Ford Motor Company (F) Earnings Call Transcript & Summary

Hey, good morning, everyone. I am Adam Jonas from Morgan Stanley's Global Auto and Shared Mobility team. Welcome to day 2 of the Morgan Stanley Eighth Annual Laguna Conference. I am still saddened when I see Mark van der Pluym's memes and fake imagery of the coastline of Laguna. My working assumption is next year, we can watch the dolphins and seals and surfers all flapping around in the water and the breaking surf of the Pacific. But until that time, we are delighted to have virtually with us the team from Ford, Ken Washington, Chief Technology Officer; and Lynn Tyson, Executive Director of Investor Relations, with us. I'm going to read very quickly a disclaimer that this webcast is for Morgan Stanley clients and Morgan Stanley appropriate employees only. Appropriate, I hope I'm appropriate today. This webcast is not for members of press. If you are a member of the press, disconnect now. For important disclosures, go to www.morganstanley.com/disclosures. If you have any questions, don't hesitate to reach out to your Morgan Stanley sales representative. So with that, Ken, we got about a half hour. Let me give you a chance here on the webcast to kind of make some introductory remarks and key messages for investors to this nice presentation that you've got on the webcast. Ken, thanks again.

Great. Thanks, Adam, and good to be here, everyone. Let's go to the next slide. The value creation framework at Ford is the foundation of everything we do. And what I want to talk about today is how we're using and developing technology to drive customer-centric differentiated value for our customers. Next slide, please. Jim Farley first introduced this framework of fix, accelerate and grow earlier this year in February. Accelerating connectivity and technology and the tech stack that I'm going to talk about today is a significant and foundational part of the company's growth strategy and our acceleration strategy. Next slide, please. I want to focus on connectivity because there's no mistaking that connectivity has accelerated and has changed the way the smart world has developed and evolved. Starting with wireless and 5G, which is ushered in at a pace that no one really expected. In fact, the first 5G phones were introduced to the market in the first quarter of 2019. Since that time, we've seen the adoption and exploration of 5G in smart cities as well as in our smart vehicles. And Ford is deeply involved in exploring that, and we have plans to feather that into our tech stack. We've even seen home automation go through an inflection point where devices are common in homes today with technology like Wifi, Bluetooth, Z-Wave, ZigBee, and other technologies that are enabling our smart homes to connect to the rest of the smart world, including our smart vehicles of the future. We're even seeing the introduction of extraterrestrial satellites and constellation of CubeSats that hold the promise of less expensive connectivity all over the globe. All of this is underpinned by a revolution in global edge, cloud and fog computing. That represents more than a $9 billion opportunity with a 30% CAGR in the year 2023. So connectivity is upon us, and we're committed to leveraging that in our work. Next slide. Our tech stack is designed to build on that, to accelerate the development and delivery of differentiated customer experiences. And this includes both our retail and our commercial vehicles. We're designing this tech stack to be future-proof, to connect the vehicle to the smart world around it that I just spoke about. It's going to be able to evolve and continuously integrate into the smart world and get better over time through providing over-the-air updates. We're designing it to move the intelligence from the sensors and actuators into a central compute, high-performance compute cluster in the vehicle so that we can create a true digital platform upon which we can innovate with software and add-on services that will provide experiences like the consumption of TV, music or even shopping apps. These are the building blocks also for more advanced infotainment as well as the Level 4 autonomy. The unique and ambitious approach we're taking is powered by our core technical capabilities and our innovative spirit. We've brought more than 3,000 advanced computing experts to work on this tech stack and the surrounding technologies to bring this to reality. We're also going to not do it all ourselves. We are partnering with tech companies in this important technology strategy work, as Jim Farley shared with you earlier this year at the June Deutsche Bank conference. We have no news to share with you today on that front, but stay tuned. Next slide. Vehicle connectivity is an enabler to value creation through improved customer experiences as well as internal enterprise benefits and fitness. We're also seeing cities get in the game, producing technology for connectivity to make intersection smart, doing things like enabling the vehicle to talk to these intersections to improve safety, enhance mobility services, provide for data collection as well as improve and enhance autonomous driving. We're using connectivity also to help us with anomaly detection and to mitigate errors. In the past, we had a heavy dependence on detection of warrant -- through warranty claims and through -- improving these issues through dealer flashes and deploying updates. That's the past. In the future, we're going to leverage connectivity to be able to detect issues in the field dynamically and then fix them through over-the-air updates. The Mustang Mach-E and the F-150 are the first vehicles that will have this advanced connectivity capability. And we're poised to take advantage of it, providing bumper-to-bumper over-the-air update capabilities. Ford vehicles are evolving to tie into the connected future digital world. Next slide, please. We're also working to implement cellular V2X into our vehicles. Ford has been a leader in providing cellular V2X technology in vehicles. In fact, we've made a commitment to launch cellular V2X into our connected vehicles in 2022. This technology is going to enable us to assist drivers well beyond the line of sight, even seeing around corners, enhancing the ability to be more safe and to provide advanced autonomy capabilities. We'll be the first automaker to deploy cellular V2X in U.S. vehicles starting in 2022, provided that there's a supportive regulatory framework in place. Next slide, please. Importantly, our software and hardware platforms are designed to support a variety of driver-assist technologies. As you can see by the graphic, there are many sensors and many cameras on our vehicles, and we're integrating all of these to inform and assist and automate portions of the driving task, with the potential to help customers drive with more confidence and help them reduce driving-related stress. It's really important to us that we have the capabilities and talent to pull this off. Over the last decade, our research driver-assist team has increased by an order of magnitude. We've grown the team from 20 engineers to more than 200 over that time period. We've also gone from having an engineering team in only our Dearborn campus to having them all over the world in the innovation hubs of the world, including Palo Alto, Cologne and Aachen in Germany, Shanghai and Nanjing in China and Tel Aviv in Israel. Next slide, please. This talented team has developed driver-assist technologies with differentiated customer features including active park assist, intersection assist, pre-collision assistant and automatic emergency braking, intelligent adaptive cruise control and lane keeping with blind spot assistance. There's many more designed for various purposes, such as helping us on our daily commute, assisting us with work and helping us play, as shown on the next slide, please. These technologies significantly increase our confidence, improve our dependability and trust in the Ford brand. With that, I'll end and look forward to discussion and questions.

