Déjà Vu: Is Ford repeating one of its biggest mistakes?

It’s hard to believe that it’s been about 16 years since the Great Recession that nearly brought the auto industry to its knees. It was a massive wake-up call, and executives at Ford Motor Company (F 3.21%) and General Motors (GM 4.54%) they drastically adjusted their organizations and strategies from top to bottom.

While Ford has been praised for the way it has financed its way through tough times, and the company has done so right over the years, it could be about to make the same mistake that got it into trouble with years ago.

More affordable, less wanted

Over the past few years, Ford has done something that was considered controversial when it phased out all passenger cars other than the Mustang in North America, its main profit driver. The idea was simple: Trucks and SUVs cost only slightly more to produce than passenger cars and could sell for two or three times as much.

You don’t have to be a finance major to figure out the math, and neither did Ford. SUV and truck margins keep the lights on and the profits rolling. So here’s the rub: At a time when the auto industry is in overdrive with the transition to electric vehicles (EVs), Ford is refocusing on providing a low-cost and highly affordable EV platform with a price target of $25,000.

The problem is that larger vehicles require larger batteries, which are generally the highest cost component of the vehicle. For now, that means some of those luscious margins are eroding — and amid a race to more affordable electric vehicles to attract a mainstream consumer, Ford’s Model-e division is drowning and is expected to lose as much as 5.5 billion of dollars in 2024 alone.

As Ford reverses its vehicle strategy — at least as far as electric vehicles go — not only will it cost a penny to adjust, it could be a repeat of all those years ago when the company failed to turn a profit. on passenger cars.

What does Ford do?

Ford announced this week that it is canceling plans for three-row electric crossovers entirely and delaying its full-size electric pickup by 18 months as it pulls back billions in EV spending to help cut losses. It’s a move that could cost as much as $1.9 billion, including a $400 million non-cash fee. Electric vehicles will now account for 30% of Ford’s capital spending, down from the planned 40%.

Ford is between a rock and a hard place. It could ignore electric vehicles until costs come down and be ostracized for arrogance and lack of vision for the future — similar to when foreign automakers introduced more fuel-efficient vehicles to the U.S. market . Or, the company can take a loss on EVs with an eye on the future and subsidize EV development with its traditional lineup of gasoline-powered SUVs and trucks.

The iconic Detroit automaker chose the latter, but the risk for investors is that the long-running gravy train of juicy SUV and truck margins will never be the same once the transition to EVs gains traction massive. This is a major problem for a company that in recent years has produced record profits and gained zero traction with a lagging stock price.

What should an investor do?

For Ford, delaying some of its EV projects and replacing EVs with its wildly popular and profitable Super Duty trucks at its Canadian plant is the right move. But for investors, it’s imperative that the automaker demonstrate a checklist of things before it can be considered a long-term holding.

Ford needs to prove it can cut losses from the profit black hole its electric vehicle division currently represents. It also needs to prove it can develop a low-cost EV platform and make money on the vehicles — or close to break even, because EVs at that price point can always be a waste of money. Then they have to prove that juicy margins on SUVs and trucks can exist as battery costs are reduced. And then, perhaps most importantly, it needs to demonstrate that it can take those low-cost EV customers and put them into more profitable vehicles.

As the world moves to electric vehicles, it’s clear that the company can’t operate the way it did recently when it phased out almost all passenger cars. But if it can’t turn a profit on those affordable EVs, it could be deja vu all over again. Investors would be wise to watch for those boxes that Ford needs to check before buying the stock for the long haul. Ford’s entire investment thesis is changing.