Earnings Call Transcript - F Q2 2021

Operator, Operator

Good day, ladies and gentlemen. My name is Holly and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company Second Quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time, I would like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Lynn, it's hand it to you.

Lynn Antipas Tyson, Executive Director of Investor Relations

Thank you, Holly. Welcome to Ford Motor Company's Second Quarter 2021 Earnings Call. With me today are Jim Farley, our President and CEO, and John Lawler, our Chief Financial Officer. Also joining us for Q&A is Marion Harris, CEO of Ford Credit. Today's discussions include some non-GAAP references. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck along with the rest of our earnings materials, as well as content from our Capital Markets Day at ford.com. Today's discussion also includes forward-looking statements about our expectations. Actual results may differ from those stated. The most significant factors that could cause actual results to differ are included on page 21. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS, and free cash flow are on an adjusted basis and product mix is volume weighted. A quick update on our upcoming IR events on Monday, August 2nd, Barclays will host a fireside chat with John Lawler and Drake, our Chief Operating Officer for North America. On Tuesday, August 3rd, Jefferies will host a virtual fireside chat with Alex Purdy, our Director for Business Operations for Enterprise Connectivity. And on August 11th, JPMorgan will host a virtual fireside chat with Hau Thai-Tang, our Chief Product Platform and Operations Officer. Now, I will turn the call over to Jim Farley.

