Jim Farley: You can imagine — John, you can — thank you for your question. You can imagine with our choice portfolio being big on scaled hybrids, ICE, of course, and EV, this is a very fundamental question for us because we have to plan our capacity years out. Here’s what we found. Customers are doing the quick showroom math on hybrids. They can quickly evaluate the breakeven between ICE and a hybrid on the showroom floor. For an F-150, they can — they know how much a Honda generator cost versus Pro Power on board, and they don’t have to change their behavior. A lot of the operating cost efficiencies in EV for a mainstream customer require change like installing a charger at home, or they’re uncertain. How much will I save on repair cost?
How much will I save on electrons versus gasoline? It’s harder to compare. And so we’re just seeing the cost of ownership, which is interesting, because the success of EVs and Pro is a customer that does that math more brutally and they use the vehicle at a higher utilization. So they’re looking at cost of ownership in a much clearer lens. And therefore, some of them are doing the math and going to EV. I think that math has always been there for HEV, but now more customers are interested in doing that. And we believe that customers are smart and some people would do these cycles for EVs. So going to do that math over time and it’s worth investing because it’s a really good business. But it’s on us to get the cost right. So I just think we’re seeing the math for an EV customer, mainstream EV customer is a little bit more opaque than what we see on hybrid.
We’re hearing — Marin, do you want to say anything quickly about dealers?
Marin Gjaja: Yes. I think what we’re seeing with our dealers is they’ve been making margins comparable to their ICE vehicles in the last year. And in ’21 and ’22, we’re actually doing better than their ICE vehicles when pricing was really strong. So we feel really good about making sure our dealers are making money on this and are making investments for the long-term. But I think that’s something that we monitor closely. I think just building on Jim’s point quickly, I would just say the big difference for consumers is they make that 1 choice every few years, whereas the Pro customer is changing their fleet, consistently buying lots of vehicles, and they test and they learn what the TCO difference is that total cost of operation.
Jim Farley: And as far as the manufacturing capacity, we planned that 40% growth in HEVs years ago, so that is our capacity. We may have some pricing room above that. And we’ve seen actually HEV pricing become more robust as we hit these capacity limits. But 40% growth is a big increase for us. We think we got it about right. That means like on an F-150, America’s best-selling vehicle, we think 25% of the sales or America’s best-selling vehicles can be hybrid. And I think we’re going to get close to some of the all-hybrid nameplates out there that people think of when they think of hybrids with F-150. So we have a lot of flexibility. I think we’re in good shape.
John Murphy: Jim, just one follow-up. I mean, you reported to a rumor to be doing a two-week tour to your dealers, around your different dealers. I’m just curious, I mean, some of them are happy, some of them are annoyed at the EV stuff. What is the general message going to be as you’re going around to the all-important channel and trying to get the troops in line and everything moving in the right direction in the distribution channel?
Jim Farley: A couple of key messages. First of all, I mentioned Ford Pro and what a profit juggernaut that is. We continue to need our dealers to invest in the brick-and-mortar in those remote service van and accelerate that because that is the upside. We want to get to — if we want to get to 20% of the profit for Pro being attached services, it’s going to have to come on the back of capacity in our dealers and vans. So invest in Pro. The second thing is we have manufacturing flexibility between ICE and EV and hybrid. So we want to make sure that they understand that we’re in probably better shape than any other brand in this transition. The third message is we want them to understand our progress on quality, and we are going to press to be among the leaders in retailing.
They should keep for our customer, remote pickup and service, doing more repairs for our retail customers remote, and that takes investment in their side. We really want to step on the gas on customer experience, both ownership and purchase. And I think that has to come from the top. Jim Farley has to say to all these dealers who are private investors, we need your partnership right now. That’s why I’m going on the tour.
John Murphy: Sounds good. Thank you very much.
Operator: The next question is from Rod Lache with Wolfe Research. Please go ahead.
Rod Lache: Hi, everybody. Jim, you said that you’re discovering that the adoption curve for EVs is a bit shallower, but we’re still seeing $5 billion to $5.5 billion of losses in Model e, which implies that structural costs are probably higher in 2024 than 2023. So it sounds like you’re committed because you see the ultimate benefit and maybe also a little bit because there isn’t much choice. So ultimately, the question is, can you control and commit to when that business reaches breakeven, either through stronger demand or lower spending? Because from here, $5 billion improvement is pretty meaningful. Or do you have to do that because of the trajectory of ZEV and EPA and all the other things possibly exceeding where consumers are?
Jim Farley: Well, we’re not going to go to market with the vehicle unless we completely convinced ourselves that it’s going to be profitable. And that takes some adjustments on timing actually. And we see opportunity in the short term to make some adjustments. But yes, I know it’s a huge turnaround and it’s a big number. John, maybe you want to go into the actual losses in Model e just to pick them apart a little bit. And then I think you’ll see a little bit more about the opportunity we have at Gen 2.
John Lawler: Yes, the biggest issue we have in our Gen 1 vehicles, of course, is that the revenue collapsed and they’re not optimized from a cost standpoint. We put them through very quickly to get to market and you’re seeing that flow through. But I think, Rod, part of what you were getting at is that we have no choice. And we will continue to work on improving the cost structure of the Gen 1 vehicles. And as Jim said, our Gen 2 vehicles we won’t launch unless we can get to a profit and a return on that capital that we’re investing there at the pricing environment that we now understand is reality. So yes, it is very much the mother of all optimization modeling and work around the balance between how many EVs we sell because we talked about the compliance benefit of that.
For every Lightning, we can sell 12 ICE vehicles. We can sell a number of ICE vehicles with every Mach-E we sell, and so there’s that balance. And then there’s the balance of what we need to sell from the ICE standpoint and how we can improve with HEVs there, and that’s a benefit, too. But there’s also, and you’ll see that in our K tomorrow, we are buying credits as they’re available. So we have to optimize across all three of those frontiers and that’s what we’re working on right now. But we know that we have to have this electric vehicle business stand on its own and be profitable because we know that there are competitors out there. We talked about that the Chinese as well as Tesla that are profitable, and we have to cross that fulcrum and get there.
And that’s what our goal is. So it needs to be a benefit of profitable business, return on the capital plus the compliance benefit that we get from those.
Jim Farley: And Rod, we have a lot of stakeholders at Ford so we’re not going to go in a lot of details, but we have optionality even this year in capital spending. I mean, a lot of that guide is EVs. John, I don’t know if you want to be specific but…
John Lawler: It’s about 40% last year and 40% of our CapEx this year and is EV.
Jim Farley: And we’re driving as a team to be on the low end of that range.
John Lawler: Absolutely.
Jim Farley: Because we are working hard on our EV spend. And I just want to make sure we don’t want to leave this call with the fact that this is totally baked. We are working really hard to be on the low end of that range because we think it’s appropriate to run the business.
Rod Lache: Can you commit to breakeven at a certain point that you said before that the Gen 2 vehicles come out in 2026, is that kind of the time line for closing that $5 billion? And then just as a follow-up, I think you’re saying that you’ve got line of sight on warranty coming down. Will we see the variable cost disadvantage that you’ve highlighted in warranty and material starting to come down this year?
Jim Farley: We have the leader of our EV business here, Marin, so I think that question goes to you on timing and warranty.
