Ford Motor Company (F) Earnings Call Transcript & Summary

Welcome to Bernstein's SDC. I'm Toni Sacconaghi. I cover IT hardware and electric vehicles at Bernstein, and I'm thrilled to have Jim Farley, CEO of Ford, join us today. Jim's been with Ford since 2007. He became CEO in 2020, and he's really leading a significant transformation at the company. Jim attended our conference last year. I've gotten to know him a little bit over the last 18 months, and he is one of the most open-minded, change-ready CEOs that I've met. And so we're thrilled to have him here and to hear his ideas. But before we get into the Q&A, let me just play a video. [Presentation]

Great. So just one housekeeping item. I will be leading the fireside chat. But inside your conference brochure, there's a bar code that enables you to enter questions, which will then show up on my iPad. So it's -- we've gone to the digital age at the SDC, so feel free to submit questions via that mechanism. So Jim, welcome back.

Nice to be here, and thank you all for joining in person.

So maybe we can just start really big picture and think about the global auto market. Like how do you think about the size? Is it structurally growing? And do you think like 10 years from now, the auto market is bigger or smaller than it is today?

We've traditionally thought about unit sales, but I don't...

Yes, units are fine.

I think we need to start thinking about it a little differently than that because we're creating a digital product. So the 2 attributes that I -- we are starting to see is, one, the winners and losers in the digital era are completely different than the analog winners and losers. So let's just say the TAM is the same. There's going to be a pretty big mix up, it seems, already. If you take China, which is 1/3 of all, I would say, digital products so far, the traditional ICE winners in the analog world are like 60% of the industry, and they're like 3% of the digital industry. So the brands are getting all mixed up. How I like to think of it kind of in the third inning of a 9-inning game on the digital side is that the business model for the OEMs was to sell a vehicle, make a margin and then maybe get some financing revenue on maybe through your captive of half and maybe get 1/3 of the parts sales, especially collision, in the first 3 years of the first owner. What a digital product gives us that we never had before, which would expand the TAM and shift it away from others to the OEMs, is owning the addressable market in the second and third owner of the vehicle. The vehicles tend to last 10 years to 15 years, depending on the market. With these new digital vehicles, they're going to last longer. The mechanics are simpler. The batteries will last 15 years, especially an LFP battery. And if the financial markets can support it, I could see more and more of the OEMs owning -- having a relationship with the second and third owner because it's a digital product. That will massively change the addressable market. So how we think about it is it will grow. The winners and losers will be asymmetric, and the digital product will give us a chance to make money on the second or third owner where we've made none.

Right. Now, so implicitly, it sounds like you're saying, look, units may not grow, but if we can capture more revenue per unit, that will be good.

Yes. And we're seeing it on Pro now.

Right. And maybe we'll get to that in a little bit. But if we think about just structurally the industry, the auto industry has always been pretty competitive, 8 to 10 sort of big global brands. We now have, I think, 6 or 7 EVs with market caps above $10 billion. Whether they're warranted or not, separate discussion. But going concerns that are in the market, we have increased globalization. What happens to this industry? I think a year ago, you said, look, I think there's going to be consolidation. Do you still think that's going to be the case? And what way, shape or form might we see that? So is end state back to 8 to 10 players as opposed to 16 or 17 today with market caps kind of above $10 billion? Or how do you see just sort of the nature and number of competitors going forward? And how does that shake out?