Jim Farley, President and CEO

Thank you, Lynn. Hello, everyone. And thanks for joining us today. Early in the second quarter, two months ago, we detailed our strategy for the future Ford. Put simply, our Ford Plus plan is focused on two things, really distinctive products that only Ford could do and an always-on relationship and experience for our customers that gets better and better over time. We're building on our foundational strengths, our iconic products, the uniquely appealing vehicles, our manufacturing excellence, and the industry's best captive finance company. But we're now adding new capabilities and new talents, and we're investing in new businesses that will accelerate our value we create for customers and our investors. We're committed to delivering a richer experience for our Ford and Lincoln customers, one that improves over time with things like our over-the-air software upgrades, data-driven experiences, productivity, and uptime services for our critical commercial customers, charging software, and a lot more. Ford Plus also means introducing the industry's most compelling, high-volume, electric vehicle line-up and investing the capital and human resources required to design and build world-class batteries and electric powertrain components. And with Argo AI, we're well-positioned to launch an autonomous people and goods delivery business with significant future growth potential. But fundamental to transforming Ford is to further strengthen our auto operations while we're also expanding our addressable market. Our commitment is to earn your confidence with strong execution quarter-after-quarter, year-after-year, delivering solid returns regardless of the challenges that we face with external environments like we did in the second quarter. Despite the many headwinds from the semiconductor shortage, some of which were unique to Ford, our teams skillfully managed our business and we generated a positive EBIT. And I can tell you that this outcome was far from certain at the beginning of the quarter. It required intense focus from our team on cost, pricing, and mix. The primary advantage we have right now is the strength of our product portfolio. And it's about to get a lot stronger. We stopped making me-too products in declining segments a few years ago. And we unleashed our product development team to create emotional and distinctive products that can only come from Ford. The Mustang Mach-E, which is already the second best-selling electric SUV in the U.S., was recently named Car and Driver Electric Vehicle of the Year after rigorous testing against ten other great EVs, including the Tesla Model Y Performance, the Porsche Taycan, and the Audi e-tron. The demand for our first round of high-volume EVs clearly has exceeded our most optimistic projections. The reservations for the F-150 Lightning have now climbed well past 120,000 units. And 75% of those customers are new to Ford. We're now working around the clock to break constraints and increase our manufacturing capacity for these red-hot new battery electric vehicles. We're working with LG Chem and SKI Innovation to increase our annual battery capacity for the Mustang Mach-E by 70%. And we're taking similar actions ahead of the launches of E-Transit later this year and the F-150 Lightning early next year. The customer and critical reception to our new Bronco lineup has also been remarkable. In June, we started shipments to fulfill 125,000 orders we have for Bronco II and four-door models. And 70% of those Bronco customers are also new to Ford. And then there's the Maverick, our upcoming hybrid pickup, that offers room for five, gets 40 miles per gallon in the city and is priced starting at less than $20,000, and customers already recognize the value of this product and the initial interest from our dealers is more than almost 80,000 orders. Great products alone are not sufficient, though, to deliver Ford Plus. Always on means we are regularly interacting with our customers on things large and small, and we're building new capabilities like connected services to enrich the customer experience and drive recurring revenue streams. We developed a proprietary software and hardware stack we call Blue Oval Intelligence to deliver updates to customers' vehicles over the air. Some of our competitors can do it for their entertainment systems, we do it for almost all of our modules in the vehicle. For example, the Mustang Mach-E activation rates, the number of customers who opt in to Connected services like FordPass, are now over 95%. We have now updated more than 150,000 vehicles over the air just this year. And we expect this to top 600,000 vehicles by