Ford Motor Company (F) Earnings Call Transcript & Summary

I'm Toni Sacconaghi, Bernstein's IT hardware and electric vehicles analyst. And I'm super happy to have Ford CEO, Jim Farley, join us today. I think his participating in a conference where we don't have coverage of this company is just one more testament to Jim's open-mindedness and willingness to pursue new avenues and to pursue change. For those of you who don't know Jim, he's been in the auto industry his whole career. He was at Toyota and Lexus before joining Ford in 2007. He became CEO in October of 2020 and has laid out an ambitious change agenda for the company, including dividing Ford in the Model e and Blue and setting a goal of 50% EVs by 2030 and spending $50 billion on EVs by 2026. We're going to just do a 3- or 4-minute video to start, and then Jim and I are going to have a Q&A. Thanks for joining us. And Jim, thanks for being here. [Presentation]

Great. [Operator Instructions]

So Jim, I want to keep this kind of a strategic conversation. So maybe we can just start with the auto industry. Historically, about a 90 million-unit market globally. Obviously, a little weaker the last couple of years. If we really look out like 10 years plus, is this market ultimately growing? Is it a bigger market? Or with autonomous driving and electric vehicles potentially having longer lifespans, it's a market that will actually contract in size. How do you think about that?

Well, the TAM is going to change a lot. So it's hard to handicap a specific revenue. We're already seeing with the move to, I would say, digital products, not just EVs, that the winners are completely different than the winners in the ICE world. I'm not just talking about Tesla. But I do think the vehicle sales, hard to say it won't be that 90 million to 100 million that we normally see. But I think, again, shared mobility revenue will grow a lot. These vehicles are too expensive for most people. Number two -- and no one's ever made a vehicle that was optimized for cost of ownership. We've always developed vehicles for individual owners. Second of all, we have the software TAM. We think that moving goods and moving people are enormous revenue pools that we haven't optimized. So I would characterize it as -- I still believe that there'll be 90 million to 100 million units sold. They'll be geographically distributed very differently than today. But the biggest change is going to be the revenue mix is going to change, much more -- much less capital, more revenue around software services and shared mobility.

Okay. I will come back and pick up on that. If we think, again, at the industry structure level, there are probably at least 6 credible new entrants that the market would tell you that in the EV space. You have Tesla, then you have 5 other EV companies with a market cap above $20 billion. So the market is saying there are at least 6 credible new entrants, at least for now. So you have a market that's increasingly competitive. Is -- and probably increasingly global with 3 relatively successful at this stage, Chinese EV makers. So is the industry 10 years from now more competitive and more fragmented? Or is there an inevitable consolidation that happens? Or do you expect there to be a shakeout among either the traditional ICE OEMs and the new EV makers? How do we think about that? Because -- and I want to get into sort of the shifting profit pools in a sec. But structurally, you sort of go, okay, I have a market that's maybe not growing in terms of units. I have more competition that feels like an increasingly tough market. So how do you see the structure in terms of number of players? Consolidation?

No doubt about it. We're going to see very large consolidation and big changes. I would say, I'll just have my list here. I would say new EV companies probably will get simpler. And Chinese will become more important.

Jim, if I can interject, what do you mean by simpler on the new EV?

The portfolio of -- consolidate. I just don't see the addressable market that these companies are going after being big enough to justify the capital that they're spending or their valuations. However, I feel almost the opposite in China. The China EV makers, if you look at a $25,000 bill of material for an EV in China, it's probably the best in the world. And I think they're incredibly undervalued. And they haven't had or shown any interest in exporting other than Norway. So to me, there's a shakeout coming. And I feel like that shakeout is going to favor many of the Chinese new players. The old OEMs absolutely will get consolidated. There'll be some big winners. Some people would transition, some won't. Many of the small players cannot afford to make this transition. Many of them are not investing in embedded software and electric architectures, which is the heart of this transition. It's not motors and gearbox. It's gateway modules and software that controls the vehicle. The old suppliers will consolidate. And the new suppliers will emerge, a number of new suppliers that I don't think are fully valued today like Mobileye, many, many, many new ones. And then the dealers, which is one of the largest valuations, many of them are private. So we don't see the kind of capital markets value them, but their business would change a lot, and there'll be a lot of winners and losers and, I believe, consolidation. So if you look at that all, I feel like there's going to be more consolidation ahead of us, but it will be in pockets.

