Ford Motor Company (F) Earnings Call Transcript & Summary

Okay. Well, thanks, everybody, for joining us this morning for our meeting with Ford. The timing of this meeting, I think, is really great. Ford reported their second quarter earnings on Wednesday of last week, and we thought the numbers were quite good. And based on the stock's reaction, it's clear that many of you agreed. Part of that performance was, of course, the industry price environment, but it was also very clear that Ford is making very good progress in addressing the challenges that they've had over the past few years in South America, Europe and China. We also saw some very good progress in warranty. And most importantly, we were encouraged by the momentum that we're starting to see in terms of electrification and digital initiatives. And these are the kinds of things we think that could set the stage for significant growth. And that last point is mostly what I'd like to focus on this morning during our fireside chat because that's really the opportunity for value creation. So this morning, we're very fortunate to have with us today John Lawler, Ford CFO; and Hau Thai-Tang, Ford's Chief Product Platform and Operations Officer. So John and Hau, I have a few questions that I'd like to ask you. And I'd also like to encourage others who are joining us on Zoom to chime in with your questions. I would see those if you type them in. They would come to me, and I can ask them anonymously. I can try to weave them in with the questions as well. So John and Hau, thanks again for taking the time to talk to us.

Happy to be here, Rod. Thanks for having us.

Thanks for having us, Rod.

Well, thank you. So let's just start out with one question that I think I'd like to focus on, just in terms of intermediate term before we talk about longer-term strategy. There's obviously a lot of changes at Ford and in this industry. But obviously, there are still some issues that have to be resolved. We're seeing that over the course of 2021 and into 2022. But I wanted to ask you, during Q1 of this year, Ford took 1.1 million units out of production. It was an enormous impact. And Ford, of course, wasn't alone. So now as you look into 2022, you're talking about growing 10% off of that base. So by our math, it's maybe 200,000 units in North America, 400,000 units globally. And that's a big increase, but it's kind of in line, we think, with what you lost from the Texas storms and the Renesas fire. This is not a short-term question. I hope it doesn't come out that way or doesn't sound that way, but I was hoping you could maybe talk a little bit about whether you have visibility into your Tier 2 supply chain that gives you confidence that you can get back up to normal in a year or so. And maybe you can give us some insights into what you see. And also, related to that, how has your procurement or vehicle engineering strategy changed?

Sure, Rod. That's a great question. Maybe I can take it and start off and see if John wants to add anything. So I would say your question around long term, and let's say beyond a year, we do think the situation will reach an equilibrium in terms of the balance between supply and demand. We know that in Q1 of this year, many of the wafer foundries started to reallocate some of their capacity back towards automotive. It was a question of how fast the automotive demand was rebounding, so we started to see some of that. We think that will start to come online next year. And then there have been strategic incremental investments into more capacity, and that should come online in the back half of the year. So long term, I think we will reach an equilibrium. The way we look at it at Ford is within our manufacturing system, we're not capacity constrained. We know that. So we can -- we're not gated by our own manufacturing capacity. We can meet what we project as the upside demand. It's really now working through the value chain. And we have improved visibility, as you've mentioned. But if you look at the learnings from this year, nobody predicted these black swan events. Nobody anticipated a fire at Renesas. Nobody anticipated a winter storm hitting Texas and impacting the supply chain. Nobody anticipated a COVID Delta variant breaking out and impacting the back-end operations in Southeast Asia and Malaysia. So what we're trying to do is be very prudent and look at, not only the long-term structural balance between supply and demand, but also what firm commitments do we have through the value chain from our sub-tier suppliers, all the way down to the wafer foundries. And then what planning that we put in place, what provisions for black swan events that we haven't anticipated because we know there will be some. And I think what's different about today versus prior years is that there's no float or a buffer in the inventory. The entire value chain is completely maxed out, and we're kind of hand to mouth. And when you're in that kind of a situation, you're very vulnerable to black swan events. This is why you may feel like, hey, on paper, Ford's being very conservative, but there's a lot of good reasons for that. We're going based on firm commitments from our supply base. We want to make sure those assumptions drive the right mindset internally around structural costs and those types of things. And then we think there is upside, but we have to through with our suppliers to get those commitments. So that's the first part. The second part of your question is we've learned a lot from this experience. It's fundamentally changed the way we're thinking about procurement and design. Obviously, it's highlighted the just-in-time operating model that's been prevalent in auto may not be the right operating model for a lot of the different, I'll call it, systems that are very capital intensive with long lead times and then perhaps interdependencies with other industries. So semiconductors would be a great example, but you can get into things like memory chips, batteries. They have a lot of the same risk profiles. So we have fundamentally changed our approach. It means getting greater transparency through the value chain, working with those sub-tier suppliers to understand their capacity, where they've allocated capital, and then in many cases, making commitments to those folks on volume commitments. And in some cases, we're buying capacity with those folks. And then -- so that's one change. The second one is thinking strategically, so I'll use semiconductors as an example. There are some that are very much strategic and brand differentiating for Ford, so think about things that we would use for advanced driver assist or even our high-power compute systems as we roll out our new technology stack, Blue Oval Intelligence. In those cases, we're working directly with the chip makers and the foundries in cases where the chip makers are reversed, integrated and basically securing that technology node, that capacity and then going back to our Tier 1 suppliers and saying, "This is the chip we will use for this system." So that's a very different model than a turnkey black box model that we've done in the past, and we've already started to do this. So for example, on our SYNC infotainment system, we specify to our Tier 1 supplier, who is primarily a build-to-print supplier, which chip they'll use and that not only allows us to lock in the supply but also the technical road map to help us maximize the value for the customer. So those types of things are happening. And then the last thing I'll mention is designing for much more interchangeability, fungibility, so going through every chip in the vehicle, looking at each layer of the value chain and ensure we have multiple sources so that we're not over-indexed and vulnerable to any single source. And working with the chip makers who we're finding that, in some cases, they are strategically planning to exit some legacy technology nodes because it's no longer profitable or it's not as attractive. And in those cases, we're designing our way out of those nodes proactively. So those are examples of many of the things that we're doing. The last comment I'll make is as I referenced earlier, these learnings are relevant beyond semiconductor, so we're applying them to other critical areas of the value chain as well.