year-end. And by 2028, we will have 33 million OTA-capable vehicles on the road around the world. And we are mining the real-world data from these vehicles in real-time to better meet our customer needs. For example, driven by the vehicle data from the Mustang Mach-E and the F-150, we've identified $50 million in efficiencies just from warranty cost avoidance and other opportunities. We're also building out our global Ford Pro commercial business, which we expect to grow from $45 billion in 2025, from $27 billion in 2019. Last month, we announced our acquisition of Electriphi to help accelerate electric vehicle fleet adoption. By offering those customers the best-scaled depot charging experience for all commercial customers. It's an example of how we're building out Ford Pro now. In mobility, we are now focused on planning and executing a phased deployment of AVs that will lead to large-scale commercialization of Ford's AVs. Last week, we reached the industry-first collaboration between Argo and Lyft to deploy Ford Driverless Vehicles on the Lyft TNC network. This collaboration will enable commercial deployment at scale and demonstrate Ford and Argo's ability to connect into multiple TNCs or transportation networks. And on the technology front, Argo introduced Argo Lidar, which will help us expand our autonomous services beyond the dense urban areas that most are focused on. This new lidar, designed to be cost-effective and manufacturable at scale, will offer what we believe is the industry's longest distance sensing range of 400 meters with dark object detection for safe highway driving. Now, before John reports on the quarter and our expectations for the rest of the year, let me give you an update on the semiconductor situation. In April, we said we expected to lose about 50% of our planned volume in the second quarter, which then implied a loss in adjusted EBIT. In fact, we did better than expected. We leveraged the strong demand to optimize our revenue and profits. We're seeing signs of improvement in the flow of chips now in the third quarter but the situation remains fluid, especially due to the delay in ramp-up of one of our key suppliers, Renesas, that Ford is uniquely exposed to in the first half. Overall, after effectively managing through the first half, we are now spring-loaded for growth in the second half and beyond because of those red-hot products, pent-up demand, and improving chip supply. Navigating these chip constraints has led us to make important permanent changes in our business model at Ford. We are modernizing our go-to-market strategy. What does that mean? We're placing greater emphasis on build-to-order sales banks, not just low stocks. We have learned that operating with fewer vehicles on lots is not only possible, but it's better for customers, dealers, and Ford. But we're also driving a significant increase in the number of customers configuring and ordering their vehicles online. So we have better visibility to real demand using an order bank. This allows us to lower inventories, simplify our incentives, and reduce our order complexity in the industrial systems cost. For our customers, the upside is that they more quickly get the precise vehicle they want. Now, this isn't theoretical. We're doing it right now as we speak. Relative to the supply chain, we made three notable changes. First, we are no longer relying heavily on a tier-procurement structure for transparency. We are now engaging directly, for example, with the fabs on semiconductors and key points in the supply chain for critical components, electronic components. With closer relationships and a more transparent exchange of information, such as technology roadmaps, we can integrate their know-how into our designs to better align supply and demand. Second, we're providing longer-term forecasts to critical vendors so they can better understand and accommodate our requirements. And third, we are more comprehensively scanning for obstacles in our supply chain. Risk mitigation actions include stockpiling of critical parts like semiconductors, dual sourcing, and design interchangeability in the case of single sources. These changes are all being applied to new technologies as well, including batteries, which are rapidly becoming a larger portion of our bill of material at Ford. Our pending joint venture with SK Innovation, called BlueOvalSK, will produce EV battery cells and arrays, helping us secure supplies of batteries at competitive cost and performance levels, really critical given our demand for our new electric vehicles. And now I'd like to turn it over to John to take us through the results for the quarter and our outlook.

