Ford Motor Company (F) Earnings Call Transcript & Summary

Well, welcome back, everyone. Chris McNally here, Head of Global Automotive and Mobility at Evercore ISI. And I wanted to welcome you back as we hit mid-day on day 2 of the Autotech and AI Forum. Now we just heard about next-gen high-speed connections from Balance. So why don't we dive further into that theme of connectivity with our guest, Alex Purdy, Director of Business Operations, Enterprise Connectivity at Ford Motor Company. Now I think, obviously, everyone is familiar with Ford. That goes without saying, but some really quick background on Alex. Alex is named Director of Business Operations, Enterprise Connectivity in May 2020. Prior to that, he joined Ford from John Deere, where he's actually Director of Precision Agricultural Strategy and Biz Dev. Prior to that, he's with the Boston Consulting Group. Quick background on enterprise connectivity within Ford. The current -- under the current leadership of Stuart Taylor and actually the recent hire of Doug Field from Apple, enterprise connectivity team has specifically grown from 300 programs only 4 years ago to 4,000-plus today and is tasked with advancing cars towards a "central brain," a theme that we've been talking about for the last 2 days, which can turn your car from -- turn your car into an iPhone on wheels and increase value, decrease costs through over-the-air updates and upgradable software. Alex, with that long-winded intro, welcome. It's great to have you on the forum, and we look forward to your presentation to give a little bit of a background about what Ford is doing in connectivity.

Thanks so much, Chris, and I appreciate the opportunity. Thanks for having me. I wanted to very briefly kick off with a little bit of an overview of our strategy for the Ford+ plan and talk to you about the massive digital transformation that we've got undergoing. Ford is transforming from a traditional OEM, where we build and sell in a transaction model, to a lifelong, always-on customer relationship model. This means that the vehicle plus new services, which includes constant over-the-air updates, safety and security offerings, media, digital content, on- and off-road navigation, uptime and productivity tools for commercial customers are all really important. It starts at its core with the foundational strengths of Ford. We've got the F Series, the Mustang, the Transit, the Ranger, the Puma in Europe, the Navigator and the portfolio of expanding Bronco families and most recently, the Maverick. This is a big part of our iconic nameplates. We continue to improve these automotive operations around the world. And we're the world's leader in commercial vehicles, the leader in North American trucks. And the Mustang is the best-selling sports car on the planet. This, in addition to Ford Credit, which is our well-run captive finance company, is undergoing its own digital transformation as well to support both commercial and retail customers, driving loyalty and repurchase. This is an important competitive advantage for Ford. When we take those foundational strengths and we add on enhancing capabilities, things like we've made big investments around developing our fully networked vehicle with software update capability, putting modems in almost every vehicle. We made tremendous progress, but this is a journey. And there's certainly more to do, and we continue to augment our skills with some leading talent from across the industry. But all of this is made possible through our investment in our tech stack, which we call Blue Oval Intelligence, which enables our vehicles to be fully connected, updatable, software-defined, and that get better over time. We update these vehicles using Power Ups, which are coming just like Ford BlueCruise. Unlike many of our competitors today who really can update only their entertainment features, we update almost every module on the vehicle and truly enhance performance of that vehicle. Ford is not only doing this in the luxury segment. We're doing this at scale. These capabilities are being put into our biggest nameplates, things like the Mach-E, the F-150, and now the Bronco are our leading fully networked vehicle capable offerings. And these vehicles are connected to the cloud automatically, and we're able to deliver unique features without having to change the physical hardware. What does this do? Well, first and foremost, it expands our total addressable market. This connected ecosystem acts as a constant connection to our customers, creating lifelong relationships. And this is really a core part of our Ford+ business model and a core part of the transformation, capturing post-vehicle interactions with our customers, driving recurring revenues for Ford. And so when you look at the sum of these things, our foundational strengths plus our enhanced capabilities expand our total addressable market, our value creation and new growth opportunities well beyond where we are today. On the next slide, I want to maybe dive a little bit deeper on the connected services side of things, which I think is really relevant for the work that I do at Ford. We always want to bring us, Ford, closer to our customers and establish these lifelong relationships. We estimate that our potential share of revenue in this space is $20 billion by 2030. And that's driven our ability -- by our ability to continually offer new services through our tech stack that I've talked about. Connectivity really touches every part of the enterprise, and it's not just about the subscriptions. It is also about realizing tons of efficiencies inside our business, such as identifying warranty issues sooner and limiting the number of vehicles affected and being able to fix them over the air, which saves costs, time and customer pain. We are being very purposeful about what we do in-house and where we partner to ensure that our customers have access to best-in-class services. And we do it at scale and at the most efficient cost. Between our foundational strengths and our enhanced capabilities available through connected services, we continue to enhance these relationships and provide services they value, our customers value over the life of the hardware into ownership, into riding and driving and then into repurchase. So that's all I really wanted to share with you upfront and look forward to the questions.

