Ford EV strategy secures its long-term strategy, but the global auto sector is struggling (NYSE: F)


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Investment thesis: Ford Motor Company (New York stock market :NYSE:F) has arguably had the most inspired approach to building an electric vehicle (“EV”) strategy of any mainstream automaker. It’s no exaggeration, as the Mustang continues and always evolves The story has now made a seemingly natural transition to the next chapter, which is an EV. It’s created waves where so many electric vehicle concepts offered by traditional automakers have failed.

At the same time, Ford isn’t neglecting its line of conventional cars, even as more mainstream automakers decide to risk it all. With a solid EV strategy in place, Ford should have a solid longer-term future. That being said, the global economic situation is deteriorating and most factors point to Ford’s most important markets stagnating in terms of economic growth, and therefore personal vehicle sales. The combination of higher interest rates, slowing economic growth and inflation rates above average wage growth is making the outlook for car sales bleak in Ford’s two largest markets, namely the United States and Europe. China, Ford’s third largest market, has its own economic problems.

My personal view is that these issues will persist for longer than the market currently expects, while the chances of things getting worse are higher than the chances of things getting better. This means that in the short to medium term, Ford faces tough market conditions, like most other automakers.

Ford’s latest quarterly results are okay, but the broader global auto market shows signs of weakening

For the second quarter of this year, Ford reported decent sales and revenue numbers, amid less-than-stellar industry-wide auto sales results in its core markets.

Ford quarterly sales

Ford quarterly sales (Ford)

Although revenues were strong for the quarter, net income did not increase significantly from the same quarter a year earlier. With a net profit of $667 million, profit margins look very slim, given that revenue came in at over $40 billion. It should also be noted that for the first half of the year, Ford has so far recorded a loss of $2.44 billion.

Auto sales data for major markets like the United States shows that over the past 12 months or so there has been a decline to levels that have only been seen so far over the past 12 months. of this century during the 2008 economic downturn, as well as during the COVID-caused plunge in sales.

Monthly US auto sales data

St. Louis Fed

The sales data is misleading in this particular case, as sales volumes were largely impacted by parts shortages, resulting in lower production volumes. That said, there are also signs of problems on the demand side for automakers. In the EU, for example, where Ford sells more than 20% of its cars, total car sales are now at their lowest since 1996 in June this year and demand increasingly looks to be a major factor. There is also talk of rising default rates on auto loans here in the United States, although there is no return to pre-pandemic default levels yet. Therefore, this shouldn’t be considered a problem, at least for now.

The global auto industry continues to face energy price inflation, semiconductor and other shortages, and a battered consumer

The latest US CPI numbers are not very encouraging. Despite a massive drop in oil prices, the year-over-year figures are quite high at 8.3%. Most worrisome is the fact that month-over-month prices rose 0.1%, despite falling energy prices in recent months. This means that even though energy costs were deflationary, other factors seem to have taken off and are no longer influenced indirectly by higher energy costs. This means that it will be much more difficult for the Federal Reserve to control inflation.

Europe is much worse in this respect. The latest EU-wide data suggests that despite lower oil prices, the overall regional energy situation continues to push inflation higher, with no end in sight in this regard.

EU inflation


My view on the EU situation is that we may be months away from the energy crisis which will lead to a breakdown of supply chains in the region, where breweries, for example, will stop making beer, for lack of aluminum bottles and cans. Such systemic shortages will lead to an inescapable spike in prices, which will lead to an equally inescapable rise in nominal household incomes, especially taking into account state aid schemes. At this point, even if the energy situation improves somewhat, the ECB will be fighting a losing battle to contain inflation, which is clearly turning into an entrenched stagflationary nightmare.

Ford sales, Q2, 2022 by region

Data source: Ford

As you can see, Ford relies on the North American and European markets for around 80% of its sales. Both markets face a central bank policy of fighting inflation, driving interest rates higher, even as economies in those regions are set to slow. In the case of Europe, it could contract either in the second half of this year or next year. Ford’s sales outlook, particularly next year, is expected to be bleak due to these developments. Rising loan defaults could also threaten its bottom line if too many people feel financially squeezed by the rising price of everything and feel the need to default on their auto loans as a result.

The second biggest market for Ford is the Chinese market, where the news isn’t particularly encouraging either. A continued zero-COVID policy apparently threatens to throw the Chinese economy into a stagnation trap, along with a number of other factors, such as lingering economic frictions with the US and EU. China remains a wildcard for Ford as well as for the entire global auto industry. A sharp reversal in COVID policies, coupled with other measures, could potentially lead to an acceleration of the Chinese economy. On the other hand, a prolonged continuation of the lockdown policy could lead to permanent damage to the Chinese economy, with the outlook for auto sales in this market suffering a corresponding setback.

The evolving history of electric vehicles and Ford’s place in it

When I first bought Ford stock, it was largely based on my view of its EV strategy, which I felt was adequate and beneficial for its long-term prospects in the context of continued evolution of the automotive industry as I see it. I continue to believe that Ford has been successful in its EV strategy compared to most of its industry peers, making it a potential auto industry outperformer over the longer term.

The brief explanation of why I think Ford was successful with its EV strategy is that it managed to do two main things. First and foremost, it has created enough brand recognition for its Mach-E as being specifically an electric vehicle, even though it is associated with Ford’s iconic, decades-long and ever-evolving history. In other words, kind of like a Tesla (TSLA), when you get in a Mach-E people tend to know it’s an EV so that gets to the status symbol aspect to own one.

Second, Ford sells its best-selling Mach-E and F-150 electric versions in the high-end portion of the EV market, where automakers are able to offer EV buyers a convenient lineup. As I pointed out in an article a few years ago, inequality of range is very likely to become a social problem in the future, especially if or when conventional cars are banned. In effect, this means that those who can afford it will be able to drive a car that can be taken on a long-distance road trip, whereas the majority of people will only be able to afford a city car.

I don’t see the complete ban on conventional cars happening in most of the world because public outrage will most likely spread once the public understands what it means in practice to force everyone to buy exclusively unconventional cars. For this reason, I believe conventional cars designed for the global middle class will continue to have a future for many decades to come. Ford appears to be positioning itself for a future where its premium market offerings become increasingly electric, while it continues to supply conventional cars for the middle class, for the foreseeable future. This contrasts sharply with the likes of Volkswagen (OTCPK:VWAPY, OTCPK:VWAGY, OTCPK:VLKAF), which recently decided to abandon development of its conventional technology beyond the middle of this decade. I think that’s going to be a huge strategic mistake, and it looks like it’s a mistake that a lot of traditional automakers are about to make in the next few years.

Investment implications:

Over the next two years or so, the situation will look increasingly grim for most automakers, based on the overall economic situation in most major global auto markets. Personal vehicle purchases will be one of the first major items on the chopping block as households feel increasingly pressured by rising inflation, with most households not seeing a corresponding increase in wages. . For this reason, the entire automotive sector, with the possible exception of a few pure electric vehicle companies, is now a risky bet. I decided to reduce my position in Ford stocks by about three-quarters. I kept the rest of the shares in case my thesis was wrong. If I am right, there will be an opportunity to increase my position at a better price.


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