Why Ford thinks its $1.9 billion investment in electric vehicles will benefit the automaker

DETROIT – Ford EngineFord's profit engine for decades has been large trucks and SUVs in the U.S., so it may surprise investors that the automaker believes its new path to profitability in electric vehicles will be led first by smaller, more affordable vehicles.

The new plan is an “insurance policy” for the automaker to expand its increasingly popular hybrid models and create more affordable electric vehicles that it believes will create a more profitable and capital-efficient EV business for the company and investors, according to Marin Gjaja, Ford’s chief operating officer for its Model e EV unit.

“We are convinced that the highest adoption rates of electric vehicles will be in the affordable segment of smaller models,” he told CNBC on Thursday. “We have to play there to be able to compete with new entrants.”

The expected newcomers are largely Chinese automakers, such as Warren Buffett-backed BYD, which have been growing rapidly from their home market to Europe and other countries.

Gjaja’s comments came a day after the automaker announced updates to its electric vehicle strategy that will cost up to $1.9 billion. That includes about $400 million for amortization of manufacturing assets, as well as additional expenses and cash outlays of up to $1.5 billion.

Ford’s new plans for North America include canceling a large three-row electric SUV that was already in an advanced stage of development, delaying production of its next-generation “T3” full-size electric pickup by about 18 months to late 2027 and reorienting battery production and sourcing to the U.S.

Instead of a three-row SUV or large pickup truck, the company's first new EV is expected to be a commercial van in 2026, followed next year by a midsize pickup and then the T3 full-size pickup.

Gjaja said the decision was not made lightly, especially the cancellation of the upcoming three-row vehicle, which Ford CEO Jim Farley and other executives had been touting as a game-changer for several years.

The commercial van comes at a time when Ford's “Pro” commercial vehicle and fleet business, which includes vans and large Super Duty trucks, has been a standout for the company and has offset billions of dollars in electric vehicle losses.

And the midsize pickup is set to be the first vehicle from a specialist “skunkworks” team in California. The company had tasked the team two years ago with developing a new platform for small electric vehicles.

“We believe that smaller, more affordable vehicles are the way forward for volume EVs. Why? Because the math is completely different. [internal combustion engine (ICE) vehicles]”Farley told investors last month. “In internal combustion vehicles, a business we've been in for 120 years, the bigger the vehicle, the bigger the margin. But with electric vehicles, it's exactly the opposite.”

Farley has said the weight and cost of battery packs needed for large vehicles, such as a three-row SUV — which many families buy for road trips, towing and hauling — are a limitation for electric vehicles given current ranges and charging networks.

Ford’s current electric vehicles — the Mustang Mach-E crossover, the F-150 Lightning and a commercial van in the U.S. — are broadly unprofitable. The Model E operation lost nearly $2.5 billion in the first half of this year and $4.7 billion in 2023.

The losses, as well as changing market conditions and business plans, prompted Ford earlier this year to withdraw an ambitious 8% profit margin for its electric vehicle unit by 2026.

Wall Street investors and analysts have largely been supportive of the EV moves, recently pushing the company's shares up about 2.3% since the announcement earlier this week, despite the expected costs.

“Overall, these changes will position Ford to benefit from growing demand for electric vehicles, while also focusing on areas where it has a fundamental competitive advantage,” BofA’s John Murphy wrote Wednesday in a note to investors. “Given the size of the demand, this is clearly a difficult decision in the near term, but we believe it makes sense in the medium to long term, given the likely underperformance in the three-row CUV/SUV segment.”

The updates are the latest in Ford’s electrification plans, which now include a big focus on hybrid and plug-in hybrid electric vehicles, or PHEVs, to help meet strict fuel economy regulations, in addition to all-electric vehicles.

Ford Chief Financial Officer John Lawler said Wednesday that the company's future capital spending plans will shift from spending about 40% on all-electric vehicles to spending 30%. He didn't give a timeline for the shift, but it's a massive change from when the company announced plans in 2021 to spend more than $30 billion on electric vehicles through 2025.

Hybrid plans include offering these options across its entire North American vehicle lineup by 2030, including three-row SUVs, to help meet increasingly stringent emissions and fuel economy requirements. Lawler said that to improve profitability, Ford is also accelerating the mix of battery production in the U.S. that will qualify for tax incentives and credits.

Ford's shift in plans is consistent with the broader auto industry, which is facing growing but slower-than-expected adoption of electric vehicles and automakers' failure to achieve expected profitability on the vehicles.

“What we saw in 2021 and 2022 was a temporary market surge where demand for EVs really took off,” Gjaja told CNBC during an interview earlier this year. “It’s still growing, but not at the pace we thought it might have in 2021 and 2022.”

There are also fears that Chinese carmakers could flood markets with cheaper and more profitable electric vehicles. Chinese carmakers such as BYD are rapidly increasing vehicle exports to Europe and other countries.

Lawler on Wednesday rejected the idea that the Chinese have outgunned American automakers. He said Ford, in part, developed the skunkworks equipment to prove that Ford can compete against Chinese automakers.

“As we've seen over the last 18 to 24 months, I think the emergence of amazing products and formidable competitors in China has really been what's happened to us,” Gjaja said. “And now when we look at the competitive landscape, we have to measure ourselves against the most competitive companies in China.”

Ford's new plans are completely opposite to those of its closest rival, General Motors.

America's largest automaker has cut spending and delayed many of its electric vehicles, but it will soon roll out several large all-electric vehicles.

GM was one of the first to go all-in on electric vehicles, even creating a dedicated, vertically integrated platform and supporting technologies such as batteries and motors.

Apart from TeslaGM was the first automaker to begin manufacturing battery cells in the United States through a large-scale joint venture, which the company has continued to tout as a cost advantage.

GM’s current lineup includes three all-electric full-size pickup trucks, a Hummer SUV, two recently launched Chevrolet crossovers, a Cadillac luxury crossover and a $300,000 Celestiq car. Several more crossover models and an all-electric Escalade SUV are expected to join the lineup this year.

Last month, GM reconfirmed its expectations that its electric vehicles will be profitable in terms of production, or contribution margin, once it reaches production of 200,000 units in the fourth quarter.

A GM spokesman said Thursday that the automaker continues to “work toward achieving positive variable profit during the fourth quarter.”

Gjaja declined to comment on GM's goals or operations, but said Ford is doing what's best for the company.

“We are focusing on what we believe are the right technologies to serve our customers, that can also be affordable for them and profitable for us,” he said.