentioned there's this big labor dislocation. A lot of your core leadership team has actually changed. How do you change the people and the talent in the way that you're doing it, but preserve that 120-year-old culture and core values of Ford? I mean this seems like an enormous challenge. How do you balance that?
Jim Farley
You've got to recruit for people upfront that share that. One of the things values the company is [greediness] [ph], people. We found a lot of technology people who don't have the [greediness] [ph]. So, we have to recruit for the values. And then you have to codify them. We have in our behaviors what we expect from leadership team. And then you have to evaluate people based on them and give them regular feedback. It's not easy though because some people don't know what they don't know.
Some people don't know what good looks like. So, it's not easy. And many people haven't dealt with the reality of firing 5,000 people because they happen to be just in the wrong place. So, I think there's only so much you can do, but you just have to overcommunicate. You have to make it really clear, and you have to recruit the right people. Anything I missed, Team?
Unidentified Analyst
So, the other thing is, you've talked about Ford values, but they're not stacked, right? You've actually maybe shifted some of the priorities in it. You've started to prioritize a little bit more speed, innovation, and efficiency. You've talked a lot about Lean and how important that is in the organization, reducing complexity was a big theme of your Investor Day on Monday. How have you shifted that prioritization and the values of the organization overall because that's going to be all the way down to the bottom, right?
Jim Farley
Yes, just tied it to the business results. I mean, we've had a, kind of culture personality of CEOs in the car industries that kind of fall in love with quality and someone doesn't care. And so, like if you want to be world-class in quality, you want to be world-class in waste elimination, you have to do it culturally with something like Lean or else it will fall apart the next person, which I wanted to get better. I'm a transitional CEO.
I want the next person, but to get better for them, they don't have to worry about it. So, I think the needs of the business really speak very clearly on what changes need to happen in our behaviors. Speed is really important. Like there are a lot of – I know my competitors are snickering in the lighting right now. But they haven't sold 100,000 lightnings, I have. What they're like, well, it's not a ground-up EV. It's – yes, but you were three years late. Like the President drove our vehicle like we were the first one to innovate in full-size trucks.
So, speed really does matter a lot. And we want to be the first one with hands-off autonomy on a highway in a sunny day in New York. And we want to be – we have to be first sometimes. So, it's just the needs of the business.
Unidentified Analyst
We've spent a lot of time today talking about electric vehicles, but the fact is, is that people are still going to be buying gasoline-powered vehicles for a long, long time. What opportunities do you see from the work that you're doing around EV and efficiency and improving those vehicles and pursuing those ESG goals even in the context of a product that some would say is counter to that?
Jim Farley
Yeah. I think what we learned – when we went to aluminum on F-150, we learned a lot that actually – the image of people buy full-size truck for work actually, they don't want to get left behind. They actually want technology like everyone else. In fact, there are probably more inclined to use technology in the inside of the vehicle than a retail customer. So, we're Number 2 in hybrid in the U.S., which we don't [toot our horn] [ph] about, but we are. We put hybrid on F-150. It's extremely popular because they can power your house for 7 days.
So, we use it for other things than just more efficient propulsion like more network to Toyota with Prius, but we have – so we have to modernize the drivetrains. So, no one who buys Ford blue or internal combustion engine vehicle feels like they're left behind. Like they need to feel like, hey, I got the most efficient vehicle, but what we learned is that there are certain duty cycles or drive cycles that will never go electric because electric vehicle is a really bad solution.
If you're towing in [indiscernible] in Wyoming, you do not want electric vehicle because it all go like 100 miles. If you're towing something really heavy or doing real work. So, we took our internal combustion product lineup, and we only invested in areas that won't be disrupted quickly from electrification and then modernize and then also invest in electric architecture upgrades.
I think a lot of my competitors will go student body left and invest in electric architectures, [Adam] [ph], that only on the new stuff. And I think that would be a terrible mistake to our Super Duty customers, and it's the most profitable vehicle for – and how customers love [indiscernible] the highest net promoter score any vehicle in our fleet, and we're like 50% market share. They're going to like shipping software to their car just as much as our key customer.
So, you just have to keep investing, but you have to make sure that the products are durable. The revenue is durable as much as you can. And then you need to have really ruthless operators who operate that business to get the most out of the value for the company.
Unidentified Analyst
So, foreign purpose is helping to build a better world. That's your mission. How do you feel about your stature in the industry? And how – what is your responsibility to lead from the front?
Jim Farley
I think we're a family company. Bill Ford is Chairman. Thankfully, our family is very involved in the business, fifth-generation now, Ford’s involved in the business. So, there's a long arc to the company. It's like 120 years in a few months. So, we've gone through wars, depressions, all sort of [indiscernible] happens and we kind of made it through. So, I think our responsibility is to be a leader. It's maybe not fair, but it's great. And we accept that.