I think for sure, there'll be consolidation, but in a way, in a mature industry like the ICE analog world, consolidation was kind of like moving assets around between players and becoming more efficient. I think what we're going to see now is, especially in the next 5 years, is a very large acceleration of cooperation and a lot of talent movement. Not all the pure EV players are going to make it because it requires a lot of cash, but they have a lot of talented people. Those talented people and others from outside the industry, we've seen it forward for the last 2 years now, is there'll be a lot of talent change. I know that's not related to your question, but I think it's a very important aspect of the changing nature of the industry. The cooperation is essential because there's a lot of players like a Suzuki in India or a Honda in North America that rely on certain geographies for most of their profitability. And -- but they aren't big enough to do an embedded electric architecture or come up with a fully competitive, super cost-efficient EV platform with vertical integration. They don't have the resources. So you're going to see a lot of cooperation now that's required just like what you saw with Ford and Tesla on the infrastructure side. We did it on transmissions and engines without anyone noticing on the ICE world. Now it's going to be more on the technology side. I think that's one of the most interesting new dynamics. As far as the kind of -- as I said, I just want to double-click on the winners and losers being different. In the first quarter of this year, no one noticed, but we noticed that something monumental happened in our industry where China became the #1 exporter of vehicles globally. It had always been the Germans and the Japanese. They exported more than 1 million units away from China. Increasingly to Europe, 50%, 60% of the Chinese market is going to be EV digital products. They have a different digital ecosystem, as you know, so that will require some transition for them. But companies like SAIC, Geely, BYD, these are going to be global players now. Their local market was big enough at 25 million units, approximately 25% of the overall vehicle sales. It was big enough for them to concentrate locally. But now with the pricing wars in EV, they've turned their sites to overseas where the pricing power is higher like Europe, especially Europe. So I think what you're going to see in our industry, even in the short term, is a lot of shifting within the industry of winners and losers. And you'll see some mature OEMs shrink, they have to, and others will expand dramatically like, I would say, a company like BYD. They have to sort out their brand and their distribution overseas and become a global player. It's not going to be easy. But if you take the half life of what happened to the Chinese, the Japanese, where I work for 25 years and then the half-life of the Koreans, who are doing amazing jobs now on EV and digital products, you take that half-life and apply it to the Chinese OEMs that are now exporting the largest number of vehicles in the world now. I think you can clearly see it's a bit of a new world order.

But that sounds like a really significant challenge, Jim, because the Japanese were, the Koreans were, and now you're saying this is perhaps as big a wave as we might ever see in terms of globalization and foreign imports coming into the -- into Europe and potentially, ultimately into the U.S.

I think that's what's exciting for me. Like I think that's a really positive thing in our industry. Because we've had this model of selling to one owner basically, financing a little bit, getting some parts revenue, especially collision, and that was really it. That was the business model. And what you're seeing now is as we go to a digital product, I believe an American company like Ford could be a winner in that scenario. We have to get our costs brutally competitive. Our batteries have to get down in size. We can go over that. But we have to kind of redo the product execution on the digital side. But when I see the talent at Ford right now, I see Pro productivity software, physical network of repair vehicles all integrated, just like John Deere and Caterpillar do on the Pro side. I can see differentiated Level 2 and Level 3 autonomy that's better than what I see in China from my team in Ford. I see safety and security software that has not been built out yet, but will be, another node on your house for safety and security of your vehicle. These are all $1,000 to $4,000 revenues just from one owner. We've never done insurance. The connected car data will be critical in more thoughtful insurance products. These are whole new revenue streams that don't go away when the economic cycle turns down. This is a different opportunity we've ever had. And I believe if Ford can execute our product, put the platforms, especially advanced electric architecture and great application-facing software to our customers, there's no reason why we can't win against these great competitors. And it all comes down to one thing: talent. The talent. It's a talent war globally now, and I don't see any reason why Ford can't win that talent war. It's amazing to see the talent we have at the company, not just compared to other OEMs. These are world-class technical people.

So Jim, you've talked a lot about this transition happening to digital product and the potential for incremental revenue. I think right now, revenue is $200 million on potential products at Ford, right? So maybe we can double-click on some of those opportunities that you talked about because, at least to me, they're -- the Pro story is very clear, and I'm happy for you to summarize it for investors who aren't familiar. But the consumer story is a little less clear to me in terms of the ability to capture incremental revenue for a couple of reasons. One, I feel that historically in the automotive market, innovation has benefited consumers, not companies, right? And I may have shared some of these examples with you before, but when I was a kid, windows were manual. $250 for electric windows. In fact, I'm Canadian. We had to pay for a rear defroster, which you really needed growing up in Montreal.

A block heater too.

Block heater, yes. No. I mean -- and -- but then you think about first airbags came out, $1,000 an airbag. Now every car has 8 airbags, and you don't pay for it. Cruise control.

ABS.

ABS. Et cetera, et cetera, right? And competition has kind of priced that away, right? And so if we have an industry structure that is arguably as or more competitive than it was before, again, on the consumer side, what gives you confidence that the OEMs can actually take price and it won't be competed away?