John Lawler, Chief Financial Officer

Thank you, Jim. So first, I want to reiterate that everything we do and every decision we're making, including capital allocation, it's squarely focused on delivering our Ford Plus plan. And you'll see that as I share our key takeaways from the quarter, our full-year outlook, and describe how we're positioned for even stronger performance heading into 2022. As Jim said, we delivered better-than-expected results, given the semiconductor constraints. Year-over-year, our automotive business improved across several key financial metrics as we overlap the industry-wide COVID-related manufacturing shutdowns we saw in the second quarter of last year. For a more accurate picture of our true trajectory in this present environment, we're focusing more on sequential comparison, and we think those are more appropriate. While wholesales were down 28% sequentially, our teams optimized revenue and profit with disciplined incentive spending and mix management. We allocated chips to customer orders, new launches, and our more profitable vehicles. In addition, the strength of our sales order bank gives us confidence in our ability to drive a more balanced performance of wholesales, revenue, and profit in the second half of this year, including sequential improvement in wholesales and share. So let's turn to our results. On a consolidated basis, wholesales and revenue were up 18% and 38% year-over-year respectively, and we delivered adjusted EBIT of $1.1 billion with an adjusted margin of 4%. Outside of North America, our underlying trajectory continues to improve despite the impact of semiconductors and that's driven by more focused product portfolios, geographic footprint, as well as lower costs. Ford Credit continued to deliver strong performance with record quarterly EBIT of $1.6 billion demonstrating why it's a strategic asset and critical to enabling Ford Plus. A prime example is through the launch of a new service like Ford Pro FinSimple, which provides bundled financing for commercial vehicles, services, and EV charging. And so it's another example of Ford Credit being a strategic weapon for us. Now, turning to the regions. North America posted a 40% sequential decline in wholesale due to the semiconductor shortage. Now, as we managed the chip constraints, we focused our efforts on customer ordering vehicles for future delivery. We exited the second quarter with our U.S. customer sold order bank up more than seven times compared to a year ago. And with new models to come, we are clearly poised for a rebound in North America when the semiconductor supply stabilizes and aligns with demand. On a year-over-year basis, EBIT was up $1.1 billion. Outside of North America, the turnaround of our operations remains on track. In aggregate, EBIT improved by $800 million year-over-year but declined sequentially, mainly driven by Europe, where the semiconductor shortage caused wholesale units to drop sequentially by nearly 35%. The transformation in Europe continues as the region capitalizes on strength in commercial vehicles with Ford Pro, and a more focused passenger portfolio, including key imports. Europe has stepped up investments in electrification, including $1 billion for a new EV manufacturing center in Cologne, the launch of our E-Transit next spring, and a new all-electric light commercial vehicle from Romania. In South America, our restructuring is on track. Our lean, de-risked, and asset-light business model is focused on our strengths with Ranger, Transit, and key imported vehicles. The region introduced Bronco Sport and Mustang Mach-1 in selected markets, and is preparing now for the launch of the new Transit van in the second half of this year. In China, we continue to see improvement in key areas of focus, including Lincoln, commercial vehicles, electric vehicles, and with our portfolio of near-premium Ford vehicles. Lincoln attained its highest ever quarterly sales, was profitable, and also captured the number one spot in J.D. Power's luxury sales satisfaction ranking, unseating Audi, which had held the position for 11 years. In addition, 97% of Lincoln's volume is now produced locally, and commercial vehicles now account for 52% of the overall sales mix in China. Finally, we are readying for the launch of the localized Mustang Mach-E later this year. Our international markets group delivered another solid quarter, leveraging its portfolio strengths with Ranger pickups and Everest SUVs. We're continuing to assess our business in India and will have more to say on this later this year. Company-wide second quarter adjusted free cash flow was negative $5.1 billion. As expected, semiconductor-related volume losses had a greater impact on the free cash flow than EBIT because of adverse working capital and timing differences related to customer allowances from marketing incentives. Ford Credit did provide a partial offset with distributions of $4 billion in the quarter. We expect working capital and these timing differences to normalize over time as the semiconductor supply is restored. Cash and liquidity remained very strong, ending the quarter at $25.1 billion and $41 billion respectively. The strength of our balance sheet provides significant financial flexibility to navigate periods of stress while also continuing to invest in growth in our Ford Plus plan. So now let's turn to the outlook. Based on the underlying strength of our business and present assessment of the semiconductor supplies through the second half, along with other factors, we have increased our outlook for full-year adjusted EBIT to between $9 billion to $10 billion. This assumes about a 30% sequential increase in volume in our second half versus our first half, which is supported by the anticipated improvement in the supply of semiconductors. Our guidance implies we expect second-half adjusted EBIT to be lower than the first half of the year. We also provided a bridge to help with this. Relative to tailwinds, we expect about $3 to $4 billion in favorable market factors and an increase in volume-related production costs for the higher volumes. As for headwinds, we expect commodities to be up almost $2 billion, half-over-half. Warranty costs are expected to be higher in the second half up about $500 million, but we still expect full-year warranty expense to be down year-over-year. Relative to structural costs, we expect about $1.5 billion in investments for modernization consistent with what we laid out in May, including customer experiences, connectivity, IT, and new product launches. Looking at Ford Credit, based on current market dynamics, we expect Ford Credit to decline by about $1 billion as auction values begin to normalize, and we also have a non-repeat of reserve releases that we had in the first half. Lastly, we also have the non-recurrence of the $900 million non-cash gain that we booked in the first quarter, and it's important to note that this gain also impacts our run rate heading into 2022. We are also increasing our full-year adjusted free cash flow target to $4 billion to $5 billion, supported by expected favorable working capital in the second half as production increases from an anticipated improvement in chip availability. As our operating results improve, so does our cash conversion, which we continue to target in the range of 50% to 60%, and the strengthened cash conversion in our balance sheet provides us ample financial flexibility to invest in growth, including EVs, Ford Pro, our connected services, and mobility. Looking towards 2022, we are confident in the underlying trajectory of our business and excited to see the momentum continue as we leverage one of the strongest product lineups in our history and continue to implement our Ford Plus plan. We're on a new path at Ford. We have a plan, the resources, and the results to build a better business. Now, I'll hand it over to the operator to open it up for questions.