Great. So it sounds like all of those things collectively, digging deeper into the Tier 2, getting those secure, particularly the things that are proprietary to Ford and important for the brand, building up some safety stock. These are the kinds of things that you're working on over the next 12 months or so that give you some encouragement that beyond the next year or so we would be looking at the company getting back to normal levels of production.

Yes. And we're also seeing, I think, great support from governments around the world to put in incremental capital, and you know about the chip stack and some of those things. So we're partnering with all of the key players in that space with our policy team to help accelerate that to get more capacity in the system and more of it localized in North America.

Great. Now I wanted to ask a little bit more about the intermediate-term plan because it's pretty clear that with the changes that you made, just eliminating the drags from some of the regions and products that you've had in the past, you should be able to get to an 8% margin globally, which has been your target. That looks very clear to me. But I'm hoping maybe, John, you could talk a little bit about, just financially, how we should be thinking about that target? Because it could be argued that the investments that you're making now have very long-term returns. And I'm just thinking about Tesla spent 10 years losing money, and now they argue that that's positioning them for a lot of advantages in the future. But the question really is should we focus on the near term? Because I want to clarify that, simply because that 8% margin target that you provide for 2023 is kind of going to become a short-term focus in about a year or so. So maybe just some thoughts on how we should be thinking about that.

Yes. Thanks, Rod. So the way we're talking about it as a leadership team together is how are we going to drive long-term value creation for Ford. And so we think about it around now and what's in the near and then far and how are we going to manage all 3 of those. And at Capital Markets Day, I think you saw that our investment thesis is about value creation and growth, right? And one of the first steps of getting there was to work through some of the issues that have been holding us back in the near term, and that's really around making sure that we fix the core areas of the business that needed to be fixed. And so you see that starting to come through, and you're seeing that in our performance. We restructured South America. We've spent a lot of time restructuring Europe. We're now moving forward in International Markets Group, in India. And that is going to have a significant impact on our ability to generate positive EBIT and cash flow coming out of that and automotive cash flow. And that's really important for us to focus on those in the near term so that we start to build a stronger business so that we have that cash flow to fund the future. So we've made those necessary, difficult decisions. We're also focusing on our margins in North America and how we continue to drive those efficiencies as well. And all that allows us then to increase that investment in our growth opportunities and in our future, in connectivity, in the digital ecosystem, in our BEVs. And you see that in those investments coming through with what we announced in Kentucky, what we announced in Tennessee, from battery capacities, the expansion of our capacity on the F-150 Lightning. One of the key thing for us right now as a management team is how agile, how scrappy, how quick can we move to increase additional capacity on the Mach-E, which is sold out. And so we're going to make those investments. We think the Mach-E right now has at least 200,000 units of demand out there, and so we've got some things to do to break the capacity there. So we're investing, and we don't see it as a binary thing. We don't necessarily, Rod, see it as a short term versus long term. We have to do both, and I think we have the opportunity to do both. And then one of the other things I'd like to say is that one of the great things that we have right now is we have an incredible product lineup. It's probably the best lineup in my 30 years at the company. And as I was talking about, once we get through some of these black swan issues and we work through those and we get that rate and flow and get back to what we see our demand rate is, we have capacity for 5 million units. And when we run this business and we approach that and we get to that 8% margin and we're producing at volume, it will generate a lot of return and a lot of cash flow that we will then invest and continue to invest in our future value creation, long-term value creation.