Right. And will that be initiated -- so will the consolidation ultimately be the result of mergers? Or do you actually expect people to fall out of this market? So -- or do you see consolidation? Do you see active cross-border consolidation, particularly with Chinese companies going forward? .

Yes. I mean, look, what [ Julie ] did with Volvo and I think all of the above. It depends on the category, so to speak. But at the OEM and vehicle manufacturer creation side, all of that could happen, I believe. And we've seen it already happen in the ICE world. It's going to just accelerate, I believe. And with capital tightening, there are new constraints that will make the new players better, but some of them won't be able to afford to fulfill their ambition because they can't raise capital. And so they'll look for partnerships and other ways to raise capital. This is going to be a very interesting time in the next 3 or 4 years as capital gets constrained. And I believe it will be the best thing for some of these EV start-ups. They will be forced to solve tough problems like Tesla did with those constraints.

Right. And do you think, ultimately, the nature of this consolidation will be more from a JV perspective? Or do you actually anticipate there to be mergers of equals and outright acquisitions in the space? You could argue even pre-EV, the auto industry was a pretty tough industry with the low [ margins ].

[ Sure. Looking at ]...

[ Look what these alliances did ].

Yes. And I think the new winners -- I mean, we don't talk enough in our industry about the product execution and the customer experience and the winners and losers in that space. We tend to think of like companies and allocating capital. As we get into the third and fourth inning, it's going to be all around, the customer experience, in dictating the winners and losers. When I handicap that, I absolutely feel like there'll be both probably more acquisitions than JVs. The partnerships are hard. We've been in business for 118 years. We probably have one partnership that worked really well, Ford Otosan in Turkey. These are really super hard things to do. And often, they come down to the leader, the character of the leaders. And if those characters of those leaders change or they retire or leave, the whole thing could fall apart. So I wouldn't rely on that.

Okay. So you talked about kind of the shifting dynamics of revenue composition going forward. And so maybe you can talk a little bit about profit pools for autos and how those change. And do they grow? Because against this backdrop, part of me sees an opportunity for incremental profit pools. On the other hand, part of me thinks it's always been a hypercompetitive industry. There's even more competition now. The Chinese are more involved. And to some degree, is the consumer just going to win, right? I've wondered, yes, Tesla is trying to charge $12,000 for full self-drive. But 15 years from now, a lot of people will have full self-driving. Won't that be like airbags?

Sooner than that.

They charged for airbags when they first came out, but so how do you think about profit pools, Jim? And...

Well, I believe, like I said in the video, I think this is the biggest most exciting kind of land grab of revenue in our industry since the Model T. I really believe that. And the reason is because think about -- we used to use our phones to make a call and then the embedded systems got put in place and the sensor set and all that software allow those devices to not be used for calls. That's about to happen in our industry. When I see the pricing power for ADAS, not just at Tesla, but all of us have -- it feels like that's the first shippable software that we could send to a car that customers are really willing to pay a lot of money for. When I was at Toyota and I sold my Prius, that HOV sticker was worth $5,000. That only saved me 5 minutes a day on my commute. If we can get people to fall sleep in their car, give them 45 minutes back on their commute, they can go to work 45 minutes later. They can go home 45 minutes earlier. It won't be $500. It will be tens of thousands of dollars. And so we're about to change the ride, just like Apple and all the smartphone companies changed the call. And I believe when that happens, when you can ship a lot of software to that car and you have great sensors, really change that experience to be a lot more productive, there will be a large revenue expansion. That's number one. Number two, the largest fleet of operators today in the U.S. are Lyft and Uber drivers. There's 1.3 million of them as we speak. They're larger than all the rental companies combined. And no one has ever built a product for them. And no one has ever built an optimized product for them with an optimized low cost of operation, low insurance. And that will definitely be an EV, and that will definitely have very high ADAS content. And that will bring more mobility to many people who are stuck today, older people, single moms who are working for their kids, they'll be -- disabled people. There'll be a lot more people able to move. We have to sort through the traffic issues in big cities and -- with that kind of mobility solution. So you don't have to own a car. And I believe that move to a per-mile concept or model will also unlock a lot of new revenue. But I believe both of those will completely remix the winners and losers.

