Ford Motor Company is ramping up its efforts to challenge Tesla’s dominance in the electric vehicle (EV) market. The automaker has been struggling to gain traction in the EV sector, with a 27% drop in revenue in its EV segment in the first quarter of this year, and losing money on every EV sold.
However, Ford has announced its plans to scale up its EV production and do it profitably, while also focusing on reducing costs in its operations and supply chain.
Ford’s Strategy To Challenge Tesla’s Pricing War
Tesla has been cutting prices in all of its major global markets to focus on volume over profit margin, with the ultimate goal of becoming even more profitable in the future. Tesla CEO Elon Musk spilled the beans on the company’s pricing strategy during a recent earnings call. The company has already lowered vehicle prices in the US six times this year, making it difficult for other automotive companies, like Ford, to compete.
Ford has a more pressing need to scale up its EV production and do it profitably. Now that Ford is breaking out its three operational business segments, investors can see how it intends to do that. The company’s strategy is to focus on reducing costs in its operations and supply chain, which it previously said in its fourth-quarter 2022 conference call had up to 30% inefficiency in its production and engineering process.
Ford needs strong profitability from its legacy internal combustion engine (ICE) products and its commercial truck and van offerings to help it become profitable in its EV business. Ford reported that in the first quarter, the operating margin for its two segments – Ford Blue and Ford Pro – was over 10%. The company noted that the operating margin for the Ford Blue segment was significantly higher than it was a year ago.
Lowering Prices To Compete With Tesla
Despite having a market capitalization of only 10% of Tesla’s, Ford’s stock may prove to be a lucrative investment if the company’s efforts pay off. To compete with Tesla, Ford has unveiled a plan to reduce the prices of all Mustang Mach-E models by up to 8%. This move will lower the base price to $42,995 (before factoring in the full tax credit from the Inflation Reduction Act).
Although it may seem counterintuitive to lower prices even as the company reported negative margins on its EV offerings, Ford said it is sharing lower costs with customers. Realistically, the company is being forced to compete and support increasing its production volume.
To gauge Ford’s progress, investors can keep an eye on the operating margin of Ford’s Blue and Pro businesses throughout the year. While the performance of the EV segment is worth monitoring, it may not be a worthwhile investment if Ford fails to enhance profitability in its other segments.
Bottom Line
It is still early days for Ford in the EV business, but the automaker is determined to challenge Tesla’s dominance. With a strategy to reduce costs in its operations and supply chain, and a focus on achieving strong profitability from its legacy ICE products and commercial truck and van offerings, Ford is hoping to catch up with Tesla.
Investors will be keeping a close eye on Ford’s progress over the coming months to see if it can deliver on its promises and succeed in the competitive EV market.
