Ford Motor Company (F) Earnings Call Transcript & Summary

Hi. Good afternoon. I'm Ryan Brinkman, the automotive equity research analyst here at JPMorgan. Thanks for joining us for the 2020 JPMorgan Automotive Conference being held virtually this year. We're going to get going with our next presentation, which is from Ford Motor Company. [Operator Instructions] So with that, we've got a number of guests here. We have Stuart Rowley, the President of Ford Europe. We have Hans Schep, the General Manager of Commercial Vehicles for Ford Europe; Sarah-Jayne or SJ Williams, the Director of Ford Smart Mobility for Ford Europe; and Lynn Antipas Tyson, Executive Director of Investor Relations. Stuart, Hans, SJ, Lynn, thanks for being with us. Appreciate it.

Pleasure. And we also have -- wait. And Ryan, we also have Henry Ford III here who's part -- and he's part of the IR team.

Yes. And also the -- maybe a great grandson or great, great. I'm sorry, I've lost track of the famous Henry Ford namesake. I thought to check in, maybe just first, on the broad health of the European market. I'd be interested to know your outlook for the recovery in vehicle sales but also some of the other measures of industry health such as used car prices. I don't know if they've really recovered like that in the U.S. Inventories, how about transaction prices? Just what is the latest that you're seeing on the ground over there and your expectations going forward?

Yes, Ryan. Well, thank you, and good morning, everybody. We did have some prepared remarks and a few slides we were going to go through, Ryan. Want us to go through those and I think...

Oh, I'm sorry. Go ahead, yes. Great. Yes, sure.

Yes. So well, good afternoon, good morning, everybody, and thank you for your interest in Ford Motor Company. I have my colleagues Hans and SJ with me. We thought we'd take about 15 minutes just to give you an overview of our strategy here in Europe and I'll start that off. I believe you have materials available that we'll refer to. So we announced a reset and redesign program in Ford of Europe in January of 2019 to fundamentally transform our business in Europe. And that program is summarized in the graphic that we've got on Slide 2 of our materials. Our objective was to return to profitability in the near term. And in 2019 now, we improved our results to about a $50 million loss for Europe or a $123 million profit, excluding the Russia business, which has now been restructured and we've taken a minority position, which is now reported in our IMG segment. So we achieved that objective, but more importantly, to deliver a sustained 6% EBIT margin on an ongoing basis. And we said we were going to and have organized our business around 3 business lines: commercial vehicles, passenger vehicles and imports. And all 3 of those business lines are now stood up, and each of them have a dedicated leadership in place with clear P&L accountability. And we're going to spend a few minutes today talking about the commercial vehicle business, which will be the foundation of our business in Europe, and Hans Schep, who is the general manager of that business, is going to take you through our strategy. In terms of our reset program through 2020, that was designed to do 2 things: to drive gross margin on a vehicle line basis and to reduce structural cost as a step function, including a net reduction of approximately 10,000 people or 20% of our workforce in Western Europe plus a reduction of 2,000 people in Russia, which is now complete. And that was intended to drive a structural cost reduction of approximately $1 billion net. Now as we grow our commercial vehicle share in Europe, and Hans will share that with you, and shift our passenger vehicle portfolio to utilities, we have now delivered -- we now delivered $800 million of mix and net pricing improvements in 2019, and we have delivered a further $700 million in the first half of 2020. On the structural cost side, as of June 30, we have reduced net 7,500 people in Western Europe, and we will deliver the 10,000-person reduction by the end of this year. We've closed 5, closed or sold 5 of the 6 plants that we announced we would exit and the sixth, which is the Bridgend engine plant is on track to close in September, i.e., next month. We delivered almost a $0.5 billion structural cost reduction in 2019, and in the first half of 2020, we delivered a further -- a net $400 million reduction. And although some of that reduction in the first half of 2020 was onetime in nature as we went through the COVID crisis, we are on track to deliver the $1 billion net reduction by the end of the year. And you'll see the value of that in our 2021 results. I'm sure many of you have on mind or in mind whether the coronavirus crisis has impacted us, and of course, it has, and you saw that in our first quarter. It was really the March result. We were well on track through the end of February and of course, in the second quarter. But as a leadership team in our European business, Ford Europe business, we set ourselves the objective to protect our people, to manage the crisis and then to get back on track quickly, and we have a plan in place to do that and we are actively now executing that plan. So although we will be operating in lower industry environment as we move forward, we intend to deliver the plan that we are committed to. So with that, I'll hand over to Hans, who will talk to you about our commercial vehicle business.

