Can Ford Model E go from £2.5bn loss to 8% profit by 2026?

The bank Jefferies has calculated a $22,000 (£18,000) loss on every EV sold by Ford

The American giant is treating its Model E electric car division as a loss-making start-up

How can Ford turn its projection of a $3 billion (£2.5bn) loss on EVs this year into big enough gains to reach a promised 8% profit margin by 2026?

Ford last week split out its EV revenue and profits for the first time as part of restructuring its business into three different entities: Ford Blue for ICE vehicles, Ford Model E for EVs and Ford Pro for business sales of vans and cars.

Investors and analysts were able to peer under the bonnet of the EV side of Ford’s business for the first time, and it wasn’t pretty. 

Last year, Ford made a $2.1bn (£1.7bn) loss selling EVs such as the Mustang Mach-E SUV, F-150 Lightning pick-up truck and E-Transit van. This year, that will creep up to $3bn (£2.5bn).

But Ford also gave analysts an idea of how it will turn around that loss and create a business that will eventually surpass the margins of Ford Blue, which last year made a profit of $6.8bn (£5.5bn) with a margin of 7.2%.

For one thing, Ford pointed out, much of that loss came from the fact the company is pouring in money developing the second and third generation of EVs. Parallels were made with Silicon Valley tech companies and their huge capital requirements in early-stage development. 

“Model E is functioning like a start-up, untethered from legacy operations,” Ford chief financial officer John Lawler said in the presentation to investors.

Ford is currently going through a steep learning curve with the likes of the Mach-E, which it said was informing the development of its next round of EVs. “As velocity of this business accelerates, we have a flywheel effect,” Lawler said. “This puts us ahead of those only just coming to market with their portfolio of first-generation models."

Ford’s speed in launching the Mach-E, F-150 Lightning and E-Transit has actually been part of the problem.  “We moved quickly on these vehicles because we wanted to be first to market. They’re basically ICE designs converted to BEVs,” Lawler said.

Some of the cost inefficiencies were outlined by Ford CEO Jim Farley in February. For example, the Mach-E uses a cooling system originally developed for ICE vehicles. “It had to withhold four times the pressure of the cooling system that we actually use in the Mach-E,” Farley told the Wolfe Research Global Auto conference. 

The Ford team stripped down a Tesla Model Y for comparison and discovered that the wiring harness for the Mach-E was a mile longer and 32kg heavier. “In battery costs, that’s $500 (£400) of weight just to carry the wiring harness around,” Farley said.

Ford is working to correct that on its second-generation EVs. “We've redone all of our platforms, completely changed the engineering,” Farley said, referencing large, Tesla-style castings to reduce parts among other changes. “What you will see is a vehicle with half the labour content but radical simplicity.” 

Farley on Friday announced the first of the second-generation EVs, a pick-up codenamed Project T3 to be built at the EV-centric Blue Oval City plant that Ford is constructing near Memphis, Tennessee.

Ford has also hinted at future European EVs on its own platforms that will be built at Valencia, Spain, where it currently builds the Kuga SUV. 

Interestingly, Ford said it doesn’t count its Explorer SUV, which will enter production later this year in Germany on a Volkswagen Group platform, as a second-generation EV, suggesting that margins are going to be thinner on that car.

But design and engineering is only one way that Ford reckons it can overturn what the bank Jefferies has calculated is a unit loss of $22,000 on every EV sold.

Number one is scale. Ford last year sold 96,000 EVs with a margin of -41%. By the end of 2026, it hopes to be making two million EVs per year – a ramp-up that it predicts will bring scale savings of 20%. 

Next is the battery. Ford has partnered with Tesla supplier CATL to build a $3.5 billion lithium-iron phosphate (LFP) battery plant in Michigan, scheduled to open in 2026 with capacity produce enough batteries to power 400,000 EVs per year. 

Ford has previously said LFP is the key to unlocking 10-15% savings on the battery and will start fitting the Mach-E with the lower-cost chemistry from CATL from next year.

If this all sounds like it’s cribbing from Tesla, that’s the point. Tesla is the blueprint for EV makers for its tight focus on cost and subsequent margins. Tesla posted profit margins of 17% last year on sales of 1.9 million EVs, so it’s clearly on the right path. 

*Read more: Revolution or repetition? Tesla’s future victory is far from certain*

Tesla achieved that with just four models, and the Model Y and Model 3 took the lion’s share of the sales. Ford wants to do the same. “We’re not going to have a plethora of top hats [derivatives]. That’s not how we think you can be successful in electric vehicles,” Lawler said.

Ford is already taking Tesla’s relentless cost-cutting approach to its current first-generation EVs, and the company reckons the likes of Mach-E will be breaking even by the end of this year and even start generating a bit profit in 2024. That’s excluding the continued investment in EVs, however, meaning the Model E business unit will still be posting losses probably until 2025, Jefferies predicted.

One issue that Ford flagged on the road to EV profitability is pricing. As the likes of Tesla push prices down and the overall EV competition hots up, Ford will have to price competitively or lose out to rivals with better cost control.

*Ford ends European reporting*

One element of Ford’s split into the three main business units is that the company will no longer report regional results. That means we will no longer see how Ford is faring in its long-running efforts to make Europe profitable. Instead, the Ford Otosan joint venture in Turkey that makes the Transit and Transit Custom will come under Ford Pro. The joint venture will also take over the company’s factory in Romania, which makes the Puma crossover.

Profits (or losses) are booked by the unit that sells the vehicle, with all fleet sales (whether car or van, electric or ICE) going through Ford Pro. That means Ford Pro is likely to become the dominant force in Europe as far as the three business units go, at least until Model E starts selling more electric cars to private buyers.