So John, just to put a finer point on that, you're saying that the changes that you guys have made, taking a lot of cost out, a lot of drags are gone, combined with the operating leverage that you see now that we really -- we haven't really seen the full benefit of that yet with -- at your new cost structure and without some of those things that have been drags, that will allow you to get to that kind of an 8% margin, even with $30 billion on BEVs over 5 years, which, if I just take the 25% that's expense, that's $1.5 billion a year. That's all embedded in your -- in that 8% margin target.

Absolutely, absolutely. So when we do our plan, we've got all the investment that we need to make on our BEVs. We know that we're going to have additional strategic investments that we need to make. We're not capital constrained in any way, and all of that is accounted for, as well as the turnarounds that we've -- I talked about earlier and getting through those drags and fixing those drags on the business. And we believe that it's not binary. We get to the 8%. We invest in future growth, and we build this company into a growth company. Absolutely.

And I know on that BEV spending, you just alluded to this massive demand for Mach-E. And It looks like Lightning is going to be at least as big, if not bigger than that, and that you'd like to accelerate some of the EV volume targets. Can you maybe talk about what that might look like as we think about '23, 2024 and 2025? Because I know you've put out these longer-term 140-gigawatt hours of battery capacity in North America and 240-gigawatt hours globally. That's out in 2023. What -- and we could do the math on what that means for volume, but what should the next couple of years look like as far as your ability to really ramp that up?

Yes. Thanks, Rod. I can start on that. Our strategy, we think, is the right one. It's really paying off, which is playing to our strengths, targeting these segments where we have a dominant brand position. We have pricing power. So that's true with Mustang Mach-E. That's true with Lightning. That's true with E-Transit. You referenced the 141-gigawatt hours of capacity that we're putting in, in North America, that translates to, as Jim Farley mentioned in the Q3 earnings, about 1 million vehicles of BEVs. So the question for us is how do we really leverage targeting that capacity, that volume with the strongest lineup with the least amount of complexity. We're seeing exceptional demand on these first 3 products. It's 2x of what we had planned for. So as John mentioned, the near-term push for us is breaking those constraints within Ford and also to the supply base and leveraging the always-on approach where we continuously improve these products over time as they're in the market, leveraging Blue Oval Intelligence. And if we can maximize that, we think we can satisfy that demand, a very strong demand with a very simple vehicle lineup that has a lot of scale, volume, leverage. That's really our focus right now in the near term.

The 140, that 1 million units is 2030, if I understand correctly.

It's going to build out, yes, over the next decade. Yes.

Yes. So is there -- can you share any thoughts on -- if you had 200,000 units a year of Mach-E demand, if you have this kind of demand for Lightning? And can a lot of that be brought forward somehow? Or is it just going to be just really constrained by having kind of a lot of lead time on getting that battery capacity up on online?

Yes. So we -- the first tranche is already in place. It's what we're doing with SKI in their plant in Georgia, and that's going to come online to support Lightning and E-Transit, and some of that can also be used into the Mach-E because we've designed that interchangeability. So that's the first tranche that's going to come online. And then you heard the announcements we made in Tennessee and Kentucky that will come online in the mid-decade. In between, we have other options. We have battery supply coming out of China that we're working with our partners there. As you know, we're building the Mach-E in China as well, so we can do a bit of cross shipping. But this is going fast and breaking these constraints that John referenced earlier. So we're just very, very energized by the very strong demand. That's the first thing. And now it's just up to us to figure out how to break those constraints quickly.

And on the batteries again, this 140 and 240 by the end of the decade, have you sourced all of that at this point? And can you talk a little bit about how vertically integrated you think you really should be in this arena? Do you intend to make your own cells? Are there other parts of the value chain that when you look at this, you say, "These are strategic, and we need to really get into that level."?

Yes. So if you -- the total value chain for, I'll call it, the electrified powertrain, we pretty much have vertically integrated or announced our intention to insource most of that. So gearboxes, motors, battery, pack assembly, battery arrays and now cells with our Blue Oval SK joint venture, all of those things are going to be done in-house. What's not in-house right now is really just inverters and power electronics. Going back to our discussion on semiconductors, we are basically working to secure the technology for the low-power power electronics because we do think this is an area that's potentially differentiating. We are doing all of the software for that, which is where a lot of the secret sauces in terms of maximizing the use of every electron. But the manufacturing of those semiconductors, we will leverage our partner relationship. So think of that in terms of total value chain vertical integration. So then on the cells, through the Blue Oval SK joint venture, we are working with SKI, our partner that basically do the manufacturing. So that's part of our vertical integration strategy with respect to the 140-gigawatt hours. If you think about the announcement we made in the dual plant in Kentucky, plus the plant in Tennessee, there are roughly 43-gigawatt hours each. So between the 3 of them, that's 129-gigawatt hours. And then we have the 12 that's already committed with this first site, SKI site in Georgia. So that basically is the 141 or so. So that's fully committed. We think now with the strong demand, as John referenced, we think that may not be enough even. So we're looking at options for more. But right now, that 140 is fully planned for.