We accept that we want to be – like our competitors do stuff like this. We only have carbon-neutral electrons in our manufacturing. But then what they'll do is, we go to Florida and buy credits and still run their Michigan plants off coal. We don't do that. All of our plants will get low-carbon electrons. It's just the right thing to do.
Same with [indiscernible], same with child labor and corruption with the raw materials, a rare. And I think we also take a lead in things like making – reaching across from an old company like Ford to a new company like a Tesla or NEO or BYD to, kind of work together in a non-natural way as competitors. You'll see Ford do that just because that's what kind of company we are.
Unidentified Analyst
All right. We have a few minutes. Ready for the lightning round?
Jim Farley
Yes, sure.
Unidentified Analyst
All right. So, first of all, how is the F-150 Lightning with customers?
Jim Farley
Good. We're in our – going into our third year, we're sold out. We've increased the price [to] [ph] $11,000. Tesla has reduced their price by $7,000. We had a fall in our Mach-E, but it's only one-third of our volume, two-thirds are e-trains and lightning. We thought we'd sell 20,000. We upgraded to 70,000 capacity, and now we're rebuilding the facility for the third time in 3 years to 150,000 capacity in September. So, yes, we're [still down] [ph]. So far, so good. But the competition is going to get really exciting here by the end of next year. There will be a lot of choices for customers.
Unidentified Analyst
Good. Tell us the principles you are [going to apply] [ph]?
Jim Farley
Pretty simple for me. When someone asked how are you doing, I would say, I'm learning.
Unidentified Analyst
Growing up, before you joined Toyota, before you joined Ford, what was your dream job?
Jim Farley
Be a product planner for a car company. To be like the person who invented the product concept. Still doing that work. It drives my team nuts, actually. I think we need this. No, [at least I don't say] [ph] my son likes that or my daughter likes that. But – no, yes, I just love – I actually get as excited on minivan, as I do on Ford GT or a Raptor.
I just love seeing – I was a product planner, came up with the idea of a unibody lightweight crossover for women and combine it with a great dealership experience called the Rx 300 or Lexus in 1992 and it created the – we became the Number 1 luxury brand in the United States. So, I always love finding a [hole] [ph] in the market that others can't see because in our business, it's a big advantage. That's what I love. Product planning, yes.
Unidentified Analyst
[Name a] [ph] manufacture in any industry, any part of the world, who's getting it right?
Jim Farley
I like BYD. Totally vertically integrated, aggressive, unapologetic. They're even doing silicon carbide and [indiscernible] themselves now. Very, very impressive company. And they always were committed to electric. It was never a fashionable thing. They did a way before it was fashionable. I like also what Larry is doing at GE, a lot. If anyone can install a lean manufacturing system an American company, it's Larry Culp.
Unidentified Analyst
What cars are in your garage today? And what cars are going to be in your garage in 10 years?
Jim Farley
I have no idea, I [just] [ph] flip cars for profit. So, that's – my hobby is buying old cars and fix them up and sell them for a profit, so it changes a lot. Probably my [daily driver] [ph] in 1973 Bronco. It's all original. There's nothing fancy about it. No. I guess my favorite car, I have a 1950 [Lancia] [ph]. That's a company who went bankrupt because their engineers were too good. Cost is too high. They were bought by Fiat and they made a better car than Ferrari in the 1950s. They were first V6, production V6 in our industry. First, [DDR rear suspension] [ph].
They're the first independent suspension car. First, GT design is beautiful, designed by [Pininfarina] [ph], who end up doing all the Ferraris. So, I love that car. It's very complicated. I could see why they went bankrupt, but it's really fun to drive because it's actually faster than Honda Accord and better to drive, but it's a 1952 car. You cannot believe how modern it is. Those are probably my favorite.
Unidentified Analyst
All right. Best book you've read recently or favorite podcast?
Jim Farley
My favorite podcast is, mine. Sorry, I do think I'll drive – I interviewed like Tom Brady last year and only talked about cars. I just did Jimmy Fallon, just did Neil, [indiscernible] Tyson. And so, that's what I do in my weekend is usually a podcast. I guess, I like any podcast about well-being, staying calm, rejuvenating yourself, I'm kind of a junky for that stuff.
Unidentified Analyst
You seem like a very calm person.
Jim Farley
And books, I'm very diverse. I read a lot about native Americas.
Unidentified Analyst
All right. Superpower you'd most like to have and why?
Jim Farley
Kindness. I'd like to be more kind. I'm not. I have a – yes, so the CEO of Corning, Wendell, he’s really special guy. He gave me a [indiscernible] that I have on my desk that says, please be kind because most people are carrying a big burden that they don't share. So, I kind of live by it. I mean, I wish I had that super power. Like I see a lot of really kind people and that's one I'd love to have.
Unidentified Analyst
Well, thank you for joining us today. It was a great conversation. We're going to have a short break, but please join us here in 10 minutes for a panel discussion on emissions data and disclosure.
Jim Farley
Thank you.
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