Thank you, Stuart. So yes, our commercial vehicle business in Europe has been quite strong for a while. And the materials we sent you on the third page, you can see the market share trajectory. In 2012, we were the #7 brand in the marketplace in Europe, and we improved that position to market leader by 2015. And ever since, we've been the market leader with a strengthening market share. And actually, our leadership position is -- has been extending. And also, this year, we're on track to keep that #1 position for the sixth consecutive year. When -- about 18 months ago, we thought about how will we need to be organized and how do we need to reset our strategy in order to not only be market leaders now but also have a firm position in the marketplace after today and in the future. And what we did is we rewrote our strategy. We determined our vision as to make our customers' business thrive, and we have designed a strategy on how to win in an ever more complex and complicated market going forward. And we'll -- I'll talk a little bit about that in a minute. And what we did as well is when we had that plan finalized, we then organized ourselves around that plan. So that each and...

Sorry, I think we might have lost Hans there? [Technical Difficulty]

Yes. So let me maybe pick that up until Hans returns. So Hans was referring to our...

I'm back. Can you hear me again?

Go ahead, Hans.

Sorry, my Internet connection barely is -- it's not so stable. Okay. Let me push on this. So we organized ourselves around delivering that strategy. And within the reset phase that Stuart was referring to, where we actually reduced our personnel by -- our resources by 20%, we doubled the CV dedicated leadership team. So that, I think, is a clear indication of where we believe our future will be. Let me talk briefly about our strategy, which is on Page #4 of the material we sent. So first of all, I mean, this is about 3 things. The first thing is leveraging our strengths. And one of those strengths is our low-cost sourcing advantage that we have. Our manufacturing in Turkey with our joint venture Ford Otosan is a very, very strong asset that we have. And actually, we amplified that now by getting more scale with our alliance with Volkswagen that you may have heard of. Then secondly, we deliver -- we strongly focus on delivering the basics of our business specifically around uptime, which is really critical to our commercial customers. So for instance, the transit center network that we have in Europe, we've evolved that with higher standards to our customers to deliver uptime for their businesses. And the third element is all about building our 5 strategic pillars. I'll give you a few examples. The first one is about making our partnerships that we have in our business available to our customers. And the best example there to use, I think, is the network we have with converters. As you may know, a lot of products that we bring to market get a second-stage conversion to then be suitable for the end user. And when we started this plan, we had about 50 partners. And right now, we're about at about 200 of these partners, so we're pushing on there. Second element that we're building out is we call that deep co-development. We have dedicated teams who work with our larger strategic customers to really understand their business and how we can make their business more productive and better. So we work with them to be much more than just a supplier of vehicles but really a partner to improve their businesses. The third element here is owning the customer relationship. And that means that we don't want to deal with our customers when they purchase a vehicle or when they [indiscernible] but really, we want to have an end-to-end relationship to help them [indiscernible] to run their businesses [indiscernible]. And last month, we announced -- we found the new [indiscernible] that's also a joint venture, the ALD Automotive, a well-established mobility partner in Europe, offer our end use customers [indiscernible] fleet management. The fourth element is all about [ partly in easily ] integrating our customers and our partners' solutions into our vehicles and into our ecosystems. And underpinning all of that lastly is our [indiscernible] connected services. And I'd like to hand over to Sarah-Jayne to talk a little bit about that.