Great. That's helpful. And I was hoping you can also talk a little bit about costs in batteries. You've mentioned $100 a kilowatt hour at the pack level by mid-decade, and I think you've said $80 or so by the end of the decade. How do you sort of view that competitively as you look out amongst other companies? And on that, it seemed like those targets didn't consider any real radical things, like dry processing of cathode material or sell the pack or sell the chassis designs. And it didn't seem to incorporate things like you have a relationship with Solid Power. They're working on solid-state batteries with silicon anodes. How realistic is it that some of those things actually start to come through here over this -- the next 5 years or so?

Yes. Great question. So I think in this space, we should be careful when we're comparing numbers that were -- it's truly apples-to-apples, right? So the first one is you referenced is, are we talking kilowatt hour -- dollars per kilowatt hour at the pack level or at the cell level. We're talking about pack, so it's kind of all in. And then the second one is what chemistry? Are we talking NCM? Or are we talking LFP or some other chemistry? So those things will actually have a big factor. So our -- the numbers that you've cited, $100 at the pack level, $80 as a longer-term target, those are targets that we've established at a pack level for NCM chemistry. We think, as you referenced, there's incremental opportunities to go above that. So first, looking beyond just the battery chemistry and the cells and looking at how we integrate those cells into the vehicles. So whether that's cell to array to pack to vehicle, as we do it today; or is there an opportunity to go directly, cell to pack or even cell to vehicle, depending on advances in technology, that would be an incremental opportunity. Going to a different chemistry like LFP, lithium iron phosphate, would be another incremental opportunity that would be cost advantageous. And then beyond that, and this is why we're so bullish, we think there's another chemistry -- interim chemistry that we're working with our partners on an ion pack that's taking a lead on this called manganese-rich LMR chemistry that many people think is another advance around cost as well as performance. And then after that, it's solid state. And you know about our investment in Solid Power. We chose them because we have the highest confidence in their ability to industrialize that for automotive use as well as being able to build it in a manufacturing plant that's currently constructed to build lithium ion and NMC chemistry. You may have seen -- the people online may have seen that our partner, SKI, also made an investment in Solid Power. So we think this is another proof point beyond our investment in BMW that people really feel confident in their technology and the ability to industrialize it. That time frame is going to be more 2030, we think.

Okay. And this is a really big deal. What Hau was -- is talking about when we're talking about $30, $40, $50 a kilowatt hour out of the pack, and you think about larger vehicles having 100, 135 for more kilowatt hours in them. You can sort of do the math on the magnitude of how much those costs are going to come down and how that's going to affect competitiveness. Can you just -- maybe switching gears a little bit, I wanted to talk to you a little bit about digital and the transition of software-defined products. So we know that you're rolling out a new electronic architecture now, and then you have another one that's going to come out in 3 years or so that further consolidates compute and extract software from hardware. I think you guys internally refer to that as FNV4. So there's this path that is the state of the art. This is what we've been thinking automakers are going to be doing, and it looks like you guys are moving very quickly in that direction. The question I wanted to ask you is maybe, first, what does that do within Ford operationally? Does that give you more control internally? Do you -- does the relationship with the suppliers maybe change as a result of switching to more software-defined things versus hardware-defined things? And number two, when you talk about bringing a lot of this vehicle software in-house, how extensive is that? Because we hear different levels of vertical integration. Some companies are talking about developing their own operating systems even within the company and writing all the firmware and working directly with Tier 2s. Should we be thinking that Ford eventually gets to that level of vertical integration?

Yes. Great question. So we -- as you referenced, we have already launched Blue Oval Intelligence, and it's on all of our new vehicles today, so starting with F-150, Mach-E, Bronco and all the new vehicles that are coming out. That has -- that gives us the ability to read data off of the vehicle and also do over-the-air updates which is really powerful. Year-to-date, just on those 3 vehicles that we've just launched, we have done over 1 million software over-the-air updates already. And we're seeing a lot of benefits to Ford in terms of being able to fix issues earlier, detect issues, reduce our warranty exposure, and most importantly, provide customers with customer-facing enhancements. And the biggest one that we're very excited about is deploying our over-the-air, driver-assisted BlueCruise system. That's going through an internal rollout on company management lease vehicles now. And then in Q1 of next year, it would start to be deployed on customer vehicles. And this gives us a huge upside opportunity on recurring revenue subscription benefits. The next generation, as you referenced, takes that a step further. We have more ability to do over-the-air updates on every element of the vehicle beyond the driver assistant, the infotainment system. It allows us to move to a zonal electrical architecture. It does fundamentally change our relationship with the suppliers where we basically become the system integrator. We are going to be more prescriptive on which system on chips we use and those types of things, and it's going to move the suppliers to more of a build-to-print kind of approach on the areas where we think are brand differentiating. So for us, it's -- can be driver assist. It's going to be controls of the vehicle. It's going to be strategic areas of the infotainment stack, the sensor fusion, those types of things. With respect to the software architecture and what we want to do versus others, if you think about it as firmware, middleware and then customer facing, I think the area where we think we can add the most value and also realize the biggest benefit is really in that middleware stack, where we do the integration, we do the things that are bespoke to Ford. We leverage a lot of the existing firmware so that we're not doing things that are somewhat industry standards, Bluetooth protocol, cybersecurity, those types of things. And then on the customer-facing layer, it's going to be a function of what we do best. So you know we have a partnership with Google and Google Automotive System, and that's to leverage things that we don't think will be brand differentiating, right? So navigation, some of the traditional infotainment things, it gives us access to the Google ecosystem with their developers. But things that we think are brand differentiating, we will do ourselves. So that's, at a very high level, the way we're thinking about it.