So on the incremental software content, Isn't there a risk that ultimately, the competitive nature of the industry starts to price that away, right? Just like airbags were priced away. When I was kid, I think you were -- we were discussing we both grew up in Montreal, at least part of the time, we had manual windows and they would get frozen. And my father would always say, well, we're not going to buy the electric windows because they get stuck. Well, he was too cheap to pay the $300. But all that has been given back to the consumer, right? And so I understand the utility that ADAS can provide someone. But how do we know that the industry is going to allow that profit to be captured by the industry that the Chinese and the low-cost producer is not -- even I think self-parking was -- backup cameras were several thousand dollar options. They're now becoming increasingly standard -- blind spot indicators increasingly standard. What makes the stickiness of incremental pricing better in the future against the construct of a more competitive industry?

That's a great question. I look at our Pro business, we're 50% of all light-duty commercial vehicles in the United States. Our second competitor is not even half of our size. We're the #1 brand in Europe. We're the #1 brand in many markets from Australia, New Zealand, South Africa; #1 in ambulance in Russia, #1 in -- and I can go on and on. We do commercial vehicles. Transit's the #1 van. F-Series, #1 pickup. Ranger is the #2 pickup in its class. And so when I -- I think that's the first place we are seeing the answer to your question, which is for commercial B2B customers. And we set up for Pro not to make anything. There's no factories in Ford Pro. All they do is distribute commercial vehicles and they make all the money on services, the first company to do it. And the first inning of it is very clearly answering your question. People are willing to pay for an integrated system of telematics, fleet management, energy management, charging for electric commercial vehicles, prognostics and predictive failure because when these vehicles go down, that plumber, electrician, police, ambulance lose the revenue. Can't do their job. And it is amazing to me to see how quickly the customers have moved from the vehicle attributes to the software. And the most important stickiness is the integration. If you just come with an off-the-shelf ADAS system that you bought for Mobileye or NVIDIA, it ain't going to be pretty. If you're able to do that in your -- inside the company and have a long-term advantage like you expand the ODD faster than other people. So you can do rain before anyone else does rain. Or yes, you can absolutely have a sustainable advantage. But it requires a lot of internal know-how and a very integrated approach. If you're just buying stuff from Tier 1 autos and throw it on your vehicles, no, It will be exactly like you described.

And do you think that's -- and I get that on the commercial side, that makes a lot of sense.

Even on the retail side.

Do you think that's extendable?

Like we lost the battle on content 10 years ago without knowing it. Navigation, movies, music, we had no rights to that. I told my team, stop it, stop writing navigation systems, buying maps. Let's just go to Google or Apple, make it easy for customers. I believe that ADAS and all the future software we ship to the car, a lot of it will fall into that category. By the way, we can make a lot of people's lives better, IoT connection, precondition your house, have the garage open without pushing a button. All those magical things that should happen in your car that don't happen today are going to make people's lives better, but I don't think -- most of that is chargeable. I think what we're seeing is very specific things are chargeable and you better have a very integrated directed software -- customer-facing software plus physical experience that will differentiate you in a long-lasting way. Or else, it will be a commodity. I absolutely believe that.

You also mentioned this notion of an Uber vehicle or fleet vehicle. Is there a targeted time frame for such an offering from Ford? And how do we think about that?