Thanks, Hans, and good morning, everybody. Just apologize as an electrical storm that's actually just started in London, so there's a little bit of a [ backing ] in the outside. So hopefully, it won't disrupt the audio. Last year, a number of you visited us in London to our mobility innovation offices. And we showed you a video looking at how we were wanting to move from selling products and services to really giving our customers connected solutions that would help our businesses thrive. If you look on Slide 5, we are developing our solutions around 3 core experiences for our commercial customers. The first is smart ownership, and that's really focusing on enabling vehicle uptime and also drive uptime. And with that, it's really about the health and well-being of the drivers and combining that with fleet management. The second experience area is around business services, and that's really looking at the types of productivity solutions that integrate our business that -- our customers' business into our vehicles and our vehicles into our customers' business operations. And then the final area is around mobility services, which is really providing solutions that enable our customers to operate in a sustainable way in an urban environment. For all of those experiences, we are telling them to meet different customer personas, personas within both medium and large fleets as well as for the independent operators and small businesses. For the medium and large fleets, Hans talked a bit about the importance of uptime. There, our goal is to integrate the connected vehicle data with the wider Ford ecosystem, including our dealers, and intelligently grouping the different types of data that we have. So that could be predictive data, diagnostic data, prognostic signals together with our own internal information around warranty information as well as information that might come from drivers around, for example, broken taillights, those types of things and combine them together in an intelligent way for our customers so that they can reduce the amount of time that their vehicles are off the road. Customers can experience this either through kind of a do-it-yourself solution through accessing our data or using one of our tools, for example, the Ford Telematics tool, which works not just for Ford vehicles but actually all makes of vehicles. And we also now have, as Hans referred to, Ford Fleet Management, where we can provide different levels of [indiscernible] a do-it-for-you solution, providing fleet management to our customers. For the independent operators and the small businesses, last year, we launched a tailored app for those customers called Forecast Pro that enables our customers to be able to proactively monitor their vehicle health, manage a small fleet of up to 5 vehicles and also access some unique safety and security features. And our solutions -- sorry, our focus on solutions have already started to bear fruit. For those of you that were with us last year, we talked about the urban electric van project that we were doing in collaboration with Transport for London, which is really to provide a solution for our customers that enabled them to operate their businesses in a productive and a sustainable way in the urban centers. We tested prototype plug-in hybrid transit vehicles and services with real customers over a 12-month period, and we fed all the learnings back -- about those products and experiences back into the program to create a really great solution for our customers. Our focus on design thinking, [ highlighting ] our first-ever prototype vehicles with our customers and on building solutions is really critical to enabling us to win the International Van of the Year Award for the Transit vehicle, which you can see on the right of the slide. Looking forward to continuing to innovate on solutions that help our customers' businesses thrive and also operate sustainably in cities. Today, we're continuing on the theme around the plug-in hybrid running pilots both in Valencia and Cologne using blockchain to help authenticate that a vehicle has gone into the EV mode when it goes into, for example, a city center where there is urban access regulations, where the customer may have to pay. So that's looking at the solutions that help our customers' businesses thrive. If you go on to the next slide, Slide 6, we're also looking at how to kind of increase our focus on connectivity to help our own businesses thrive and optimize our business. And what we're seeing is, as our number of connected vehicle grows, our opportunity to derive both insights and use data proactively increases exponentially. By comparing data that we've traditionally got through our dealer network, when customers have bought their vehicles into the dealership with data from our connected vehicles, we are now able to see that we can detect issues [indiscernible] previously and are able to kind of proactively use that data to reduce the impact on our customers and also to reduce our costs. We're also using that data to understand more about how our features are used and tailor how we set up those features to get a better first experience for our customers. So a recent example is we were analyzing the usage of our heads-up display within the vehicle. And we could see that's a highly used feature, but 80% of customers actually adjusted the position of the data on the screen. So we're now able to -- we configured that it sort of sits in that perfect position for the majority of customers on the [indiscernible] vehicles and better fit with their needs. Connectivity also gives us the opportunity to delight our commercial customers with new features once they've already bought the vehicle using updates over the air. We've recently launched 2 features, so guard mode and zonal locking. These are both specifically for our commercial customers. Guard mode enables a customer to put their vehicle into a heightened sense of alertness, so that they can have the peace of mind that if anyone interacts with their vehicle in any way, even with a key, they will be notified by it. And zonal locking really addresses a key pain point that we heard from our customers and Hans' team picked up in some of their deep co-development. But the fact that the trades person actually wants now to unlock just the cargo and give controlled access to the tools and parts of that, exposing the cabin unnecessarily. So to close, just an example of how connectivity is changing our experience and our ways of working. So our commercial vehicles have an intelligent oil light monitor, which is designed to notify you when you need an oil change. And we were able to see from our vehicle data feedback from dealers and from customers that many of them were having to change their oil more frequently than was desirable and what's causing downtime for their business. So we looked at what actions we could take to address that, and we're able to provide revised software to improve the oil life and also improve the notifications to the customer with messaging through the FordPass Pro app and also access to service information within it. We were able to use the connected vehicle data to actually continue to validate that the improvements were sustained by the software update. And now we're continuing to monitor the oil life through the kind of the -- that it goes to the expected levels in the second, third cycles, et cetera. This is one example of many of the ways that connectivity is transforming how Ford are working and how we're helping our customers' businesses to thrive. So with that, I'll hand back to you, Stuart.

Great, Hans, SJ. Thank you. Maybe with that, Ryan, I'll hand it to you and happy to take any questions.

Great. Yes. Thanks, Stuart, Hans, Sarah-Jayne, for that overview. Sorry I jumped the gun earlier on Q&A but did want to check in on the broad health of the European market, what you're seeing with regard to recovery in sales but also used car prices, inventory, average transaction prices, in that way, maybe some of the investors who are more intimately familiar with the North American market would be in a better position to sort of contrast the recoveries, et cetera.