Brian Johnson, Analyst

I got a couple of questions. First, a little bit of housekeeping. but just thinking ahead to '22. If we take the second half exit rate of $3.5 billion, but also bear in mind that your first half is typically the stronger half of the year for Ford, is there any read-through for 2022?

John Lawler, Chief Financial Officer

Hi, Brian. Thanks. We believe our business is showing strong underlying performance. As we move into 2022, our product lineup is set to improve significantly. We are launching Bronco now and will have F-150 Lightning and Maverick next year. We also anticipate reaching a full production rate for our existing and newly introduced vehicles from this year. While we do see strength in our product line heading into next year, there are some challenges we expect to face. We anticipate that Ford Credit will normalize to our usual run rate, influenced by decreasing auction values, and we expect our credit reserves and losses to stabilize as well. Additionally, as volumes and inventory levels rise across the industry next year, we may experience some pricing adjustments. We also foresee higher commodity costs next year. Nevertheless, we will continue to invest in our new product offerings and follow our Ford Plus plan. Although there are some headwinds, the fundamental strength of our business remains positive, and we expect this momentum to carry into 2022, positioning us toward an 8% EBIT margin by 2023.

Brian Johnson, Analyst

Okay. And just a follow-up, $1.5 billion 2H headwind from investments in modernization, is that something new that was planned for this year, but maybe back-end loaded due to management focusing on the chip shortage or how do you think about that?

John Lawler, Chief Financial Officer

Well, that was planned. That's coming in. Part of that's due to the launches of the vehicle; with the launch costs comes advertising. We're also investing in connectivity, the IT we need to put in place for the connectivity, as well as customer experiences, digital experiences, user experiences with the vehicle. So we're continuing to invest to build out our Ford Plus plan.

Jim Farley, President and CEO

And we're not slowing down our modernization because of the chip situation; in fact, we're doing the opposite.

Brian Johnson, Analyst

Okay. And a question for Jim. As you look at the order book for the F-150 Lightning and what's shaping up for the Bronco and the Maverick, any sense of how many of those customers are, as you mentioned, new to Ford, but also maybe new to that segment? For example, SUV buyers migrating to the E Lightning due to the storage or the bi-directional charging or other features?

Jim Farley, President and CEO

Great question. Put simply, what we've learned about our very large order bank for Lightning is way over-indexed on the coast. Almost 80% are new to Ford. What’s interesting is two out of five are people who are going to trade in an ICE pickup, which is very important because it indicates a move a little bit faster to full-size truck BEV than maybe our optimistic assumptions. I would say what we've learned so far is that the customers are largely new to Ford, but they aren't new to the segment. These are customers who really like these silhouetted vehicles. What is really interesting for me is some would portray the full-size truck industry as kind of a conservative customer. It’s not what we're seeing. These very large order banks for F-150 Lightning, they're new to BEV, and they are excited to move to BEV. More than half of them are pickup truck customers.

Rod Lache, Analyst

Hi everybody. I just first wanted to clarify the answer that you gave to Brian's question. So you're going to be annualizing at $6 billion to $8 billion in the back half, and I think what a lot of people want to understand is, did you assume some moderation of pricing already in that number? Is that level of investment kind of the run rate? And how should we think about the incremental benefit from that run rate for Bronco, Maverick, for the warranty improvement and some of the international improvements that you're working on?

John Lawler, Chief Financial Officer

Hi, Rod. Thanks. In the second half, we show the net number there for the volume net of the manufacturing production costs and other market factors. What we are assuming is that in the second half of the year, particularly in the fourth quarter, we start to see some moderation in pricing due to the fact that we should see volumes in inventories and stocks coming up a bit. That is something that we do have built into that number for the second half, particularly in the fourth quarter. When it comes to 2022, Bronco is just getting up and running now. As Jim said, we have a hefty order bank there. F-150 Lightning and Maverick are launching next year. Our product portfolio is strong today, it's going to be even stronger next year. So we see that contributing to the run rate as well. So, I think coming out of Capital Markets Day, we talked about the trajectory of the business. 2022 being definitely stronger than '21 as we walk towards 2023 and the 8% EBIT margin that we plan to hit.

Rod Lache, Analyst

Secondly, really interesting comment about that sevenfold increase in your order bank and changing the way the vehicles are sold. Can you just talk a little bit about what that actually means from a volume perspective? Because I don't think we've ever really known what your actual customer order bank actually was in magnitude. Maybe you could just tell us what that number was a year ago and any thoughts on what this actually means for pricing?

Jim Farley, President and CEO

Thank you, Rod. Put simply, we're really committed to both going to an order-based system and keeping our inventories between 50 and 60 days' supply. I've been here at Ford for 13 years. There were many years after the financial crisis where our day supply was 20, 30, 40 days. In those years, the maximum retail order bank we had in the U.S. was 1,000 to 2,000 a month. We're now at 70,000 units on our way to 80,000 units. That gives you the order of magnitude difference in the way we are looking at this order bank change for the company. A lot of people in our industry are making a big deal about the move online; sure. But for Ford, we think there's massive benefit across all stakeholders for going to an order bank system. It puts pressure on our industrial system to deliver quickly. It reduces our dealers' costs from just low day supplies. It allows us to significantly reduce our incentives. I guarantee you, I don't know how much money we're wasting; I know we're wasting money on incentives, I just don't know where. With an order-based system, we will have much less risk of that. It requires us to dramatically reduce our order complexity as well. There are a lot of enablers that have been put in place to move us to this new system and new go-to-market approach.