That's a great overview. So a couple of high-level topics and debates when we talk around connectivity in the industry. And I think you've probably seen from some of our research, we think there's a big synergy between OEMs and suppliers when it comes particularly to the topic of connected car and next-gen software-enabled architectures. But we often hear a lot about OEMs wanting to do it in-house. So can you talk about how maybe Ford thinks about using large suppliers and some of the big programs that we hear about from Active or Conti in terms of high performance compute? First, what maybe is proprietary IP to Ford itself?

Yes. It's a great question. I think what it starts out with is a belief that customers are at the center of our universe, right? We want to bring the services that our customers love and the ecosystems that our customers love and trust in their everyday life into the vehicle and make that connection point as seamless as possible. Therefore, we've made significant partnership announcements with companies like Apple and Google and even Alexa in order to bring that best-in-class technology in-house. What I think is critical to understand, though, is that we have a pretty good understanding about which parts of the tech stack are going to be commodity and which parts are going to be truly differentiating. And so we have worked with suppliers on the undifferentiated lifting of parts of the tech stack where we think that's not going to be where the competitive advantage lies. And the parts that are going to be differentiating that we think set Ford apart are the things that we really invest in ourselves. Now we continue to do more and more of this ourselves because developing the fully networked modular vehicle architecture is increasingly important as a competitive advantage. And so we've seen more and more of that work go in-house. But we work with a wide variety of partnerships, some of them supplier relationships and some of them truly business partnerships across the supplier and tech space in order to make sure that we've got the right costs, the right technology and the right ecosystems in our vehicles to compete.

And Alex, you touched on a lot of the progress moving from infotainment OTA, which is where most of the upgrading is happening now, to ADAS with BlueCruise. Can you give, because we have some generalists on the line, a flavor for where that can go? Because when we think about the final destination, there could be maybe only a couple of centralized compute, and you can do full vehicle updates, right, where multiple systems working together. So help us dream a little bit about what may be coming in the next 3, 4, 5 years.

Yes. So there are dozens, sometimes up to 50 modules on a vehicle today. And those modules are sometimes connected, meaning they can be updated; and sometimes, they're not. More and more of our vehicles, particularly our FNV-2 vehicles, which is fully networked vehicle 2, which is our F-150, our Mach-E and our Bronco, the vast majority of modules can be updated over the air. And so it is no longer just about infotainment. It can actually enhance the performance of the vehicle. Imagine if by providing new software to a vehicle, we can enhance our EV range year-over-year. Like that's pretty exciting. Imagine if we can keep our vehicles digitally fresh, right? We all know vehicle freshness is a critical element of profitability and of desirability. There are certain ways to do that with hardware, for sure, but there are a lot of ways to do that with software. And so more and more of our time is spent on maintaining digital freshness of our products. And that is a pretty big change, right? In the past, Ford would have spent its time developing and delivering a vehicle. And then our engineers would have largely disbanded onto different vehicle programs, right? And now we're spending more and more time enhancing existing vehicle programs and making that freshness. That can affect cycles. That can affect the amount of money that we have to put into hardware. That can also affect the amount of new features that a customer gets over time. So it's all pretty exciting. Now it's going to be a balancing act, right? We're always going to have hardware and physical design changes. But more and more, we're seeing the results of our focus in OTA capabilities as a critical differentiator and an important part of what customers are asking for. This also means that Ford can deliver and derive revenue from that vehicle after purchase. A great example, we sold our F-150 and our Mach-Es earlier this spring, and BlueCruise was not enabled. After purchase, we're going to be launching Ford's BlueCruise later this fall. And we have a charge for that, that is a software charge or an activation charge, in order to allow that feature to work. That's just a great example of a pretty massive feature being delivered over-the-air, that in the past, we would have missed out on that opportunity with the Mach-E customer.