Yes. Thanks. So well, clearly, we ran strong January, February. April was the low point as effectively, the network was closed across Europe. We reopened our business plants in May. And through May, June, July, we've seen a progressive recovery against the run rate of an industry just under 18 million SAAR in 2019. We ran at about a 13 million SAAR in quarter 1, down to 9 million in quarter 2. But as of July, we're now north of 16 million. We have actually seen a strong recovery. We're seeing August run strong. We have stimulus programs, government programs in place in 4 of the big 5 European markets, so Germany, Italy, France and Spain, but we're also seeing the U.K. run strong. So in the near term, good recovery. We're expecting the industry to run at about this level, supported by those programs through the second half. We think there will be some moderation and some payback for that stimulus as we head into 2021 and we're planning on that. In terms of used vehicles, similar to the U.S., we've seen a strong industry so transaction prices, residual values. Germany is our largest used vehicle market. We're seeing inventory down and we're seeing strong used vehicle pricing. In terms of our dealer inventory, that obviously spiked as we -- as the network shut down. It is now rapidly normalizing. I think through the end of this month into September, we'll see industry -- sorry, dealer stocks at a normalized level. Interesting for our business, we see the commercial vehicle industry is stronger relatively than the passenger vehicle industry. We've seen very strong order intake on commercial vehicles, particularly in the last 60 days. Our order bank actually stands ahead of where it was last year. So we're encouraged by that. We're not, though, going to plan on that level of sustained strength as we look forward. We're going to be cautious. And if we see the industry hold up, we'll be in a position, though, also to take advantage of it.

Great. Thank you. Next, I thought to check in on the progress of the reset of the European business. I believe reset's that terminology that you introduced, discussed in 2019, describe the restructuring actions taken in the back half of '18 and then plan for '19 and '20 with regard to facility closures, employee separations, et cetera. You made, I think, faster-than-expected progress in 2019. But now with coronavirus, is there maybe more that needs to be done along those lines? Will you say -- where would you say you are with regard to the reset?

Yes. Thanks, Ryan. So as I said in my remarks, we're right on track, so 7,500 of the 10,000 net reduction in Western Europe complete. That was by June 30. By the end of this year, the 10,000 net reduction will be achieved. The 6 facilities we've exited will also be complete. So the restructuring program is right on track. We've not lost any momentum through the crisis. And of course, we've used opportunities to allow that to act -- to allow ourselves to act more quickly. As we look through to 2021, of course, the industry outlook is softer than we had planned prior to the crisis, and we will make adjustments as required so that we get back on track and deliver our plan that we have committed to. So that program is running very well and it's delivering. What I would say is the reset was not just about structural cost reduction. That was a big part of it, a $1 billion net reduction. But the other part of it is around driving gross margins and shifting our portfolio. So the growth of our CV business, growth -- growing share but also very importantly, the shift of our passenger vehicle business to utilities. So we launched, at the end of last year, the all-new Puma. We import the Explorer from North America and then we launched, in February, the all-new Kuga. And by '20, we will go from a utility mix below the industry average in 2019 to over the industry average in the second half of this year and into 2021 and exiting lower-margin business and driving yield management. So there's a whole series of actions and tools behind that mix and net pricing improvement that is a key part of our reset plan.

Great. And given the discussion of cost, now seems like an opportune time to work in a question here from an investor. He writes, "Greatly appreciate the color on first half 2020 structural cost savings of $400 million. Can you give detail on the negative contribution cost of $400 million year-to-date? How much of that is related to higher CO2 compliance costs, warranty and commodities?"

Yes. So -- well, good question. So the net increase in contribution cost is more than explained by our regulatory actions, which is primarily the electrification of our portfolio, everything from mild hybrids through to eventually battery electric as we introduced the Mach-E. So that more than explains the contribution cost increase. I would ask investors to think about that though in combination with that net pricing. So you see those 2 in combination as we drive an overall improvement in our margin now. In the first half of this year, of course, that is masked by this huge industry impact as the virus hit. But as the industry comes back, not to the level it was, and as we complete the regulatory shift, which is really happening this year, then going forward, we expect to see our material cost reduction programs start to flow through to be in addition to our structural cost reductions.

Great. And now that we've discussed the reset, I thought to maybe pivot to the redesign, some questions around that. I think a lot of that revolves around the light commercial vehicle strategy Hans was updating us on. How would you rate your progress there relative to when you'd first begun communicating the plan in early 2019? I don't know -- you don't break out LCV profitability separately, of course. But what can investors look to in order to gauge the progress? Is it market share, new vehicle introductions, number of transit centers, new service offerings for commercial customers, et cetera?

Yes. Let me let Hans take that.