Yes. I almost don't think of ourselves an OEM in that regard because making the vehicles just like an installed base, you have to think about the vehicles differently from that vantage point. Look, Ford now has 600,000 subscribers for software. Compared to a year ago, it's like tripled. So it's not small growth. It's growing a lot. And what we found is that the vehicle -- so I agree with you 100% when it comes to like infotainment. I don't think any OEM, no matter how much they could actually write down the revenue, is going to get any money from the customer around infotainment, content, music, video, interior experience. We can curate it better than anyone else because you have safety critical systems. We'll get in that in a second. But I think there's brand differentiation and how -- but you're not going to charge for that. I think what we've learned so far in the last year is that productivity software for our Pro customers is incredibly valuable and, I would say, even more valuable than the vehicle. Actually, our Pro customers are more loyal to our Pro software than they are our vehicles. So if you're 95% of the commercial industry, 20 million vehicles around the world of the [ 100 ], are small, medium-sized business, plumbers, electricians, HVAC. Go in the city here, go outside and look at all the transit vans, Super Duties. That's our customer. They're not last-mile delivery. That's like 5% of the industry. It's small, medium business, entrepreneurs. And they run their business on these vehicles. If you lose 1/5 of your vehicles, 1 vehicle out of 5, and you're a plumbing supply company in Manhattan, you lose 20% of your revenue. How much is that customer willing to pay for predictive failure of all components in the vehicle so the vehicle is never off the road? It's the same as John Deere and Caterpillar found a lot. If you have -- a lot of these are -- the driver takes the vehicle home at night to the personal home. There's a lot of fraud on gas cards, for example, where people have a company gas card, they actually fill up their private vehicle, even though they're supposed to be using it for their van. We can now track where the person is when they use it and whether the vehicle is next to them. We can actually limit the speed of the vehicle, which we're going to be OTA-ing this year for all of our Pro customers.

That might be a good consumer offering for parents of teenagers, by the way.

Yes, me too. Actually, it's the first thing I asked. I have 2 15-year-olds. Same thing. Like what I'm saying is that productivity software will work for retail. And we've never had this chance because the vehicle data is different and more valuable than what you can get off an OBD port or a dongle from an insurance company. It's more valuable. So -- but the biggest unlock is time. In no point in our history have we been able to give people time back, which is the most valuable thing. When I sold my Prius when I was at Toyota and I left for Ford, my Prius was worth $5,000 more because of the HOV sticker on the back of it in California. People are going to -- are willing to pay a lot for time. They're actually willing to pay $1,500 to take their hands off the wheel now. You can imagine how much money they'll be willing to pay, maybe temporary until it gets commoditized. I don't think it will be commoditized in the next 10 years, but when they take their eyes off the road on a sunny day on the New Jersey turnpike, off-ramp to on-ramp, how much are people willing to pay for that? A lot, I think. So it turns out our category of product is a little different than people thought. People thought of our kind of category as like people using a phone before the smartphone. Actually, trip's going to change now where you can reuse the time, if you were a winner in the Level 3 autonomy system. If you are one of the first and have a really differentiated Level 3 system, if you have really good productivity software, and I believe safety and security software, all those things customers are willing to pay. Will they get commoditized? Absolutely. I don't think it will happen as fast as ABS because these are not software systems that are generic. When you're using a Level 3 system on the highway in a sunny day like today, how it -- how much time you actually get, how predictive, accurate predictive the ETA is, how it pulls over safely when things don't work right, how it reengages the customer when you have to take the wheel back, those are all really hard things to do. And they're differentiating. I think prognostics is another good example. Using AI to predict failure for a plumber's transit van is not an easy thing to do. It's not easy to commoditize that. It's really hard. We think we'll have to provide about 300 predictive signals to those customers through our Pro software when we launch our truly digital pro vehicles. So I guess what I'm saying, I want to be a little bit argumentative to you, that actually giving time back for people and making them more productive if they're running the business on vehicles is very valuable. And it's actually not easy. It's not like an airbag. It's complicated to do well. I think it is differentiating, to some extent.

Right. Because if I take the autonomy example, I sort of feel like, again, we used to pay $1,000 for cruise control and cruise control became standard. And now sort of lane-keeping and distance tracking on highways, kind of Level 1 autonomy, Tesla used to charge $5,000 for it. Now it's free. It's base level autonomy on the car, right? So I just -- I wonder -- I hear you. If you deliver something that is useful to consumers and not everyone has it, you're going to get rewarded for that. But it does go back to the question but it does question of if you have these really aggressive Chinese competitors who are becoming increasingly global and they're sophisticated, are they going to say, hey, we want to win over the customer. Guess what? Are -- and the Koreans have done this with some of their technology. Their cars are really decked out. We're going to try and win market share by gifting it.