Yes. I mean I don't want to give too much away, but we're the biggest commercial customer. That's commercial vehicle. When I was at Toyota, I used to look at Ford's Crown Victoria and town car business and kind of chuckled. In the end though, they were kind of the first 737s of our industry. They got all recreated in garages with taxi companies refreshed. The airframes stayed the same. And they were the first model of this new shared mobility, and it's very clear that no one -- Prius is not a good vehicle, coming from Toyota. It's not a good vehicle for shared mobility. It's a low cost of ownership when it comes to the fuel and maybe in insurance, it resells good because it's Toyota. But it doesn't have a high ADAS content. So the insurance is high. It's an internal combustion vehicle. If you use a vehicle 70%, 80% of the day, an EV economics would be much better. But it has to be designed in a completely different way. So I believe there will be -- our industry is definitely heading to a huge price war. You're going to start to see democratized EVs. Tesla's talking about $25,000 bill of material -- or retail price, so bill of material, probably $18,000. You'll see that it's already happening in China. That's half of all the EVs in the world are sold in China. And the most popular one is the Wuling, the $1,000 van. So it's going to happen. But I believe that the answer will not be the lowest bill of material. It will be something that we offer -- someone offers by the mile, by the week, by the day, by the weekend, and it will be optimized not for purchase price because that won't matter if you rent it. It will be optimized for the total ownership cost. When we sell for that, the product and the software experience is totally different than a Prius.

Got it. So you talked about the cost of EVs, and I wanted to spend a little bit of time discussing that. So what do you think is the -- and I'll give you my answer after. But what do you think is the current cost premium for an EV powertrain versus a traditional ICE powertrain? And how does that change over time? Where do you think we're at?

This is probably one of the most -- this is what's an epiphany for me as a leader at Ford. Think if Tom Brady was 199th draft pick, I was like 400th in terms of being a CEO at Ford, right? So I feel like when that second quarter last year profit came out for Tesla and they showed like a $15,000 premium, it totally changed my world. It was an epiphany. It was like the angels' song of like, oh my God, we can make money on these than our ICE. Forget about the cost switching. We know it's a better product, except for maybe the range. So the cost between an Edge with a really efficient EcoBoost engine, 10-speed transmission and a Mach-E, they're almost the same product in terms of category. The Mach-E is a much better product, and the cost premium is $25,000 to $27,000. And that's not just the battery. The battery is about $18,000 then you have an onboard charger. That's expense of $3,000. And then you have a lot of other EV components. That's a first-generation product. That's what you'll see from Volkswagen and many of the companies that are getting in the EV game. What you have to understand is that the second-generation product is going to be nothing like the Mach-E in terms of cost. And the drivers are really important. And I think that this is the magic of Tesla is because they were capital constrained, they didn't have the money, they did things that we are too lazy to do. So the big drivers for not only getting out of that $25,000 but totally reversing it are these kind of items. The first is the distribution model. We think our distribution model today is about $2,000 per unit more expensive than Tesla. About 1/3 of that is inventory. We have all this inventory sitting around our dealers in transit, got to get rid of all that. Public advertising, another 1/3, spend $500 to $600 a vehicle on public advertising, get rid of all of it. The last third -- well, I don't want to -- I can double click on any of these. The next one is battery chemistry. Today, we're using NCM cells. They have very high cobalt and nickel content. LFP, which is the predominant chemistry in our global business now, just making its way to the U.S. That has almost no nickel in it and very little cobalt, almost no cobalt. It substitutes iron and phosphate. They're much cheaper, more abundant, and that battery chemistry is 20% less. That's like $2,000. But the biggest lever is going to be the way we design the vehicle for radical simplification of labor content, half the fixtures, half the workstations, half the welds, half the -- 20% less fasteners. We designed it because it's such a simple product to radically change the manufacturability, to take the content out of labor and optimize the engineering of the vehicle for the smallest possible battery for the competitive range. And this is where the auto companies are very uncompetitive. This is like Apollo 13. We got to get back from the moon. Every watt, every amp matters. Just on a full-size truck, a optimized full-size truck for Aero versus, let's say, a Lightning is 75 miles of range. That's $3,000 in battery. So we have to -- the aerodynamics and other brake systems that are more expensive but recapture more efficiently, the reengineering for the vehicle to minimize the size of the battery since it's so expensive is going to be a game changer for these second-generation products. There are other opportunities like the ADAS revenue. That's if you put a fully updatable vehicle in electrical architecture, you're going to get some revenue -- software revenue you don't get. The labor saves about $2,000, not a lot. But if you add all those together, it easily offsets plus the run rate of the battery getting cheaper. With the offset of the raw materials getting more expensive, it's more than $25,000. And it's all of those things. And that's why this is really hard because a company like Ford has to do it all. And I have no idea how any of them could do it if they don't have a dedicated team all the way through, plus measuring the profit.