Yes. Thank you, Ryan. So one, I think I touched on a few of those things already, but if you look at our plan, first of all, obviously, when you talk about leveraging our strengths, I talked about adding scale through our Volkswagen alliance. That agreement has been signed. So that was a big step for us. And then if you look at the second layer of our plan about delivering the basics specifically about uptime, we've started upgrading our transit center network that we have in Europe with roughly 1,000 transit centers to, as we call it, Transit Center 2.0, which is really delivering this increased uptime capability for our commercial customers and we're right on track to deliver that. That's a big step ahead. If you look at the strategic pillars, I already mentioned that we've increased our partnerships with converters from 50 -- around 50 about 18 months ago to almost 200 now so there's a big step forward there. The launch of Ford Fleet Management that I mentioned is a very material and important step. We're launching the company in the U.K. later this year. But we're then expanding across Europe to deliver this capability to all our customers in Europe. And I would say also a very important element. When we talked about this plan 18 months ago or so, we hadn't created the organization around it. And about half a year later, so exactly a year ago from now, we actually stood up our organization completely synchronized to our plan, and that's a big step as well, obviously. We're now a year underway and it's starting to function really, really well. I think a testimony of that is our market share in the first half of 2020. Although the market obviously was down, we had an all-time high market share of 40.5%. And what's really important that within that, each and every European market actually grew their share year-over-year. And as Stuart has mentioned, our order bank and also our order take is now ahead of a year ago. So all in all, I think tremendous progress on the plan. There's still a lot to be done but good progress. And yes, early results prove that we're on the right track.

Great. Next, I wanted to ask around global alliance with Volkswagen. I know it's a global alliance. But just because VW is so strong and so large in Europe and because one of the first areas to be announced was in the area of commercial vans and Transit is such a big seller in Europe, I have to imagine that Europe has got to be a key area of the alliance, right? So I think there's an impression that VW brings certain strengths to the table like an MEB and I'll ask on that in a minute. But in their European scale, you guys bring Argo pickups, et cetera. But I think your Transit franchise was really already very strong headed into the alliance. So can VW make your Transit or broader LCV business even stronger in terms of the capabilities and offerings? Or is it more about improving the profitability with additional scale? What would you say is the plan with VW on the LCV side?

Yes. Maybe let me take that first, Ryan, and then ask Hans to add any color. So you're right, LCVs are a cornerstone of commercial vehicles, cornerstone of the alliance with Volkswagen. And Europe is really ground zero for that part of the alliance. So what we have announced today and we signed agreements in June is that we will share, first of all, a compact pickup globally. Just to recall, investors may not see this so much, particularly those based in North America, but with our Ford Ranger, we have over 30%, 1/3 of the compact pickup market in Europe. And we have been consistently growing that share, including this year. So the addition of the Volkswagen business, so that product will continue to be led by Ford engineering and production, and the addition of Volkswagen to that will give us additional scale and allow us to grow that business and make it even stronger globally, but Europe is a very important part of that. The second piece was on the 1-ton commercial vans. That's our Transit Custom and Tourneo Custom. So Volkswagen and Ford in Europe are the #1 and #2 brands in that segment. So clearly, the combination of those for the next-generation product and again, that the engineering and production will be led by Ford out of our engineering center in Dunton and produced in Ford Otosan in Turkey. So that gives us a very strong position. And of course, winning in light commercial vehicles going forward is going to be about providing more and improved solutions to our customers. That business is going to electrify. That has started. We already have plug-in hybrids and mild hybrids. We will also have, in the future, Ford battery electric products. And of course, connecting those vehicles and taking those into the into the next generation of capability. So this alliance with Volkswagen allows us to share the investment to cross over those hurdles and really create a clearly leading position. So that is very important. And the third piece is a city van. So this is a small -- we call them integrated style vans. And in that segment, Volkswagen will take the lead engineering and production. We will take a product off of their platform and again, allows us to grow scale. So it's hugely important. Those are in the development stage, but those products will come to market now over the planning period and are really going to be a part of us take -- going to the next level, both in terms of scale and our cost competitiveness. But also, it allows us to broaden the offer to customers as we share the investment. So it's very important.

Great. I think another area where there's a lot of overlap with VW is in electric vehicles, including -- because of the stringent emissions requirements in Europe, right? So what can you tell us about the cooperation with VW in the battery electric vehicle space? There was some interesting disclosure on a conference call last year with Jim Hackett and the CEO of Volkswagen, where it was discussed maybe an agreement to supply 600,000 MEB platform systems to you, including battery packs and other parts. And discussions were underway for a second vehicle, it was suggested, could even double that volume or almost double it. So some pretty big numbers there. Are you able to fill in any details for us, including progress toward a second vehicle agreement? And maybe just tell us a little bit about the technology that is on offer. I don't know if you're limited in what you can say about future products, but anything that you can relay about the types of -- what kinds of vehicles this will be, what their general performance or capabilities might look like. That would be really helpful.