I think we should absolutely expect the commoditization of some of these features. But I don't see anyone who can compete with Pro right now. We have 500 upfitters. You're a plumber. The inside of your vehicle is fitted specifically. You can't ship that from California. It has to be a local company. Bailment programs having -- it's a very, very complicated, difficult business. You can't just spend money and time and figure it out.

The Pro business seems like -- I mean we've seen the economics on it. It seems like the crown jewel of Ford from a profitability perspective, but also from a barriers to entry because of the infrastructure you have with the upfitters.

Yes. Physical repair. This is not like -- these vehicles are heavily used, 90% uptime. So they have collisions. They have things that wear out, and they don't have time. They can't have the vehicle off the roads. You need 24/7 repair facilities across the world. Only Ford has that. So yes, I believe -- bring on BYD. Love for them to compete against Pro. I tried for 25 years in my career at Toyota to beat Ford. Never could do it. We tried with Tundra. The plant was half full because it's a really hard, durable business. And now when you make it digital, it's even harder. So yes. But I'm starting to see on the retail side some software ships that does change the basic experience for the retail customer. We can agree to disagree, but I really believe that Level 3 autonomy is quite difficult to execute well. And it's not -- and I don't think the Chinese new competitors are any better off getting to that solution. It's a very difficult thing for software to pull the vehicle off safely, to monitor the driver safely, to integrate all of that into the IP. Now I don't think it's like cruise control, personally. But I do think cruise control and ABS and airbags are very similar to each other. But this is different. This is software. It's very complicated. And will it be durable for 10 years? No, I agree with you. 100%. Will it be durable for 5 years? Yes. And then there'll be something else. I don't know what it is going to be, Toni, but I think there'll be a fourth software ship. I don't know what it is yet.

Yes. I mean you could argue the parallel being the iPhone, where people know the utility of the phone. It was really just through continuous application that ultimately did that, right? And so you're right. By definition, if you have a digital asset who knows the creativeness either within Ford or by third parties, that may be able to increase the value of that asset, right? And again, I think the Apple analogy is informative from that perspective. Again, the beauty that Apple had is they sort of had this locked in the iOS ecosystem. And every car vendor will, to some degree, have that. The question is, will they feel like, well, I must go with Ford because I feel like their platform is better than BYD's platform or has more applications, more utility because -- and I'm willing to pay for that because if it's -- if the functionality is similar and it's a competitive marketplace, that's probably going to get priced away.

Yes. But I'm encouraged not because I'm the head of Ford, but I didn't know a year ago that we would have 600,000 people paying. I did know that rent-a-car companies wanted to actually get -- I'd raise a hand, how many of you rented cars and lied about your fuel? All of you.

Round it, Jim. Round it.

But how valuable is an accurate fuel level for a rental car company. It's very valuable.

It's got to be tens of millions of dollars.

It is. And they're happily pay for it.

Jim, maybe you could just -- of the 600,000 subscribers today for software, what are the principal items that they're purchasing?

400,000 is -- it's in 2 buckets. 400,000 is our Pro software customers, and most of that is data services, like large fleets. U-Haul, Hertz. They just want the data off the vehicle, the stuff they can't get from the OBD port. And of course, it's charging services there, too. So we have about 30% attach rates for our EV commercial vehicles on charging. So they buy the depot charging from us and they use the energy management software. So that's very popular for Pro as well, not just the data services, and then the telematics, which is dynamic routing, fuel card, fraud, that kind of stuff. The other 200,000 is in retail, and it's all on BlueCruise. And BlueCruise is really gaining momentum. It's interesting, we've done our $13 million OTA. Most of that has been from the infotainment system for our EVs. We call it the Menlo system, but we did a massive change OTA to -- over the air to the inside experience for Mach-E and Lightning and F-150 ICE. And we used all the customer data to see how to change the experience, but we didn't charge for that. So like you said, that's like just being a good brand. Most of -- I mean -- so the $600,000 is just productivity and ADAS so far. We don't -- we haven't launched our safety and security system. We're working on it now.

Got it. And you mentioned in your comments and you talked a bit about your Capital Markets Day the insurance opportunity. And I think the number that was thrown out was $2,000 per car. When I heard that number, I thought, that feels like a high insurance premium because I pay less than that for each of my cars. And I would figure that -- I'm not sure if Ford actually plans to get in the underwriting, but if you're really a facilitator of the business, I would imagine your revenue share would be a fraction of that.

Could be.