Right. So the electric powertrain, it sounds like will come down some, but that's a big -- not $25,000, right?

It is.

So you're basically saying, we got a clean sheet the whole vehicle. We do not all going to...

We do. We do.

Yes. Powertrain is not going to get to parity for a long time.

No. And the big differentiator is going to be software. So you -- the most important thing, if I was watching our industry, the most important question you should be asking us, tell me about your electrical embedded system. Tell me how you can ship more software to your car than your competitor. That's as important as how efficient we engineer the vehicle for the battery.

Right. So you -- but -- so there's some element of price. There's some element of vehicle redesign and there's some element of having a less expensive EV powertrain in part because of...

LFP, yes.

LFP. In part, because you're going to design the cars to be more streamlined. In part, because you'll have better energy density over time, et cetera, et cetera. That feels challenging. It feels like a lot of things to work on simultaneously. How are the Chinese getting to those $25,000 price points that you alluded to? LFP is part of it, but it's maybe 20% cheaper on a 60-kilowatt-hour battery. It's maybe a couple thousand bucks tops. So it's not just LFP. How are the Chinese doing? Labor is, I don't know, $3,000, $4,000 -- $2,000 to $4,000 in a car. How are the Chinese ultimately getting to reasonable price points ahead of where most traditional ICE vehicles are struggling with? What's the bridge there?

Well, I think LFP is a big advantage. It's not a small advantage. It's a very significant advantage for them. All the IP is there. The chemistry has very low thermal risk. It has -- there's a lot of ways to judge a battery, and there's a lot of advantage for LFP beyond just its cost. But they are -- they have gotten their heads around this second-generation thinking around how to design a vehicle for manufacturability and for a small battery. The mileage in China is not nearly as long as U.S. or Western Europe. People drive much shorter distances there. So they don't have to have as big a battery. But the elegance of their engineering is something that I'm very taken with. They -- it seems like there are many more companies than in the West. The other oddity there, which I can't handicap, is that their digital ecosystem, which winds up being the most important part of the car, is totally different than ours. So the software you're going to ship to the car is totally different. And it's not shareable globally. It's like cordoned off. And those customers are much more advanced on their digital experience than the West. So I don't know how the software piece will figure out, but I don't think they have the same pressure on economics that we do. A lot of the companies are state run. They're based on employment levels. Their motivation is to hire a lot of people, and they have different motivations than companies like Ford. And by the way, you said it's a lot. Yes, it's a lot. But it's a lot better than 2 years ago when we didn't even know. Now we know. Now it's down to execution.

Right. And how about if we think about the cost challenges relative to an EV player, right? So people often ask me, Tesla's got 30% gross margins. Like mass market carmaker has 20% gross margins. Like how do you square that circle? And part of me says, okay, well, I think there are a number of things. One is direct distribution, which might be like 4, 5 points.

$2,000, $3,000.

Which is a big differential. One, which I don't know if you take it out of OpEx or COGS, is they don't advertise at all. It's definitely like...

That's right. I told you.

And [ Jay ] mentioned that even on the holistic car perspective. And so how does Model e as a company compete with that going forward? Like you still probably have to do advertising, you probably still have to do...

I'm not convinced of that.

I get that you'll [ find that ] on the dealer side.