Yes. Thanks, Ryan. So yes, so the second part of our alliance with Volkswagen is on battery electric vehicles, and that is in Europe, so the focus of that part of the cooperation again in Europe. So we have agreed and signed agreements -- final agreements in June again for that part of the alliance. So we will build a full battery electric Ford vehicle in a Ford plant, utilizing the Volkswagen MEB platform. The first product of that platform is the ID.3 that people will be familiar with. We will launch that product in 2023. And the agreement for it is a life cycle volume of approximately 600,000 vehicles. We haven't announced yet what that product will be or where it will be manufactured. Of course, though, we are well progressed with that plan and details will follow. And we have the opportunity to do a second vehicle. Of that, we have an opportunity to take that further. We have not yet concluded those agreements. But clearly, behind this strategy is again accessing scale for our European business. So Volkswagen clearly is a very large player in the European market. They are making very large investments in the electrification of their portfolio based off this MEB platform across their volume brands. And this partnership allows us to tap into that scale effectively to as we bring domestically produced battery electric vehicles to our Ford European business.

I'd like to ask you about the profitability of battery electric vehicles in Europe because I think historically, that's tended to be a drain on margin, right? Not unique to Ford. Just across the industry, they've tended to be less profitable or even lost leaders from a regulatory perspective. How do you think about your ability to turn a profit on BEVs? And does the relationship with Volkswagen, the MEB platform mean that these programs are likely to be profitable?

Yes. So first of all, I would say we do not plan to lose money as we transform the business. So our intent is to be profitable. I think it's fascinating if you watch the European industry right now. And some of your investors will be in Europe, others, I'm sure, based in North America. But it is very clear that the European industry is going to electrify, whether you listen to the EU or to the U.K. even post Brexit, there are multiple countries who have stated a clear intent over time to exit from traditional combustion engine vehicles. The -- some countries as early as 2030, others 2035 or 2040. But what we see in reality today is governments really driving that transition. The incentive programs that we've seen across Europe are very directed at battery electric or plug-in hybrid vehicles. And if you look at the first half of this year, we're running at sort of 5% BEV mix as well as a significant growth in plug-in hybrids, and it is very clear that this transition is going to happen. As we look at our business, again, it's been fascinating programs we put together, the plug-in hybrid Transit van that SJ referred to in her presentation, when we put that plan together about 3 years ago, we were asking ourselves if we could make money. We -- that vehicle is now in the market, and its margins are equal to or better than a diesel van because we see clear demand from consumers, from fleet operators for these products. Our -- the mix of our all-new Ford Kuga today is running over 50% plug-in hybrid. The mix of our all-new Puma is running at 80%-plus mild hybrid, a 48-volt technology. And it is -- we see clear customer demand and we see clear intent by regulators to drive the market in that direction. So we're all in on electrifying our portfolio. And actually, we think it will be a prerequisite to profitability moving forward.

Great. And then maybe just near-term regulatory compliance costs. Can you talk about the grams of CO2 per kilometer requirements in Europe, when and how those phase in, what your strategy is for complying with them, whether you think you'll be in compliance, what the fines might be for automakers that are not in compliance? And it would be great if you could touch upon, in your response, what, if anything, the LCV push means from a compliance perspective, whether those generally heavier vehicles, et cetera, graded any differently in the regulations than, say, like a Fiesta.

Yes. So each OEM's compliance requirements are different based upon their portfolio footprint. For Ford, the requirement is about a 20% reduction in CO2 grams per kilometer reduction year-to-year 2019 to 2020. We've been very clear from the outset. This is not new news. We've been planning on this for some time. We've been very clear that we intend to comply and we're on track to do just that. So our overall fleet objective is sub-100 grams, and our compliance will be driven by the electrification program that I talked about. So mild hybrid's now in market on Fiesta, Focus, Puma, Kuga. We have a full plug-in hybrid on the Kuga, a very important part of our compliance plan, and then as we go into 2021, Mustang Mach-E. In 2021, it's a slight change. There's a 5% allowance in 2020, so you can take the, call it, the highest CO2 part of your portfolio and put it in that 5% category and it's not counted. Next year, that allowance goes away so there is a shift year-to-year. And the introduction of Mach-E is the change that comes in our business. So we're on track to comply. On the LCV business, there's a different category. So in Europe, we have what we call M1, the M1 fleet, which is the passenger-carrying products and then the N1 fleet, which is the commercial vehicle products. So separate categories, we will comply on both. As some of the Transit product, what we call our Tourneo products, the passenger-carrying versions of those sit in the M1 fleet, as you're correct, they're typically heavier vehicles. They're also typically good margin vehicles, so they sit within our passenger vehicle fleet from a compliance perspective, but they'll be part of that overall delivery that we'll achieve.