How should we be thinking about this sort of competitively versus your other U.S., Asian and European peers? Are -- is everybody doing what you're describing here? I know that Volkswagen has a big software operation. Could you just give us a sense of how we should think about the competitive landscape? And what is really different about what Ford is doing versus what other companies are trying to build?

I think if you look at the bookends, there are some OEMs that are really trying to be very ambitious and do everything, and maybe you've referenced some of the big players that are taking that kind of an approach. There are some mid- to smaller-sized vehicle OEMs that are saying, "We don't have the capacity or the capability to do that. We're going to look to more of a turnkey solution. We'll turn to one of the tech companies or a Tier 1 supplier to provide that integration for us." Ford is somewhere in between. We're not trying to do everything. We want to do the things that are -- we feel are brand differentiating the Ford and Lincoln ourselves, and we don't want to repeat things that are more efficient being done by a tech partner. We also recognize we're not the -- a common trap for OEMs is to believe that they're the center -- they are the sun in the solar system, right? We're not the center of the universe. Customers already have a digital ecosystem. You're an Apple fan or you're an Android fan, you use Amazon Alexa, and you expect that experience to transcend work, home, your vehicle. So we want to enable that. But again, we also recognize there are things that we can control in the vehicle that's unique to Ford, and it can give us a differentiated experience for our customers. And those things are the things we're prioritizing and doing ourselves.

Great. That makes a lot of sense. I wanted to ask about how big this business -- this digital business. You mentioned BlueCruise is obviously a big one, and I can envision people paying some kind of monthly subscription for this, especially as the capabilities continue to evolve. Maybe, John, I don't know if you want to chime in on this. But how should we be thinking about the revenue and earnings if we think about 2 years from now or 2025, 2027? Any way to sort of put some thoughts around that?

Yes. So it's early days, but I would say that this is incredibly exciting for us at Ford and in the industry because it opens up a whole new avenue for the business that we haven't had in the past. At Capital Markets Day, we sized up the TAM by 2030 at roughly $20 billion. And as you said, Rod, it's the exciting things that Hau talked about, the BlueCruise technology, the driver assist, We think that there's a big opportunity in BEV charging, providing our customers upgraded content every month, every quarter, every year, and their vehicles get better, and that's really exciting for us. And that's really a cornerstone of our Ford+ and always on a relationship with those customers. But one of the things that has to happen over time, right, we need to grow that park, as Hau said. We're just launching the vehicles with this technology or this capability. So we're going to grow that from about 1 million units to over 33 million units by 2028. And as that happens and that grows and the offerings that we're able to provide grow, we'll start to scale that business. We haven't shared any specific targets, short term, at this point, but we'll be doing that over time. But I would say that we are starting to gain traction. And we see that this space is not only very exciting and a big opportunity for us from a retail standpoint, but it's a significant opportunity for our Ford Pro business and our commercial customers. And one of the capabilities that we just launched in the U.K. was what we call FORDLive or always up, right? And so it's connected uptime for our commercial customers in the U.K. And it's not -- these services not only benefit us, but they really benefit our customers as well. And just over -- since we launched that in the U.K., our commercial customers have prevented lost downtime or lost revenue of over $8 million by being out in front of issues, fixing their cars quickly if they have an issue. And so the power in this is incredible, and it's really exciting for us. And we're looking forward to scaling it because it's going to have a significant impact on the business, big opportunity for us.

Just these 33 million vehicles, if it's, let's say, $20 a month kind of thing, $240 a year, that's an $8 billion revenue stream. And are we thinking about that the right way? So this is -- people are sticking to subscriptions, and this could be pretty meaningful, and we should be thinking about software type of margins for that kind of business.

Absolutely. Software types of margins, and the key is going to be the attach rate, exactly, on those 33 million units and the monthly subscription or the monthly payment the customers will be making for these types of services. So that's exactly how we should be thinking about it.

Yes. And Rod, on Capital Markets Day, we basically laid out the financial framework which is what any tech OEM would know, right, which is units, attach rate, increasing share of wallet and then how that grows exponentially the more connected vehicles that you have. So that framework is actually in Alex Purdy's presentation.