Thanks very much, Ken. That's a great introduction. And I think it gives us a nice platform to explore the connected vehicle, mobility, tech stack and the kind of software-enabled car, which is the thrust of your work in addition to other responsibilities. But let's start with -- if I can just start with the car. And I'd love for you as we go through these questions to think about not just the tech, but also how Ford differentiates from your competitors because, of course, everyone is faced with this big challenge of making the leap and completely redesigning the car itself but also redesign the ecosystem and how it plays with it. But if I were to tear down, let's say, a Ford from the year 2030 and compare it with a torn down Ford from 2019, let's say, where are the biggest differences that you'd highlight that we'll see in terms of software operating system, electronic architecture, sense/compute, OTA, interface, anything you want to highlight?

Yes. Thanks, Adam. It's a great question because it's true that the whole industry is looking at the promise of rethinking how we wire up the vehicle electrically inside the vehicle itself. So if you were to tear down a future Ford, say, 10 years from now, the biggest difference you'd see is, as I said, you're going to see that the software, compute and sensing services are being serviced by a central compute module. And that's really important because that's more like we're accustomed to seeing with the smartphones and the smart devices that we surround ourselves in our homes with every day. So this design that you would see would enable us to really leverage the power of high bandwidth connectivity that happens around the vehicle. So imagine that you wanted to change something after the vehicle was sold to a customer and create a new experience, you wouldn't have to change out the technology inside the individual sensor. You just change the intelligence via software in this and central compute center. The biggest difference really is that you would be able to interact with the way in which the modules create experiences through changing the way that the software algorithms work, both in the vehicle and back in the cloud because they're going to be interconnected through a high bandwidth cloud connectivity.

So Ken, I mean as you kind of build the software-enabled car that can not just have greater capability and bandwidth, but also I assume help decomplexify the vehicle, make it -- lower the variable cost, improve reliability and flexibility for updates. What operating system does Ford use today? And kind of can you elaborate a little bit on the in-house software capabilities? Because correct me if I'm wrong, but it seems like it starts with the software.