That's helpful. I think one of the great parts of Ford's strategy has been your willingness to play to your strong suits, examples being the emphasis on LCVs in Europe, drawing on the strength in trucks and SUVs in North America with the pivot into the Bronco category, et cetera. I like that catchphrase from a few years back, where to play and how to win. The flip side of that, of course, is not just about selecting where to play but where not to play, right, with good examples being exiting most of the passenger cars in North America, manufactured in Australia, restructuring India with Mahindra, et cetera. In Europe, I guess you could point to the restructuring of the Russian operations. But just curious if there's maybe more to do in Europe from a where not to play perspective. Are there certain geographies or segments or sales channels that you may look to exit or deemphasize within Europe? And what could be the potential profit implications of any such moves?

Yes, Ryan. Thanks. So you're correct. So clearly, the exit of Russia was an important and significant step beyond that. You should not anticipate further geographic moves. We intend to continue to serve the European markets in which we operate. But we are also taking significant moves on the product portfolio. So clearly, as you say, growing commercial vehicles is the way to play. On the passenger vehicles side, we've said we will have a more focused portfolio moving forward. We exited all of the MAV segments with the exception of the Ford S-MAX that we continue to sell. So last year, we discontinued the C-MAX, and we took our Saarlouis plant from 3 to 2 shifts and exited over 1,500 people in that operation. We discontinued the Ka+. And as we move forward, we are deemphasizing the traditional, what I would call, passenger car segments in Europe, so segments that are shrinking, the B and the C segment, and we are investing in the stronger, better margin and growing segments, so our Puma in the B SUV segment and Kuga in the C SUV segment. And within that, we now have in our Craiova, Romania facility 2 B SUVs in that low-cost operation, the Ford EcoSport and the Ford Puma, so a shift of our passenger vehicle business to utilities and away from traditional passenger cars is another of those critical choices.

Helpful. Sarah-Jayne, I thought to ask you a few questions as a follow-up to just some of your earlier comments about connectivity. You talked about wanting to accelerate connectivity. Is that because you see it as a potential competitive advantage? Do you think that connectivity actually drives value? Or is it more just the cost of remaining competitive in the market? And are you able to attract the talent that is needed to win in this space?

Okay. Take them one at a time. So if I start around your first question around kind of acceleration and kind of competitive advantage. I think primarily, connectivity drives competitive advantage for commercial customers. And I think if we can use our vehicle connectivity to help our customers drive uptime and to give them productivity, it will actually help our customers win. And if we achieve this, we know that, that will translate into loyalty and also value for us as a company. In terms of our acceleration, we have recently restructured our team. We've moved to create one enterprise connectivity team across the organization, focusing on creating connected experiences and solutions, both inside the vehicle and outside the vehicle and have brought all the teams from different parts of the organization together, including the connectivity hardware and software to be able to provide an end-to-end capability to deliver holistic experiences for our customers. In Europe, we already had consolidated our development teams for the experiences that are off the vehicle in our site in the Olympic Park. We now combine that with teams based in Germany who are focusing more on the in-vehicle experience. And together, we're going to be working as one team going forward to develop both experiences for the global team but also regional-specific experiences for our customers as well. I think your second question was around the -- is it cost of remaining competitive or is it about driving value? Interestingly, I think in Europe, primarily, it's actually a compliance cost. We have to have connectivity for the European eco legislation. But it also does provide a platform for value for us and for our customers. And increasingly, we are working as a whole company to look at the value of connectivity really across 4 different areas: the first is around the customer loyalty and retention that, that brings; second, around the opportunity in terms of value after the vehicle is purchased, both cross-sell and upsell; thirdly, around everything kind of cost reduction and avoidance, particularly in how we use the vehicle data to help us optimize how we operate internally; and then finally, as a direct revenue aspect, particularly where we can drive value for our commercial customers. We know that customers are more willing to pay for those types of services. So we are focused on value, and we are putting a greater focus now in terms of the ongoing monitoring and measurement of the value that we bring. I think the final one was around talent. Interestingly, as part of the reorganization, we actually have brought in the founder of John Deere Labs. So Alex Purdy has recently joined us to lead the business operations part of our enterprise connectivity organization. And with that, we are also benchmarking a lot of what is happening in other industries to learn from the best practices that are there. We -- from a European perspective, we set up our base in London to ensure that we can attract good software-based talent. And we continue to kind of develop our culture and ways of working to be in a much more kind of agile and based on kind of design thinking or customer centricity in what we do. So hopefully, that -- I was still stuck to one of your questions.

It was. I appreciate it. It's a good rundown. Wanted to ask also on the impact of coronavirus, if any, on the European business profitability longer term, whether there's anything to think about there. Jim Farley, last week, he'd reiterated the call for 10% margin in North America, saying he wanted to accelerate it actually. Just wanted to check in with you in regard to your longer-term margin targets in Europe, which I think are for 6%. Does coronavirus impact that in any way other than timing? So for example, do, I don't know, supply chains need to compress or be made more redundant, contributing to inefficiencies? Or on the other hand, does additional belt-tightening instead cause you to improve long-term margin? What are your thoughts?