And I've gotten -- you alluded to Ford Pro as being part of that, and I've gotten a few questions inbound on this. So why don't we skip ahead and think about that. You talked about, at your Capital Markets Day, that Ford Pro business going from $27 billion in 2019 to $45 billion in 2025, which seems like a really big number over that kind of time frame. Can you maybe spend a little bit more time talking about what's in that? How does it break down? Part of it, obviously, is fleet management, it sounds like, and a bunch of other cloud services. Part of it might be on the ground service. How should we think about sizing some of those things and the margins associated with that?

Sure. So a large chunk of that growth, Rod, is going to come from hardware, higher vehicle sales as we create this ecosystem and our customers see value in that. Many of our customers have mixed fleets, and we'd like to have a larger share of that mixed fleet. And we think by providing them full service end to end and with this connected ecosystem and the value it's going to create from that we'll get higher attach rates for their entire fleet. So that's one area that we think that we'll get quite a bit of the growth. In the other areas around, as you said, BEV charging, commercial BEV charging, the telematics, digital services, increased servicing, increased financing. And so at the Capital Markets Day, I think we shared some of those numbers. We talked about $1 billion in revenue growth from depot charging by 2030 for our customers, our commercial customers that are going to start by buying the kind of line electric van and the F-150 Lightning. We plan to grow parts revenue because that will be a big part of it as we provide these services where we'll either have mobile service or we have uptime commitments, and there's a benefit there for our customers. And we say that growth in parts revenue could be up to $750 million by mid-decade, by 2025. So when we put those 1,200 Pro service mobile units on the road, we think that we'll be able to capture a larger percentage of the service business for our commercial customers. And financing, Ford Credit has been working very closely with Ford Pro around this product that they're launching called Ford Pro FinSimple. And we want to grow our penetration. Surprisingly, it's relatively low for us. Because we are a leader in the commercial space, it's about 10%. We want to grow that to at least 25% or more by 2025. And so there's a sizable opportunity there to the credit business as well. So we see it coming through all of those channels as we continue to build out the Ford Pro business and our relationships with our commercial customers.

We had a conversation several weeks ago with the Head of Purchasing at UPS, and he was talking about how they're viewing their vehicles as -- just the over-the-air upgrade ability as being a really big deal, just having the ability to control the software, in his words, "In the future, our vehicles are not going to be at the mercy of the driver's foot." We also had a conversation with the Head of Purchasing at Amazon who was talking about they've got 70,000 of these vans right now, and they're up from like 5,000 just 3 years ago, and so they're continuing to grow this. And they're talking about how they cobble together this stuff with like 4 different dongles within their trucks and send a lot of data to them, and it's going to become even more important for them to have that kind of data as we move into electric vehicles because they want to see how their batteries are performing and degrading in Phoenix versus Detroit, as an example. And it sounds to me like that's part of what you guys are getting into, but there are other companies that are getting into that business as well. We've had BrightDrop and Rivian and others. But maybe can you just talk a little bit about competitively, what do you guys bring to the table that's difficult for a new entrant to bring in or difficult for others to bring in or that can kind of change that model and generate recurring revenue?

Yes. So when you look at that business and you -- a lot of people go straight to the Amazons or UPS, et cetera, in package delivery. That's actually a relatively small part of the commercial industry, and so we'll compete in there. We'll provide a service, but a lot of what Amazon does is they do a lot of vertical integration, et cetera. So we'll service them as best we can. But one of the areas that we're really excited about is all the small- and medium-sized businesses. I think more than 40% of GDP runs through those small and midsized companies in this country, and that is where we are leaders. It's the small plumbing fleets. It's the midsized fleets that we can work, and they don't have necessarily a cohesive package that's going to allow them to increase their productivity and manage all of the types of things you talked about, vehicle service and driver behavior and insurance, et cetera. So we see that as a big opportunity because we're a leader in that space today, right? With E-Transit van being the #1 commercial van globally. And we know those customers. We have all the outfitters for them. We know how they use their vehicle as a tool, how we can help them better provide services to their customers and increase the productivity of their business. So we see a big opportunity in the small and midsized businesses where we're already strong, where we have those relationships. And working together, we can make our customers even more productive.

Interesting. Yes. So you could tell them when to overcharge, undercharge, help them with managing businesses and give them tools maybe that normally they wouldn't have access to, that the larger fleets might have. You can bring that to them.

Yes, exactly.