I launched Scion. I'm not convinced we need public advertising for e if we do our job. We haven't needed for Lightning, haven't needed for Transit, don't need it for commercial vehicles. Mustang Mach-E, we advertised. We took the ads out because we've been sold out for 2 years. Now it's early days. It's first inning, second inning maybe. But I'm not convinced we need public advertising. We'll -- see, our model is messed up. We spend $600 to $700 on a vehicle to promote it, and we spend nothing post warranty on the customer experience. And the problem is parts business, which historically has been very profitable, we only get maybe 10% or 20% of the customers who come back to us. It'd be much better if we try to develop an ecosystem where 100% came back. And we gave them experiences, and that's our marketing. You buy a Ford Model e and after a year, we're going to give you a complete detail of the vehicle, check all your software is up to date, you get a complete birthday for your vehicle. We should be doing stuff like that instead of doing Super Bowl ads. If you see a company doing Super -- if you ever see Ford Motor Company doing a Super Bowl ad on our electric vehicle, sell the stock.

There are quite a few of those that I see.

Yes, I know. Because that says that the model isn't really changing. So the model should be you build a simple vehicle. That Plaid Model S is a Lamborghini. You don't need to have an upper body engineering. I can make a Mach-E feel like a Raptor without engineering a new body. So these electric vehicles give you the chance to radically simplify your upper body engineering, which Tesla got after the S and the X. They're like, why are we making it so complicated? We don't make any money on these vehicles. The Tier 1s are making all the money. They got it. So I think how we compete with them, pick our segments really carefully. I believe that the company should go after customers that it knows and serves naturally. For whatever d*** reason, I don't know, Ford gets up in the morning and it does commercial vehicles better than anyone in the globe. I have no idea what's in the water. I was in charge of the Tundra at Toyota, I couldn't compete against F-Series. The company just does it really well. Company does Mustang, Bronco really naturally. So stick in your swim lanes, serve customers you like, you know really well, and then innovate on their behalf in ways they don't even know like Pro Power Onboard. Everyone else is designing electric vehicle. No, no, no. It's a portable energy source. You can bring it to the job site, power your house. It's not just a zero-emission powertrain. It can power your house. We get that insight because we know the full-size pickup truck customer. We know that they carry generators, have tools that they have to power. A lot of start-ups don't know that. So be focused on your customers that you do really naturally well, radically simplify your top hats. We should not have 9 top hats for the 2- and 3-row crossover customers. That's wasted a lot of money. We've got to break the paradigm, put the pressure on the differentiation being gearbox and motors and software and experience. And then I think we have to do all things I mentioned just to catch up. All of that can be done if you have talent, which we never talk about in the industry, but it's the one thing I obsess about. It took me 6 months to recruit Doug Field from Apple. And he did it all in Tesla, embedded electric architecture, all of it. The talent -- getting the best talent, even if they make 10x what I do, is so important to make this transition. But I believe there's a way for us, but I don't think we're going to try to beat Tesla and the Model Y.

How does distribution factor into this? You have a dealer network. Again, we estimate that's part of the reason why Tesla has superior profitability. It captures the profits of the middle person. How does the dealer network of Ford evolve over time? And is it different for Mach-E than it is for Blue and -- how many dealers do you have in 15 years?

I don't know exactly, but I think we'll have multiple tiers dealers. The dealers will be more specialized. Has anyone here gone and seen Tesla in Norway? You should get on a plane and go to Norway if you follow Tesla. They have Tesla dealerships. So I believe if you look at Net Promoter Score for Tesla, it is extremely high for the first several years of ownership. But when it gets to the second group, the third, fourth, fifth year or the second owner, it drops below us. If you have a fender bender, you hole your windshield, you get a dent, your door doesn't close right, you don't really understand the latest software update, you're left on your own. That's why they had to do what they've done in Norway where the UIO is so big. I believe for retail, we have to -- it's kind of like what happened between Amazon and Target. Target could have gone away, but they didn't. They bolted on an e-commerce platform and then they use the physical store to add groceries and return -- make returns really much easier than Amazon. They use their expertise as a physical retailer to their advantage, but they modernized the e-commerce piece so it would be really easy to do business with them. It's exactly what we have to do on the retail side. We've got to go to non-negotiated price. We got to go to 100% online. The vehicle, there's no inventory. It goes directly to customer, 100% remote pickup and delivery. But then we have this opportunity to use our physical presence to outperform them. Like, I believe some Mach-E and Lightning customers would love to have a Mustang for the weekend. Maybe they want a Super Duty. I can do that. They can do that. I don't want to say rent a Ford. So I believe on the retail side, we can do things post warranty and remix the marketing spend to have a better experience. And I think our dealers can do it, but the standards are going to be brutal. They're going to be very different than today. We're working with our dealers as we speak through this. The second thing is commercial. It's funny. The dealers wind up being our strongest thing. I think of commercial, I think of John Deere, I think of Caterpillar, I think of JCB. And when you think about our commercial business as being software and physical services, you just go look at those companies. They know where they make money: autonomy, prognostics, the physical repair of the vehicle before it goes down, telematics, intelligent planting. Our version is fleet management. Those dealers need to be physical. And we're lucky we have the biggest physical presence of any -- in Western Europe and the U.S. of any brand for repairing 24/7, a broken or damaged Ford van or truck. And the start-ups will not be able to create that physical network. And you can't do a remote pickup and delivery.