Alex, would love to dive into that because there's always a huge interest, not only from the audience on ADAS and level 2, but it's sort of it's a personal interest. Could you talk about how -- so Ford clearly had to put in the sensors, had essentially the foresight to think about, all right, well, this is a lower level 2 system. And then we will upgrade it to highway capabilities when it's ready. Can you talk about how that works? Just a little bit about the general pricing. How much does it cost to upgrade to a BlueCruise system?

Yes. So what I'll talk a little bit about is it does take a fair amount of foresight and planning. And it creates -- and you have to have a modular, scalable architecture that allows you to have multiple sensors that hit many use cases in order to do that. And so building the right architecture is a critical element of the -- of being able to offer something post purchase. And so knowing what the requirements for those sensors and cameras are in advance helps you define that architecture and then launch it at cost. And that lets you build the software after purchase. BlueCruise is priced at $600 for 3 years of service and will be offered later this year, and we're really excited. We think, based on the testing that we've done, that this is a critical element and a pretty transformative experience for customers. And once they try it, they rarely want to give it up. We are making this technology -- I think what differentiates us from some of our competitors is we're making that technology more attainable by offering these features across really big volume models and at a compelling price and giving customers the reason to opt into this technology. For instance, BlueCruise, Ford's BlueCruise will be available on F-150, Mach-E this year and will be available on 16 models within 2 years. And we're expecting significant growth in usage of that feature.

Yes. And that's exactly how you get scale, right? Because you use one system that can be launched over, as you mentioned, 18 vehicles.

16.

And the tech review -- yes.

16.

Oh, 16 includes the F-150 and Mach-E. And the tech review has been really impressive, also quite robust. We see it uses a driver monitoring or DMS system as well. Maybe, Alex, if we could step back. Ford has overall very robust and ambitious connected car rollout plans not just on the ADAS side, but just general 4G connectivity. Could you kind of walk us through it and just remind us of that timeline as we think about across the broad portfolio?

Yes. So we started this journey a long time ago with putting modems into vehicles 4 or 5 years ago and making it a base offering in most of our North American large nameplates. And that really set the stage for us to be able to offer features like lock and unlock, remote access, remote start and the like. We've augmented that series -- those early innovations with a series of new connectivity features that target both commercial and retail customers. And I think one thing that investors often forget the importance of is commercial fleet customers to Ford. The fleet customer is a critical element of our overall volume and our profitability. And we've just set up Ford Pro. And what's really interesting about commercial fleet customers is those vehicles do work, right? Like they actually go out and do work. And so if we can build software tools that improve their productivity or improve their uptime or reduce their total cost of ownership, that drops to our customers' bottom line, right? And that's really exciting because we can design products that match those needs -- sorry, and so we build a series of connected services around prognostics, being able to detect issues in advance for a van so that they can maintain uptime. We've built out telematics offerings, data service offerings and small business productivity tools that are key pillars of our Ford Pro offerings. And we're starting to see some success. Our telematics services subscriptions grew 10% in the last quarter just alone. And so we know that our customers are interested in this. We know that it's driving productivity changes. And with that opens up lots of different business models for us to explore that we're quite happy with. What's interesting, though, as you look forward on both commercial and retail, battery electric and the change to electric vehicles gives a lot of customers excitement, but also anxiety. And so being able to give range competence, for instance, to a commercial customer is really powerful. Being able to seamlessly charge their electric fleet in a depot and making sure that those vehicles are preconditioned, for instance, to get the best charging experience is really valuable. And so that's why Ford acquired Electrify. That's why we're investing a ton of time building range confidence products, and also changing a lot of our offerings in vehicle for more and more stationary moments, because a lot of -- more people are going to be in their vehicles while we're charging. And so it opens up a new opportunity that we really haven't seen in the past.

The dynamic charging, we've heard that across the 2 days from all the charging companies. And Alex, just going through some of the previous Ford publications and presentations. Does this -- that look like Ford announce that they're going to expect 33 million vehicles capable of remote updates by 2028? It's a big fleet.

A big fleet, I like that point. I also like the point that we started this journey of OTA, totally OTA-capable vehicles in January of this year, right? And because of the scale, we're going to have more of those OTA-capable vehicles on the road than Tesla does by Independence Day next year. Like that's the scale of the ambition here. And I think it gives you some sense on why we can invest some of the fixed costs in a big team on connected services because we're not just doing this at the luxury level. We're not just doing this for one nameplate. We're doing this at scale.