Exactly. Yes. If I could maybe just amplify what John said. The biggest advantage we have is we understand these customers, that institutional knowledge because of our dominant commercial business. And it's really -- it's not the big guys like UPS and Amazon and FedEx. They're going to drive for commoditization. That's what the purchasing professionals have paid to do, as you mentioned, when you talk to them. And they have their own bespoke digital ecosystem that's unique to their company. They don't need a solution from an OEM. However, the midsize and smaller folks, as John mentioned, construction, those types, mining, those locations are where we're really strong. We understand those customers really well. And what we're providing is not only a turnkey solution but an entire stack. So if you think about the stack as financing with Ford Credit, you think about it as parts support with our dealer distribution network in terms of uptimes, depots through Ford Pro for charging, the digital services then the vehicle, that entire turnkey stack is really the differentiator for us versus a startup or somebody else. So customer -- understanding of those customers and then the entire stack is how we want to differentiate ourselves.

Yes. That's interesting. And as you say, it's a much bigger market than 70,000. Even 70,000 seems like a very big fleet, but the market itself is millions and millions of vehicles. I wanted to maybe just transition to Argo because that might actually be somewhat tangential here, but anybody who's been to South Beach in Miami in the past year or 2 probably saw autonomous Fords driving around, and we actually got to ride in one pretty recently, which is really, really interesting. They've made a lot of progress. So it sounds like commercialization of this is not really that far away, which is kind of mind-blowing in its own right that a car can actually make those kinds of decisions and operate autonomously. The value of your stake in Argo is one way that Ford will benefit from that. But can you talk about how that affects the Ford business more broadly? And when do we get to see some of that?

Yes. So they have made great progress. So one of the things I really like about the Argo approach and what Bryan and his team are doing is they're not shying away from the difficult environments. I mean they're testing in Miami, which, as you know, you were down there, it is a very complex environment; Washington, D.C., Austin, Texas, right? These are tough environments, and we're doing it across those 3 cities, plus Pittsburgh, Detroit and in Palo Alto. So I think that's an advantage for us because he's really working on the tough problems, and you see the results and the progress he's making. And we're going to be collaborating relatively soon here with Walmart to launch the door-to-door delivery system in Austin, and we're going to collaborate with Lyft on autonomous ride hailing soon. So we are making progress. One of the things that we're talking about is really having a strong presentation around Argo and where we think the EV strategy is heading and how we'll commercialize it, and we're planning on doing that early next year. And we know this is mission-critical, right? This is going to be a very important business for us, and it's something that it's a key element for what we see is the growth opportunities in expanding our TAM and that long-term value creation that we talked about earlier, and we see this as a key space for that. And the other thing about Argo is it's developing. They're moving along. They're solving the toughest problems first, and they're working to build out that capability and scale it quickly. But we think it's going to take a little bit more time. It's going to take a little bit more capital and one of the things that we're focused on with them and supporting them as Argo is pursuing its aspirations to go to the public markets. So there's a lot in front of us. There's a lot to be impacted here around Argo and AVs. And one of the things that we're going to do about is, next year, we're going to spend some time taking you through that strategy and clarifying that for everybody.

Yes. I want to ask about that point. But just before that, maybe elaborate a little bit on what the relationship is? So will Ford actually sell and own and operate these kinds of vehicles with your customers? Is that part of Ford Pro? Or how does that work between you guys and Argo?

Yes. So we're working through any potential business or solutions or structure that we believe is going to drive value and growth for Ford, right? What's going to unlock value for us? How do we approach the market? What role should we play? And what role will Argo play? And how do we optimize that between the 2 companies? So there's a lot of cross-currents between the 2 companies out in the marketplace around this. You've got electrification coming into play. You've got vehicles as a service and how you manage those fleets and what you do with those fleets. So as I said, there's -- it's complex. There's a lot to unpack there, and so what we're doing is we're putting together a plan to share that with everybody next year.

Okay. So it's still TBD, but it sounds like there's opportunities for Ford to actually be involved directly. And you mentioned the plan to -- for them to tap the public markets. How did you sort of weigh that as an owner, right? Like so the ownership is pretty high, 40% of Argo for Ford today; and 40%, is Volkswagen; and 20%, roughly, is owned by management. You can make the argument that having that in-house is an enormous differentiator for Ford because not every automaker is going to be able to actually pull this off. And because -- just simply because of that, it seems like it's a big differentiator. So does having them go down that path mean that there will be any less of a differentiator for Ford down the road than other -- any company that wants to work with Argo be able to do that?

I don't think so. I think that, one, it's the right thing to do for Argo and the employees and Bryan's team and his desire and how he wants to develop that company and how his -- he can recruit and attract the best talent. I would say, though, that we're going to still have a very deep integration with Argo and the combination of an SDS that's designed specifically for Ford vehicles and what we've done so far with him, I think, will be a differentiator and will continue to be a differentiator. And whether or not they take Argo public, I don't think that will change the relationship between us and them. And the intent that we had when we first formed Argo was that we believe that having a fully integrated system is going to be a better solution for customers. And I still see us being able to execute on that strategy, whether Argo is public or if it's fully owned by Volkswagen, Ford and the Argo employees as well.