Rod Lache, Analyst

Thanks. Makes sense. Thanks, everybody.

John Murphy, Analyst

I just wanted to actually follow up quickly on that. Jim, you mentioned getting back to 50 days to 60 days supply. That sounds closer to normal than not, but you're also describing the order bank; it looks and sounds like 20%, 25% of your sales would be built-to-order. Just how do you decide where that balance lands?

Jim Farley, President and CEO

Really good question. Our target is 50 days to 60 days supply. That means trucks will be a little bit higher. About a third of our truck dealers in C&D county, five trucks to them could be a 100-day supply, but they need those five trucks for the local community. For urban and suburban dealers, it will be less than that range. Different segments will have different targets. We actually did this post-financial crisis for a few years. And then, over time, we lost discipline. This is quite important for this management team. We have a weekly and monthly operations review, where we'll look at this very carefully by segment for each of the regions. This is the kind of soft wiring or management judgment. Going to an order bank, I would say, is a hardwired way of reducing stock. We will have an exception process to go beyond that, and there will be a pretty tough discussion with our operating teams. But I think what I'm more excited about is the hardwiring of going to an order-to-delivery order system, which actually our new launches gave us that gift.

John Murphy, Analyst

Okay, that's helpful. And just a follow-up on that, current state of affairs of retail versus fleet mix. It seems like can you talk to the dealers, is an emphasis on retail.

Jim Farley, President and CEO

Sure, it is. It depends on the region. We're a dominant commercial brand in multiple regions like Western Europe and the U.S., even in China in certain segments. We're seeing in Europe a very dramatic order bank on our vans. It is something I've never seen in my career. We're talking months and months and months of back orders. The demand for our commercial vehicles in Europe is extremely strong, and the order bank is months and months. In the U.S., our commercial business is heavily focused on Transit and Super Duty, and of course, F-150 is kind of a mix. We don’t have to prioritize between retail and commercial. The one that's challenging for us to balance is F-150. As you could see in this quarter, we're very carefully mix managing. But we are respectful of the needs of our commercial customers. We know where our toast is buttered. Those customers are really important for us. We’re in discussions with them right now about the trade-off between feature content and availability.

John Murphy, Analyst

That's very helpful. Thank you.

Adam Jonas, Analyst

Thanks. A great call so far. Jim, I have to say, I did a Ctrl+F for the word hybrid in the transcript and in the press release, and I don't see it. No hybrid. It's beautiful. It's a beautiful thing. My question on EVs, your BEVs. When do you think they can be positive profit on a fully costed basis, not contribution? When can they be profitable? Do you think it's 2022 is still too early for that? My first, and I have a follow-up.

John Lawler, Chief Financial Officer

Thanks, Adam. Actually, Mach-E is profitable. Contribution margin positive and profitable on the bottom line today. We've seen strong demand for that. Yeah. So I think when we look at it over time, we've got to ride that technology curve down. We've got to get to the $80 per kilowatt hour for the battery pack before the end of the decade. We've got to scale the BEV content.

Adam Jonas, Analyst

Wow. That's incredible at 50,000 type run rate for that to be correct. Okay. My follow-on question, Jim, is about always on and the order bank. Really huge. Just really interesting when you combine the order bank system with always on, where you connect and engage the consumer directly for services and F&I and insurance and the OTA. But I'm talking to some dealers that are freaking out.