Now to the fun stuff, making money, talking about the business model. Everyone talks about how to monetize data, quotes like we believe data is the new oil. And I think everyone wants to turn that $40,000 vehicle, which is onetime, into a reoccurring SaaS model. But the industry has struggled with ways outside of ADAS to so far do that. Alex, when you just go over -- like you've given some examples, but just maybe the top 5 that you're thinking of ways to monetize that in the short term. In the long term, obviously, there's a lot more, but just what are the ways that Ford is looking to monetize connectivity?

Yes. So we agree with you. And in fact, I've mentioned it today. We see at least $20 billion worth of attainable revenue here. But it is through many different means, and I think that there are risks with all of those. We -- what I maybe want to highlight, though, is that subscriptions and recurring revenue is certainly one of the ways to make value, but not the only way to make value in this space. Let me give you an example of something where we actually are able to reach into a vehicle and probably know something that says, Mr. Fleet Manager, your van, van 7, needs an oil change, is got a battery drain and has got a slow tire leak. Would you like us to come out and service it? And we'll do all of those things all at once. That will increase post-warranty attachment of service on our vehicles. That's tremendously valuable to Ford. It's also tremendously valuable to our customer, because our customer now isn't going to have a slow tire leak that leaves them stranded on the side of the road. And so this is a win for customers, a win for Ford, and a true way for an OEM, a more traditional OEM to capitalize on the value of connected services. So I don't want you to lose sight of the opportunity to cross-sell both retail and commercial customers into other parts of the Ford ecosystem. Second, I would -- or third, I should say, so subscriptions, cross-sell. I think thirdly, this has incredible value internally whether this is figure out which features are really getting used. I have a great example of a moon roof that was -- when initially scoped, the motor was scoped to open and close 6,000 times. I can tell how many times the average motor actually gets used. I'll tell you, it's a lot less than 6,000. And so knowing that allows us to be a lot more careful around either a product being underspec-ed or overspec-ed. And so we can save warranty money, and we can save upfront capital costs. But on the whole here -- and by the way, even just on Mach-E and F-150 customers, this year alone, we've identified and saved $50 million of efficiencies on saved warranty costs. That's on a very small UIO. And what is interesting about this business is it -- certainly, it matters what I sell this year, but it actually is a UIO game, right? So if I have more vehicles over -- on the road, the warranty efficiencies will continue. The opportunity to cross-sell will continue. And opportunity to sell measurable subscriptions will also continue. The fourth area that I might highlight is we've actually started working with a number of third parties who use vehicle data in order to make their businesses better or their customer experiences better. Maybe the best example I've got is usage-based insurance. We can share information at a customer's request to a leading insurer, and we can give a driver score to that leading insurer. And that can save the customer money. It can reduce their insurance costs. And at the same time, we can have a business-to-business relationship with that insurer. And so all of these things are rocks that we're unturning, and we're seeing success in all of them. But I'll say we're still in early innings on where the most amount of value will be. And so we're kind of playing it fairly broad and try to turn over as many rocks as we can.

That's great. And we actually had Otonomo yesterday, who was just talking about the value of UBI. So I'm glad you mentioned that. You also mentioned Ford Pro and potentially growing the aftermarket. I think you have a target to double the aftermarket size within Fort Pro. So one of the questions I wanted to lead into next was if we look at a product like the F-150 Lightning, right, a lot of excitement coming in '22, not only just from consumer EV but small business owners. So can you talk about what Ford Pro can do for that business customer through things that we've already discussed Ford plus global services? Essentially, how is connectivity aligned with Pro?

Yes. So like I said earlier, it really comes down to enabling productivity uptime and total cost of ownership for customers. We relentlessly focus on that customers' P&L and the customers' business. And we think if we can improve those 3 things, they're going to choose to come back to Ford. They're going to be more loyal to Ford, and they're going to buy services from Ford. And so we ideate -- we spend a lot of time actually with customers deeply ideating across a pretty wide variety of applications, right? We haven't -- meaning commercial applications. It's not like we just do delivery or we just do service and maintenance. We've actually got leading share across many, if not all of the commercial customer segments. And that gives us scale to build offerings and the ability to invest to build offerings like telematics, like depot charging, like driver monitoring, like data services and small business productivity tools that help a customer turn an order to cash. What's also interesting is Ford's got a really good channel to market, a lot of touch points with small commercial customers and large commercial customers that a lot of businesses have trouble targeting. And so we've built out a series of services, and we have a unique channel to bring those services to market that really set Ford apart.