Interesting. I've gotten a number of inbound questions on distribution, and I wanted to maybe probe that as well here for the last couple of minutes that we have. So if you look at the public dealers, companies like AutoNation, they're showing us new vehicle gross margins. It used to be in the $2,000 range. Now it's closer to $5,000. They're getting close to $2,000 of finance and insurance earnings per vehicle. That's a lot of money. And it would seem that companies that are able to sell directly could either pocket that as profit or maybe put -- take that and put that into their vehicles with more content to make the vehicles better. And I know that there's a lot of advantages, for sure, having dealers in every corner of the country, especially with service. But can you just address that? And how you think about competitively does -- how that kind of all comes together? And what sorts of things can you start to address or not address as you're facing some competitors that can go in directly?

Right. Yes. So it is -- we see it as 2 channels. You have the retail channel, and then you have the commercial channel. And each of those is different, and the customers need and require a different approach. And we see that as vehicles are evolving with electrification and connectivity and digital services, our customers' preferences are evolving as well. And so what we need to do is work with our dealers to satisfy those experiences and how our customers want to be served. And we believe that we have the flexibility to do that, and we can involve and evolve our touch points with our customers to give them what they want. Many want a full showroom experience. They want to come in. They want to look at the vehicle. They want to talk to the dealer. They want to understand the vehicle and test-drive it, and others just want to go online and in 3 clicks be done. And so we need to have that flexibility, and we need to evolve our system so that we satisfy the customers in the way that they want to be served. Now on commercial vehicles, service is incredibly important and having dedicated commercial dealers, and we have 650 of those in the U.S., 850 transit centers across Europe. And we know that the access and the advantages that we have through the service centers for our commercial customers are critical, and so we see this evolving along those 2 channels a bit differently. And we plan on making sure that, as we do evolve that and we provide those customers that flexibility, that we can have a competitive advantage. In the commercial space, it's going to be hard for these start-ups to have the breadth and reach that we have with our dedicated dealers in our transit centers, and we see that as a significant competitive advantage.

On that point that you made about wanting to serve the consumer the way that they want to be served, how is that going to evolve? Is there a way for Ford to create a platform where you -- from a consumer's perspective, it's more transparent and maybe the dealer is sort of in the background, but you are establishing a more direct relationship and transparency and taking advantage of some of those really big profit pools that appear to have emerged? Or is that just really challenging, just given the industry structure?

Yes. Well, we're starting to see it evolve quite quickly, especially this past year. In September, over 30% of our sales came through orders where customers went online, configured their vehicle, put their order in, and then it shows how they wanted to receive that vehicle, could be dealers delivering it and dropping it off. They could come in and pick it up. It could be a very light touch or it could be a heavier handover where the dealer takes us through and takes them through the vehicle and shows them how everything works. So it's evolving today. I think we have more work to do with our dealers on how we optimize that system, and that's what we're working on today. But it's evolving, and you're seeing that come through with the number of orders we're now placing each online and satisfying our customers that way. But there's more work to do here, definitely.

Yes. That makes sense. And the last one I see here coming in from investors, I think, is more of just a point of clarification. So thinking beyond 2023, and I mean, no one is really -- it's hard to forecast 2021. So -- but just kind of at a high level, you did put out this 8% margin kind of expectation in normal years. There will be some pressure as EVs launch and ICE vehicles decline, and the costs are still coming down for them. How should we interpret that 8% margin? I mean, is there some volatility around that in the subsequent years? Obviously, there usually is, just based on what the cycle is doing. But is there some volatility around that, just structurally? Or do you think that actually that's a level that, in normal years, you should be able to achieve even with the products that you're going to be launching?

Yes. It's something we believe we should be able to reach in normal years. I think the question at the center of that is would we forgo BEV sales to drive to that 8% margin. Because we know that BEV margins are lower than ICE margins, and would you sacrifice that? We know how important it is to bring those BEV customers in, right? That's the long-term play. Once they come into a platform, they tend to be loyal. Once they move into a BEV, the feedback we have from our customers is they're not switching back to an internal combustion engine. So we know how important that is. And that's why we're laser-focused, as we talked about -- Jim talked about on the call and Hau talked about earlier, about breaking those constraints so that we can put as many of those vehicles in our customers' hands as possible. But I don't think it's a binary thing. I think we can do that, and we can continue to improve the business, manage the ICE business and drive for that 8% margin. So we're intent on satisfying both of those deliverables. So as many BEV vehicles as we can as quickly as we can, continue to work on the cost structure of BEV and the margins of BEV, while we also continue to improve the ICE business and drive for margin enhancement there and deliver our overall commitment for '23 of that 8% margin.

Great. Well, that's a great place to wrap up. So John, Hau and Lynn, thank you so much for taking an hour with us out of your busy schedules. This has been super helpful. Congratulations on all the progress that you guys have been making. It's been really nice, really awesome to see from where we sit over here. So with that, we'll wrap up. And thanks, everybody, for joining us and for all your questions.

Thanks, Rod.

Thanks, Rod.

Thank you.