Jim Farley, President and CEO

Great question. We're going to have a couple of different populations of dealers. We are going to have our professional dealers and the answer is a little different for them versus our retail dealers. We’ll have our rural dealers and the answer is a little bit different for them than suburban and urban dealers. The message we're giving to our team, our dealers is, look, we're going to have to work really carefully together, because the customers are going to have a lot of questions on Ford BlueCruise, for example. We want to ensure the dealers are very knowledgeable about these new OTA features that are really meaningful in the use of the customer's life. The second one is service, service, service, service. That is the most important thing for us, is wiring a closed loop between the vehicle, the condition of the vehicle, the service capacity of the dealers, and the customer is going to be the most important ballet we're going to have to play together with the dealers.

Colin Langan, Analyst

Great, thanks for taking my question, and congrats on a good quarter. Inventory levels. We've never seen them at these levels obviously before and obviously it's impacting your market share. Any sense of how much of that you think you could recoup and how much are you concerned may switch to other brands because people might only wait for so long?

John Lawler, Chief Financial Officer

Hi, Colin. It's John. The market share drop is completely related to the fact that our stocks reduced so much. We have the chip issue and we lost the volumes that we lost in the second quarter. We expect that as we work to improve the run rate through the third quarter, we'll continue to work on retail orders. We think that we have a good chance to regain that share, especially with the strong lineup that we have. We see this as a temporary issue related to the chip issue and the volume and production we had in the quarter.

Jim Farley, President and CEO

We will not cede truck leadership to anyone.

Colin Langan, Analyst

You recently launched FORD Liive for commercial vehicles in Europe. Currently, it's free. How is that rollout progressing, and when do you plan to start monetizing these services?

Jim Farley, President and CEO

Great question. We just launched FORD Liive, as Jim mentioned, in the UK and Spain. We have five more EU countries covered by the end of the year to launch, so we're really excited about FORD Liive. What we've committed to so far is in the next couple of years by 2025, we expect our digital and charging revenue in Ford Pro to be about $1 billion today. We have about just under 200,000 unique subscriptions for our telematics and data services. We grew at about 20,000 subscriptions in the quarter. The monetization of FORD Liive is really around our traditional parts business, which has very high margins and we have a very low share. So the opportunity for us upside is tremendous.

Ryan Brinkman, Analyst

Thanks for taking my question. One thing that especially stood out in your results, I think, is on Slide 6, where it shows that units wholesaled in the quarter rose 18% year-over-year, but that revenue was up by more than twice as much by 38%. Just a few questions around pricing and overall revenue per unit. I can see from the report on Slide 9 that Net pricing helped EBIT by $1.9 billion or kind of 10% of last year's revenue, which suggests about the idea that half of the growth in revenue over unit volume into Q was driven by price and the other half by makes. Is that roughly correct? What do you think the outlook is for continuing to grow revenue in excess of the change in volume?

John Lawler, Chief Financial Officer

Yeah. Thanks, Ryan. Pricing is the majority of what was behind that growth. We had a very strong quarter relative to pricing as we saw our inventory shrink. We see the strength in the underlying demand for the products that we have. So I think I would think about it more as pricing, a little bit of mix in there, but more of it is pricing.

Ryan Brinkman, Analyst

Okay, very helpful. As a follow-up, we saw some estimates that your incentive spending in June in the U.S. may have fallen like 50% year-over-year, leading the decline in industry-wide incentives. I'm curious how much of the decline in incentives do you think might be driven by hot new products like the F-150, Bronco, Bronco Sport, Mach-E, et cetera, versus how much is the function of the low inventory environment or maybe just a general inflationary environment? What your outlook is for incentive spending going forward?

John Lawler, Chief Financial Officer

That's a great question. It's a combination of all of the above. We have strong products, we see continued demand for those strong products, supply is well short of that, allowing us to continue to keep the pricing strong and improve the pricing in the second quarter versus what we had expected. As we go through the year, when we start to see supply and demand normalize, we'll see some of this pricing come off a little bit in the fourth quarter and then we'll have to see how that runs through next year. But given the strength of our product lineup and the demand we see, we expect to have relatively strong pricing power for the near foreseeable future.

Joseph Spak, Analyst

Thanks. Good afternoon. I wanted to get back to the investments in modernization and maybe frame that in the context of the 2023 view you laid out at the Capital Markets Day. How does that investment trend through those years as you think about the margin targets you laid out?