Alex, I always like to use the last 5 or so minutes to answer some of the questions that have been written in by investors. Definitely some good ones. I'm going to try to consolidate. There's more than 1 question about voice. How do you think about voice playing a role in connectivity, both infotainment service, but also ADAS co-pilot? We obviously had Cerence on who has a relationship with Ford. They're talking about getting into voice, co-pilot and ADAS. So voice and connectivity, how do you see that playing out?

Yes. It's a great question. And I think I always go back to the customer. And so if I asked my peers how to find something on their phone, 9 times out of 10, they'd go like search it, type it. You go and ask a 20-year-old to find something on their phone, 9 times out of 10, they ask Siri for it or they ask Alexa for it. And so I think we see the customer preference and the simplicity of voice as being a critical element of the ecosystem. It also helps tremendously with distracted driving, right? And so there's, I think, good opportunity. And what you've seen from Ford is early investments with SYNC 4 in voice capabilities. I think that there still is a lot of room to make it better and more natural and use natural language processing in order to get the right answer. And AI to be able to figure out when a customer asks something and it's not the right thing, how do we retrain the model to get better and better. But you've also seen from Ford more recently investments in things like using our Google Automotive Services and the Google Assistant as well as announcing Alexa will come later this year on to Ford vehicles. And so I think there is surely a place for it in the vehicle. I think our customers are demanding it. We can imagine a world where it can actually help control parts of the vehicle experience or help search a user manual, so that customers can find things more easily. And I think that the technology is pretty darn good. We will have to get it more ready for some of the vehicle applications. Certainly, Alexa and Google are great at being able to set timers and find the weather and the like. But how are they going to say, "Hey, my yellow engine light's on. Why?" Those are the kinds of differentiation that we think Ford is going to offer. We know how a vehicle works incredibly well. How do we pair that with our voice partners?

Yes, voice is definitely still a technology in search of a lot of applications, particularly in auto. A couple of questions. Everyone seems to be very impressed by the $20 billion number that you talked about in 2030. Is that all incremental revenue? Obviously, it's from all the different sub buckets. But just -- should I think about that Ford's capitalizing very little of that now, so this is mostly incremental?

Yes, we're doing -- we are selling services today like I mentioned. But the vast majority of that should be incremental. And it is across retail and commercial. So it is in both of those spaces, and it's global. But I think that for the vast part, you should think about that as incremental. Certainly, higher risk than -- and -- than some of the other items that we've talked about, either Ford Pro or battery electric. But we're going to go after as much of that as we can.

Great. And then one on vehicle life. We actually just had REE on. Previously, they're talking about what's interesting about EVs is battery technology may change every couple of years, but the people are going to want the upgradability, so that if you have a commercial vehicle like in Ford Pro, you want to keep that for 20 years. Do you see your connectivity as extending the life of things like electric vehicles where we may just swap out the battery after 10 years, but the software will be upgraded for 20 years?

Yes. So I think it can. It will do a couple of things. One is it will enhance value later in the ownership. That's clear, right? And I think that has an impact on residual values as well, by the way. And so if you've got a vehicle that stays fresh, it will have an impact on residual values, whether you sell it in year 6 or not. But in addition to that, we think that the services that a vehicle will have will continue to get enhanced. Now there will be hardware restrictions, right? Meaning, if there's a new service, we can only be backward compatible up to a certain architecture, just the way that Apple does it today. I think they just recently launched iOS 15 and made it backward compatible for 6 generations. That means that you can't have iOS 15 on a model that's 7 years old. I think we'll have a similar view of the world. And that's some of the work that we have ahead of us, is how much backward compatibility do we want to offer? And what does that mean in terms of new features versus backward-looking features? And so that's part of the reason why we've hired Doug into the space is because he brings a wealth of information around how to manage the interaction between embedded systems, hardware -- embedded hardware decisions, embedded hardware and cloud architectures. And that combination and the pairing of hardware to software is one of those really challenging things that a number of consumer industries have solved. And so we're looking to leverage that as much as possible.

Well, unfortunately, Alex, with that, I think we're at time right on the nose. It's been an absolute pleasure catching up. Thanks so much for your insight on the space as we -- in our intro and off camera, Ford really seems like doing really exciting things at an accelerating pace. So I'm glad we got to learn about a couple of them today. For those on the line, I'm happy to put you in touch with Ford, Lynn and the investor relations team and further dive into these aspects of connectivity. So Alex, thank you so much, and hope to see you live at some of these events soon.

That -- I look forward to it. See you.

Good. For those on the line, we have ChargePoint and NXPI in about 10 minutes.