Ford's $100 Billion EV Disaster...What Happened?

July 24th, 2024. Ford executives sheepishly  begin the earnings call. The audience, is angry investors, and skeptical analysts.

Ford has missed Wall Street’s earnings expectations, and as a result, their  shares saw their lowest drop since the financial crash of 2008. Their $103B  in debt, is even more concerning. The cause of this crisis seems  obvious to everyone, except Ford.

Leadership prepares for a barrage of  difficult questions and harsh comments. “You said that Ford’s a different company from  what it was three years ago,” says a Morgan Stanley analyst, “but the stock market really  doesn’t seem to agree with you at all on that. ” Leadership is stumped.

After a storm of criticism, Ford’s CEO, Jim Farley speaks. “The EV journey has been… humbling,” Ford had bet big on EVs, and had committed  $100 billion to the EV race. But now, that bet has failed, and they  seemed to be pulling out.

What happened to Ford? How did they end up here? As it turns out, this was caused by more than EVs.

Ford’s situation is bad, but on the surface, most  would assume Ford is doing fine. In fact, their revenue for one is moving up at a steady rate! (Show data in this graph from end of 2020) At the end of 2020, their revenue had  fallen dramatically during the pandemic, by over 50% year over year!

But after a  tough period, things began to pick up. Annual revenue was $127 billion in  2020, then $137 billion in 2021, then $158 in 2022, and finally, $176 in 2023! That’s honestly extremely impressive growth.

Especially in such a saturated  market like the automotive industry. But a company is much more than just revenue, and  at this scale, things are much more complicated. In fact, we can see much of the problem,  just by looking at their profitability.

Ford’s operating income has gone up and down,  but after an extremely unprofitably season during the pandemic, things were looking up in 2023. But as time passed and investors watched, their outlook changed from optimistic, to cautious,  to concerned. Ford’s income was going down, while their revenue was going up.

(Show data from the end of 2023, and show quarterly data getting worse and worse.  Use “trailing 12 months” data at the top). This dropped Ford down the list of the S&P500, all  the way to 494th, almost off the list entirely!

What’s going on here? If  their revenue is climbing, how is their profit simultaneously going down? Before we can answer that, we need to look at one crucial detail.

The reason the  alarm bells are ringing. Ford’s debt. At almost $150 billion total debt in 2023, Ford has a D/E ratio of 2.

2. That means their  debt is more than twice its shareholder equity. And that number has only risen since  then to a debt to equity ratio of 3.

59. For comparison, the industry average for  “automotive manufacturers” is 1. 01.

BMW’s ratio at this time was 1. 17, and Toyota’s was about 0. 6!

Ford has a staggering amount of debt, but what’s even stranger, is that this is nothing new. Even before the pandemic, they had a D/E ratio of 3 in 2019. They brought this down dramatically in 2021, but their debt  has slowly been creeping up again, jumping by over $10 billion in 2023.

What’s even funnier is that the Ford F-Series has been the best selling  car in America for 40 years straight, yet financially, things are shaky at best! There are two parts to this, and one of them is Ford’s EV ambitions. The saddest  part is that things started off so well.

In the 2010s, Ford watched the EV industry  cautiously. They were dabbling in the idea, but more as a concept, but  with no serious investment In 2017 they formed a dedicated  group towards researching EVs, named “Team Edison”. The goal  was to produce an all electric SUV by 2020.

And soon, in November 2019,  Ford revealed their first EV vehicle. The Mach-E reveal felt like an Apple press  conference. It sparked a lot of interest, But, Ford had much bigger plans.

In reality, The  Mach-E was a test, and the real EV breakthrough would come in just a couple years. Tension Other car makers like Tesla, or  the GM Hummer EV, or Rivians, all look distinctly “EV”. This strategy  works, as most EV customers want something flash and totally different.

But Ford had different plans. Remember what I said about The Ford F-Series?  The best selling car in America, and it’s held that title for 43 years.

It’s also held the  title of “best selling truck” for 48 years. They had captured perfect design. So, they  would use their golden goose as a template.

In May 2021, they revealed  their working prototype. The Ford F150 Lightning. It had a few modern tweaks, but ultimately  was made to appeal to the millions of people who just want a simple, effective truck. 

The same reliable product, but electric. Ford built this truck with their own customers in  mind at every step, and it paid off. Not only did the F-150 Lightning become the best selling  pickup truck in the US, but Ford became the second biggest EV seller in the country!

Only  losing to Tesla. The Mustang Mach-E was doing even better than the F Lighting! So, how is Ford in trouble?

They are dominating the EV market! Well, let’s take a step back. In 2023, The Mach-E sold over 40,000  units, up 3% from the previous year, and the F Lightning sold over 15,000, up  18%.

