Ford Stock (NYSE:F)
Recent announcements made by Ford Motor F +0.83% detail the company’s goals to achieve significant profitability in its electric vehicle business within the next few years. The company anticipates a decline in the prices of batteries and manufacturing. Even if Rivian Automotive (NASDAQ:RIVN) were to achieve the same level of success, it would not be enough to propel the company into the black.
This past Thursday, Ford (NYSE:F) disclosed its financial results, breaking them down by new business segments. Ford no longer reports its results according to the geographic region; rather, the company now reports results for its traditional car business, its business with commercial customers, and its business with electric vehicles.
On the operating line of Ford’s profit and loss statement in 2022, the electric vehicle (EV) business had a loss of approximately $2.1 billion. The margin of operating profit was negative by forty percent. In the electric vehicle (EV) industry, the target for the year 2026 is to achieve an operating profit margin of 8%.
The reduction in costs associated with batteries accounts for approximately one-quarter of the total reduction. The remaining portion is the result of economies of scale and production-related efficiencies.
If Ford can get 25% of the total reductions from batteries and 75% of the total reductions from manufacturing, respectively, this indicates that Ford will be able to get very roughly $6,000 out of the price of a battery pack and $20,000 out of the variable cost of producing an electric vehicle.
How Ford is Setting a Higher Bar for EV Cost
The revolutionary step that Ford is taking in the electric vehicle market entails taking a new approach to the manufacturing process as a whole. The company’s goal is to cut costs associated with the production of electric vehicles by streamlining the manufacturing process and improving the efficiency of the supply chain. Ford hopes that by taking these steps, electric vehicles will become on par in price with gasoline-powered automobiles.
The innovative approach that Ford is taking to the production of electric vehicles involves decreasing the number of components that are required in an electric vehicle. Because of these manufacturing cost reductions, electric vehicles are now more accessible to consumers of all income levels. In addition, Ford is working to improve the efficiency of the supply chain by purchasing components and materials from regional vendors. This strategy reduces the costs associated with transportation, which ultimately results in lower costs overall.
Battery technology is one of the most expensive components of an electric vehicle, and Ford is investing in its development as part of its overall EV strategy. The business is working on improving its batteries, which will make EVs more accessible to a wider audience financially. In addition, Ford is exploring the possibility of recycling and reusing batteries, which would bring down the overall cost of manufacturing electric vehicles.
When compared to the levels in 2022, these calculations suggest a reduction in the cost of batteries of approximately 40 percent. That isn’t too far off from the goals that the majority of businesses in this sector have set for themselves. It is the same percentage reduction that General Motors (GM) hopes to achieve with the next generation of batteries that it manufactures.
The fact that GM and Ford now own a portion of their local battery manufacturing has contributed to the improvement. This has eliminated the need for logistics as well as a portion of the profit margin that was previously paid to third-party battery suppliers. The scale and manufacturing-related improvements in the battery side of the business, which are the same kind of improvements Ford plans to implement in the electric vehicle assembly arena, are a part of the improvement.
It is important for the entire industry to achieve the battery goal. If battery costs were to drop by 40 percent, electric vehicles would cost roughly the same as gasoline-powered vehicles upon purchase but would be less expensive to run over the course of their lifetimes.
The numbers provided by Ford demonstrate that Ford’s competitor in the electric-truck market, Rivian Automotive (RIVN), still has a ways to go. If the same cost reductions could be achieved in battery and manufacturing-related costs, the start-up would generate a negative operating profit margin. In order for Rivian to achieve profitability, the company will need to locate additional cost reductions of at least one billion dollars.
It’s possible that Rivian has another issue. It has not disclosed any plans regarding its own battery capacity as of yet. Because of this, the potential for improvement from batteries may be hampered, and the company may have to search for variable cost reductions of close to two billion dollars.
It is very difficult to make comparisons between automakers because their production levels are so different. The findings are only a close approximation of the true value. Wall Street analysts have raised concerns about Rivian’s spending, but the company has not commented. 20,000 vehicles were produced by Rivan in 2022 at a cost of approximately $7 billion, after accounting for stock-based compensation and depreciation. The production of 96,000 automobiles by Ford in 2022 cost approximately the same amount.
Both stocks will benefit greatly from a reduction in expenses. The price of Ford stock is approximately seven times the company’s estimated annual profit. If investors were under the impression that the electric vehicle (EV) business will generate billions of dollars in operating profits within the next couple of years, the stock would most likely be trading at a higher price.
Over the course of the past year, shares of Rivian have dropped by more than 70%, and they currently trade for close to the amount of cash that Rivian has recorded on its books. The concern is being expressed by investors regarding current spending levels.
During Monday’s premarket trading, the price of Rivian stock rose 1.2%. The price of Ford shares rose 1.3% today. The market has reached a new high. Futures contracts for the S&P 500 (SPX +0.55%) and the Nasdaq Composite (COMP –0.00%) are currently trading higher by 0.7% and 0.5%, respectively.
FeaturedvImage: Unsplash