We have about 7 more minutes left, so I'm going to enter sort of the lightning round portion of this. So one of the -- I think the biggest challenges, I think, that Ford has is you have this Model e business, which you're hoping to scale to 2 million units by 2026, call it 3 million by 2030. And invariably, that will cannibalize from your Blue business, right? And so if we said even if Ford were to grow during that period, we may have EVs going from 0 to 3 million, and we could have ICE vehicles going from 6 million to 3.5 million, I'd say, right, which is vehicles going down 300,000 to 500,000 per year in that division. How do you manage that company and ultimately improve profitability in that company when you have a top line that will fall by design dramatically, right? And how do you not get swallowed up by the legacy and fixed costs associated with that organization?

Great. Well, the first step is you cannot ask everyone to do everything. You have to say, Blue team, you're the cash cow. You heard in the video. Our job is to fund the future. And we have passion brands. We're not going to have commodity products like Edges and Escapes, Mustangs and Broncos and good stuff and especially vehicles that don't suit themselves for BEV. So it turns out this commercial truck thing is a real advantage for us because they make really -- like if you're a Super Duty customer towing 10,000 pounds in Montana or in the North Slope of Alaska in the energy business, then electric for you is an awful solution. The batteries are too heavy. And until we get to hydrogen fuel cell, so a lot of -- we've shrunk wrapped our ICE business around segments that are often kind of self-selected out of EV and they're real passion brands. And I'm going to allow the team to invest in those passion brands because we're in the motional business. We have to get really good restructuring. We're going to have to maybe have the suppliers do more engineering. We're going to have to do a lot of things we haven't done. We're going to have to get after our structural cost in a way we never have and we're going to have to be really good at that. We're going to have to be radical about our quality. So -- and I need a team focused on that. Not focused on doing it all, but just go run that business, make more money and radically simplify it and restructure it and get good at restructuring. And by the way, Ford is really good at restructuring because we've been losing market share in North America for 20 years, where I used to work at Toyota. On the EV business, you've got to make sure that you don't just have electric digital versions of your ICE products. To have top-end engineering much less, like Tesla has shown us, you have to approach the creation of the product through a conquest methodology. And so you design the product so they are actually incredibly painfully advanced in the -- you overinvest in electrical architecture and embedded system, the way they look, the digital experience inside of them. It's probably not going to be comfortable for our current customers who buy an Explorer. In a kind of weird way, it's kind of too bad that Lightning winds up being our most successful vehicle today because it feels so derivative from the F-Series. It's not our only truck, and the other trucks won't look anything like it. So I think there's a mix, but setting up our compensation, talent that are specialized, and I've spent a lot of time talking to PE firms. A lot of companies, GE, they have done this, try to learn how do you do this successfully. I don't know, but it seems like it's been done many times.