Yes. No, you're right. It does start with the software, but it also starts with the design of electrical architecture, both inside the vehicle as well as in the cloud in the enterprise. And so a couple of key features, if I could describe how we're enabling the software to be unleashed in our architecture. First, shared memory is really important because if you bring sensing back from a sensor or an actuator or some module in the vehicle, you want to be able to share that information between modules so that you can really ideate and create like differentiated experiences. So we're designing the architecture in the vehicle so that the individual modules can share memory with each other. Secondly, zonal power is really important because you want to be able to power the individual elements of the vehicle independently and on demand. And so in the past, the vehicles are either on or it's off. Well, in the future with this zonal power architecture, you can power individual modules when you need it. So imagine you want to create an experience where you turn a camera on to do some task or to create some experience when the person is not even in the car, you could do that with that technique. And then lastly, creating this platform upon which you can build software and then drive AI innovations into the experience is really important. So all of these things are what we think will differentiate the Ford architecture and the Ford tech stack. And then the last thing I should mention is this is going to be deployed on our really important nameplates, like the F-150 and the Bronco 2- and 4-door. So we will -- we anticipate that we're going to have large scale as we implement these technologies on our vehicles and our platform.

So Ken, how important is in-house development of the operating system? And remind me what OS you use. Because there seems to be this decision that the automakers face, which is to maybe they do some OS now but it's a bit of a patchwork, and that longer term they might use an Android auto or a Google automotive system or Apple auto or some kind of third-party development. I didn't know how you viewed that, whether that was -- whether OS is like really sacred, IP needs to be done in-house long term. And again, just remind me what OS you're using.

Yes. Currently, we partner with a variety of technology companies on our OS and our tech stack development, including QNX and AUTOSAR and Linux. Currently, our IVI systems are based on a QNX operating system. That comes through our partnership with Blackberry. And we -- but we build on top of that leverage in creating middleware using an internal software team to create differentiated experiences. So in the future, across our business, we will plan to partner with -- continue to partner with technology companies to evolve our OS. And as I said before, we're working very closely with technology companies that Jim Farley mentioned earlier. And we don't have something to announce today, but I'm very confident in the OS evolution that this partnership and the partnerships that we have in the queue will lead us to be industry-leading and differentiating.

Great. And it seems like enabling technology to develop an OS is the ability to do over-the-air updates, particularly of firmware. Can you give us an update right now on which of your cars or what level of capability that are across range you have for OTA update of firmware? And when you could get to a point or what's your target for when you would have, let's say, an F-150 with full OTA updatability of firmware for the vast majority of software and/or electromechanical battery functions, et cetera, not just things like the HMI, for example?

Yes, that's a great question. And starting this year, in 2020, we began equipping most of our redesigned vehicles with the ability to do what we call advanced over-the-air updates. And so to your point, this is not limited to the IVI. This is true bumper-to-bumper over-the-air update capability, where we can get to each module and deploy new software capabilities to fine-tune or fix some issues or create a new experience. We'll first launch this technology for enabling updates to any module in the vehicle, bumper to bumper on the all-new F-150, the Mustang Mach-E and the Bronco 2 and 4 door. And the significance of that is this will create over-the-air update capability on a massive scale, but will also have massive amounts of data from the scale of the F-150 and the Broncos for us to learn from and improve the capabilities of those vehicles and other vehicles because of the learning that will come from having these connected vehicles in the field. So we're very excited about the promise of providing this capability. And by the way, we have 5 million vehicles connected globally today. So it's not just these new vehicles that we're putting into the market that's going to give us that signal. It's the 5 million that we already have connected today that's going to give us an advantage of scaling this technology across many vehicles. So it's an exciting time for us.

All right. Ken, we're going to leave the car now, and I'd love to give you a chance to focus on what you think is the most important part of the mobility ecosystem beyond the car. And I know Ford has been really a leader in developing capability of what you call the transportation mobility cloud or I guess that's your version of vehicle to vehicle, V2X, vehicle to everything comps. Can you kind of give us your -- the Ford's -- what's unique about Ford's approach and why it's an advantage?