That sounds good, but when you look at the true scale of things, it’s really not. In their official sales report, we see Ford’s total vehicle sales were almost 2 million units,  and total EVs made up 64,000. So in reality, EVs accounted for just 3.

2% of sales. But that’s still a strong start right? It’s a niche but growing market!

True, but  unfortunately EVs are a money sink. Ford invested $11. 4B into two battery plants.

Then another $1. 8 billion in Canada for EV manufacturing. Then €2 Billion into an EV plant in Germany.

This is just scratching the surface however. Ford  committed $50 billion in 2022 to just EV spending. EVs aren’t like gas cars, at all.

Since they’re  entirely unique, they need entirely unique plants for batteries, and factories for manufacturing. Remember, these 10s of billions are going towards a tiny fraction of Ford’s actual revenue. But that’s okay because it’s a rapidly growing market, right?

Ford is just  building their long-term future. Well most certainly thought so, but  the EV market has changed dramatically. In 2022, a race to the bottom slowly began, as  Tesla battled emerging EVs in China.

They cut the price of the model 3 by 6%, then the model Y  by 11%. This was because their Chinese opposition, BYD, were already offering much cheaper EVs. But since Tesla is the market leader, it caused a domino effect.

This war only continued to escalate, and Ford was caught downwind. They had to cut  prices of the F Lighting by as much as $7000. It’s not just pricing, material costs were  rising, and supply chains were getting tighter, and this was happening for a while.

In quarter 1 of 2024, Ford’s EV unit reported losses of $1. 3 billion. That means for every EV they produced, they lost $130,000.

But while costs were rising, buyers and governments were getting cold feet. Governments were pulling support for the industry. Germany ended their EV subsidiary  program in December 2023, and soom, New Zealand, France and Sweden also followed suit.

Now in the US, Trump is attempting to do the same. It’s a crowded market, and also extremely  unprofitable. Now, Ford have realized it’s too much trouble.

They officially canceled  an upcoming EV SUV, and have written down most of their EV investments as a loss. The full year  of 2024 was a $5 billion loss for Ford’s EVs, and it expects the exact same for 2025! In the earnings call from the beginning, Ford revealed they were cutting the  spending on EVs from 40 to 30%, and were cutting the production of the F-150 Lightning.

All of this is quite surprising. Everyone was saying EVs were the future, and every company was  in the race for them. But now, it’s hard to say.

What’s surprising though, is this is just one  crisis Ford is facing. There’s an entirely different one straining the business, and  somehow, it’s much worse than the EV disaster. Despite holding spot for the #1 most  sold car in America, Ford has had a rough relationship with consistency.

They can’t seem to get their quality control right, and many of the cars  they send out, end up coming back. In 2020, Ford recalled over 700,000 vehicles,  as the rearview cameras would suddenly switch off. Though, that’s nothing.

Just four years later, Ford issued 37 different recalls, which included  2 million Ford Explorers, and almost 800,000 other models for electrical issues. To make matters worse, that same year they were also ordered to pay a penalty of $165 million  to the US government, for recalling vehicles too slowly, and offering inaccurate information. In 2014, Ford had expenses of $4.

8 billion on warranties, which is pretty high,  yet, as the years went by, this problem got worse and worse. By 2023, this number had  jumped to $11. 5 billion.

Repair costs also grew by about $2 billion as well. Investors have had enough. In the 2024 Q2 earnings call, one analyst asked  “How can investors really build confidence in an earnings trajectory when every year, the  surprise warranty issues keep happening?

” Ford’s CEO Jim Farley nervously responded, saying  that quality is Ford’s “number one priority”. But investors aren’t buying it. In  fact, Ford’s PE ratio currently sits at an unbelievable low of 6.

32. That quarter alone Ford spent $2. 3 billion on recalls and warranties, with  some costs coming to $25.

5 million per day. The famous Ford F-series doesn’t  seem to be the main culprit, it’s many of Ford’s modern models. In fact, Ford's defect rate increases by 70% after they launch a new model.

The  industry average is only a 20% increase. Something has gone terribly wrong. Ford seems  to be thriving, and simultaneously dying.

Ford can’t get their costs under control.  Climbing revenue doesn’t mean much, if it doesn’t translate to profit. Now, it’s cost them billions, and the trust of investors.

But, they’re also in too deep to abandon EVs. Tens of billions sunk into EV factories  and plants that produce unprofitable cars. EV might have been the alluring future  investment, but it’s distracted Ford from a growing sinkhole right beneath them.

Ford needs to fix their core business. They need to fix their quality control,  before it destroys their brand. Aside from the new EV makers, Ford is  the only American car company that has never gone bankrupt.

But the way things  are going, who knows what happens next. Another American giant that’s fumbling  the ball with $180 billion in debt despite strong market share is AT&T. Check out  this video to learn more but until then.