And just on the sort of next couple of years, you talked about how expensive sort of Gen 1 EV vehicles are relative to ICE. And the Lightning obviously has a big range of price points, like $40,000 to $100,000 basically. But there have been increased input costs. How -- A, how tough are those margins going to be for EVs in the next couple of years? And how committed are you to kind of keeping price as reasonable as possible to drive volume? And just expectation-wise, how should investors be thinking about profitability of the EVs initially because there is a trade-off, right? You could try and say, well, we want to keep prices -- margins a little better in the near term and boost prices. On the other hand, you want to establish yourself, particularly in the truck space, probably as an early leader once you get through your backlog. So how bad will margins be just to set investor expectations? How do we think about kind of where average price points might be for Lightning? And how would you -- are you comfortable having losses while you drive EV volume? Or are there lines in the sand now?

Well, the great thing about Ford versus a lot of our competitors is you all know because as of January and April, we're going to report our EV business, and you'll see it all. So I would say first-generation products, we need to get the contribution, positive margins. Second-generation products, we need to get A+ margin. That's 4 years away. Right now, we're in the final engineering or the real heart of our engineering for advanced electric architecture, fully updatable vehicle, as well as the second generation, the next group of models that would be built in completely modern facilities with radically lower labor, distributed differently. All things we talked about, smaller batteries due to Aero and a lot of other optimization, all of them, the first generation of those first several will be out by '26. So what investors should expect for is, hey, Farley and the team are working really hard to get to positive contribution margin. We've already found $2,000 of cost on the Mach-E, and we just launched a year or 2 ago. Like we're finding a lot of cost. But we didn't really engineer them the right way. And we haven't distributed it in the right way. So it's going to take a little while but I'm putting pressure on myself to get to making money on these vehicles. It's going to be an upfront investment, so I'm focused on contribution costs and margins. Are you getting more from the customer than the whole thing cost? And then the second cycle of the product which, again, we're like in the midst of right now, by '26 -- we picked '26 for a good reason. That's a next-cycle product. We didn't do it just because it's 4 years away. So okay, that's when they all come out. That's when all the plans are done. That's when we have all the raw materials lined up and all the battery JVs are scaling. And to me, we better be at 8%. In fact, several vehicles better be a lot better than 8%.

And final question. When you think about that 10% EBIT margin target by '26, are you more confident about your ability to hit 8% in EVs or the rest of the business, including Blue to be at higher margins? What worries you more in terms of the bigger challenge because they are both significant challenges as we've discussed?

I mean pick that [ chin up ]. I think it's -- I think there's a lot of executional risk in all those steps that I talked about. But I feel so much better than even 6 months ago because I know. I know exactly what we have to do, so it's down to execution. And therefore, we get back to talent. So I don't know if I'd handicap it right now. I think it's too early. I think we haven't seen the intense competition that you keep pushing on. I don't think we've seen that yet. So I don't know if we know what revenues are going to be in either one of those businesses. You could easily make the argument that many companies underinvest in their ICE business for vehicles that are not really suited for BEVs like Super Duty. We're dominant, Super Duty, 50% market share. Even if one of those undervest, you can make the argument. It could be pretty good. So I don't know. I guess I look at it like '26, I can control what's going to go happen in '26. And I think there's an equal number of executional risks on both sides. I wouldn't handicap it right now. The one that's most exciting for me is the shared mobility. I entered the business -- I started Toyota because I really believe in democratizing cost of moving. And I really believe that most people can no longer afford these vehicles. And even if there is a plethora of $25,000 vehicles from China or whoever, it's not going to be good enough for them. They're going to want a great experience. And I believe, maybe then the conversation that way, I believe there's a second cycle of competitors we have not seen yet like the technology companies. They could wait for autonomy -- for a big shift in technology and jump in to the transportation business. And the biggest TAM for -- I can see is moving goods. The moving goods TAM in North America is 10x the addressable market in moving people. When you add up all the cars sold, all the dealer revenue for the cars, like all of it, and then you look at the TAM of moving goods, it's 10x as big. And I believe that we have not seen the next cycle of shared competitors who will approach that when autonomy becomes democratized and they will use their very powerful consumer brands to integrate into their digital experience already, and we will have a whole new wave of competition. And if anything, that's what keeps me up at night, how do I compete with them.

Awesome. Well, Jim, I appreciate your enthusiasm and your candor. It's a pleasure having you at the SDC. I hope we'll have you in the future.

Sure. Thank you.