John Lawler, Chief Financial Officer

Yes, thanks. As we make our capital allocations and we make these investments, we expect to see a return on them. That’s all part of our walk up into 2023, the 8% margin. We're also continuing to work on cost reductions elsewhere. These are investments we're making in our new products with the launches, connectivity, and IT. We've got advertising in there for these launches, and then, of course, customer experiences. We should also see costs coming down in other areas, particularly material costs.

Jim Farley, President and CEO

One particular area of modernization that doesn't get enough attention in where we're investing as a company. Certainly $30 billion in electrification, the vertical integration of batteries and, of course, our investment in autonomy. The one I really want to highlight is the very significant investment in our embedded electrical architecture upgrade. This is really a significant move by Ford to not just invest in electrification, but also to move those products to fully digital, updatable in all modules and go to a fully modern zonal electric architecture.

Joseph Spak, Analyst

Okay, so just to clarify, so the EV spend is included in that bucket you mentioned?

Jim Farley, President and CEO

Yes. When we talk about upgrading our electric vehicles, it's much more fundamental than just the investment, and the tooling, and the engineering of the electric vehicle and its components and propulsion. It also includes a completely new approach to an embedded software and hardware system.

Philippe Houchois, Analyst

Yes. Good afternoon. Thank you very much. I've got two questions. The first one, sorry, I'll go back on this order bank and inventory levels. To be honest, I'm a bit surprised you're talking about 50 days to 60 days of inventory in the fleet because that's much lower than what we've had in the past. And I would've thought the order bank would enable to carry much less inventory and we've seen that benefit to pricing. Do you think you can do better in the future?

John Lawler, Chief Financial Officer

We see the order bank helping us because we see it simplifying the industrial system because we'll know exactly what we're going to build. That is our working through that now and trying to use that to simplify and reduce things like working capital. So I think if anything, it would have the opposite impact. It would increase working capital. We hope to use it to drive down working capital.

Jim Farley, President and CEO

In China, the team has made tremendous progress from a $1.5 billion loss hovering around breakeven now, which was slightly below that. We've just localized those models. We're on the eve of the Mustang Mach-E launch localized, and we have all these new vehicles, the Evos. We're just commercializing and industrializing the vehicles as we speak.

Dan Levy, Analyst

Hi. Good evening. Thank you for including me. First, I wanted to ask about the chip shortage. I understand the situation is quite fluid, and your predictions are just as uncertain as anyone else's. However, do you have any idea of how long it may take until you are no longer constrained by supply in production? Or do you anticipate that supply constraints could continue well into 2022?

John Lawler, Chief Financial Officer

So Dan, yes, I mean, I think my guess is as good as anybody's on this. We see the chip issue running through this year, and we could see it bleeding into the first part of next year. But I think we won't really have a good feel for that until later in this year. We know that, as we've had discussions with the suppliers, they're reallocating capital and increasing supply for automotive et cetera. We need to see the releases coming through before we can feel comfortable that we're out of the woods here.

Dan Levy, Analyst

Great. I understand. And second question is just on ICE versus BEV. Clearly you're deemphasizing ICE, and presumably that means the investment is coming down. I assume that part of that $30 billion headline number you gave includes some reallocation from ICE to EV. But I think we also know right now that ICE sales are extremely strong in the U.S.. It could remain the case for a while. What should we expect on margin for ICE vehicles, especially as some of that investment comes down? Is it possible that the outgoing margin on some of the ICE vehicles actually increases?

Jim Farley, President and CEO

It's a good question. That certainly could happen. We don't know how the demand will shift. Our guess is 40% of the total capacity by 2030. So we're busy making all that happen. So much of this transition is going to depend on government support, infrastructure buildout. We need to be patient. I think agility will become a very important skill for the company.

Operator, Operator

Thank you. And with that, this concludes the Ford Motor Company's Second Quarter 2021 Earnings Conference Call. We'd like to thank you for your participation. You may now disconnect.