Yes, Ryan. So clearly, we are going to be operating in a lower industry environment, particularly in the near midterm, not clear yet on the long term. But we're going to adjust our plan accordingly. We're committed to the transformation of the business and delivering profitability in our 6% margin, so that plan has not changed. We will just need to execute that in a lower industry environment, at least in the near and the midterm. In terms of consumers, I think it comes back to the shift in electrification, the EU Commission driving the green new deal. I think that is probably going to accelerate. But I think that's a trend that we will have to lean into and take advantage of. And we're seeing not only governments but consumers demand those technologies and we're seeing a demand for them. So we feel very good about our commitment to electrification that we made back in the second quarter of 2019 and the products we're bringing to market. On the other side, clearly, we're seeing the same shift to online business in Europe that we've seen in North America or the shift of retail. Our commercial vehicle business is very well placed to take advantage of that. So we're working with our commercial vehicle customers, providing them improved products and solutions. And we think that will definitely play into our strategy and we intend to capitalize on that.

Very helpful. Maybe just another coronavirus impact question here. How do you think about the virus potentially impacting the type or pace of technological change within the European industry? Does it speed up or slow down or have no effect on pre-existing trends such as electrification or autonomous driving? I don't know if automakers maybe slow innovation and rate of change in an effort to conserve capital. Or alternatively, they're like, "Well, we can conserve capital. We can spend it only on the most needed, most forward-looking technologies, so sort of skip reinvesting in some of the more legacy propulsion systems." I don't know. What kind of net effect do you think it might have?

Yes. Well, absolutely, as I just mentioned, I think on electrification, I think we see that accelerating both in the reality of the first half of this year and looking forward. I think it's going to transform our business in other ways, the connectivity of our products, and Sarah-Jayne has spoken to that, will become even more critical, including for our professional commercial vehicle customers. The other trend we're seeing is going to be the move to online purchase and transaction. We're investing heavily in the online purchase experience, the online service experience. We think consumers increasingly are going to take advantage of that. I think many people have, through these lockdown periods, changed their buying behavior, and automotive is going to be no different from that. The great thing is we're seeing our dealers react to that extremely positively. It's been a real realization time for them and they're leaning into that with us as we invest. And the other thing I would say finally is this is where our alliances are critical because we must invest to make this technology transition, particularly in our commercial vehicle business but also in passenger vehicles. And our ability to share those investments, particularly in the nonconsumer transparent parts of the business and the back end of the business are critical because they are very large investments that it's not an alternative not to make.

Great. Try to squeeze one last one in here before we go. Just on the business of importing vehicles from the United States into Europe. Import vehicles now is one of the internally reporting segments, I think, in the redesign, right? So there was that headline a few years ago about how the Mustang was outselling the Porsche 911 after it was introduced in Germany. I don't know if that's still the case. But obviously, there's going to be a lot of interest in the Mustang Mach-E in Europe like in other regions, too. Do you intend to continue to focus to be sort of on those more iconic American models going forward? Or I don't know, you've also exported some more mainstream vehicles, right, like the Edge. I'm looking at the euro is $1.18 now. I don't know if that makes this business more attractive, including for mass market entries. What do you think?

Yes, Ryan. Well, you're right. It's one of our pillars and we do intend to build upon it and I think it's a fascinating business. It's going to be a niche business for us. It's relatively low volume, but I think it can be a very brand-enhancing and importantly profitable business. You really started with Mustang. That's been a great product for us in Europe. It's exceeded our expectations. It's a very good business for us. We launched, at the end of last year, the Ford Explorer in Europe. That's a large product for Europe relatively. But there is a group of consumers who love that product. It's a full 7-seat SUV. We only sell it as a plug-in hybrid, so 450 horsepower, over 700 newton-meters of torque but 70 grams of CO2. It's a great product for people who are really attracted to those iconic Ford brands. And we're really going to go the next step when we launch at the end of this year the Mustang Mach-E, building on that imagery. And it will be our first full battery electric vehicle in Europe. It's a Mustang. Only Ford can do that. The way I talk about this with colleagues is and maybe for investors to think about it is if you are a distributor in Europe and offer the opportunity to distribute iconic Ford vehicles in Europe, is that a business you would take. It's certainly one I'd be very happy to own. And it's not going to be a huge volume, but it can be a great business, and it will really contribute to the Ford brand in Europe.

Okay, great. We're about out of time here. So Stuart, Hans, Sarah-Jayne, Henry, Lynn, I thank you all so much for your time and insights here today. It was very helpful.

Thank you very much, Ryan.

Thank you.

Take care.