Earnings Call Transcript - F Q4 2020

Operator, Operator

Good day, ladies and gentlemen. My name is Holly, and I will be your conference operator today. I would like to welcome you to the Ford Motor Company Fourth Quarter and Full Year 2020 Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Lynn Antipas Tyson, Executive Director of Investor Relations. Please go ahead.

Lynn Antipas Tyson, Executive Director of Investor Relations

Thank you. Presenting 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. Jim will make opening comments. John will talk about our fourth quarter and full year results and then we’ll turn to Q&A. Today’s discussion will include some non-GAAP references. These are reconciled to the most comparable US GAAP measures in the appendix of our earnings deck, which can be found along with the rest of our earnings materials at shareholder.ford.com. Today’s discussion 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 Slide 30. 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 Tuesday, February 9, JP Morgan will host our post-earnings fireside chat, featuring Hau Thai-Tang, Chief Product Platform and Operations Officer; and John Lawler. On February 24, Jim Farley will keynote at the Wolfe Global Auto, Auto Tech and Mobility Conference. On February 25th, Bob Holycross, Vice President of Sustainability, Environment and Safety Engineering, will speak at RBC’s inaugural ESG conference, highlighting how our achievements in sustainability will benefit our customers, the planet and create a competitive advantage. On March 10, Stuart Rowley, President of Ford Europe; and Hans Schep, General Manager, Commercial Vehicles for Ford Europe will participate in the Jefferies Auto Conference. And on March 23, Bob Holycross will speak about clean technology at JP Morgan’s Global ESG conference. Lastly, we continue to target late spring for our Capital Markets Day and we’ll provide more details on that later. Now, I’d like to turn the call over to Jim Farley. Jim?

Jim Farley, President and CEO

Thank you, Lynn, and thank you all for being here today. Last year was unprecedented, as COVID significantly affected everyone. Yet, challenging times often showcase people's best qualities, and that was evident at Ford. I am extremely proud of how our team quickly mobilized to tackle this crisis, utilizing our existing capabilities while developing new ones. Our employees prioritized the safety of others as we returned to work and produced essential medical supplies. I want to share some highlights from our response to the pandemic, including our new Finish Strong initiative aimed at limiting the virus's spread and saving lives until we gain control over the situation. So far, Ford has produced 55 million medical-grade masks and plans to donate 100 million by mid-year. In collaboration with UAW, we've also created 20 million face shields, 50,000 patient ventilators, over 32,000 powered respirators in partnership with 3M, and 1.4 million washable isolation gowns. Regarding today’s discussion, we demonstrated the same determination and resourcefulness that enabled us to achieve strong financial results during tough times. We enhanced our execution with a clear plan supported by vital early actions that are transforming Ford into a more robust company—one that competes and succeeds for our customers and stakeholders in this new landscape defined by electrification and connected experiences. After safely restarting manufacturing in May following last year’s shutdown, we saw a significant rebound in the second half of the year, rebuilding our inventories to address strong pent-up demand. We more than doubled our adjusted EBIT in the second half of the year compared to the previous year, achieving a 7.3% adjusted EBIT margin. In the fourth quarter, we launched three critical vehicles that represent the new direction for Ford. Our first all-electric Mustang Mach-E, seen by many as the first credible mass-market competitor to Tesla; the 2021 F-150, America’s favorite truck, now equipped with connectivity features; and the Bronco Sport, the initial offering from our revitalized Bronco brand, which has generated remarkable excitement. As we review last year's results and our expectations for this year and beyond, I want to stress that everything we do aligns with our plan. In simple terms, we are witnessing tangible improvements in our core automotive business, and we are focused on further progress this year. This includes expanding the company and consistently generating strong free cash flow in our core automotive operations as well as Ford Credit. We will allocate that capital to create sustained value. To achieve this, we are competing with a challenger mindset, earning customers through must-have products and services and delivering excellent customer experiences. We are acting urgently to enhance quality, reduce costs, and restructure underperforming segments. We will begin to grow again, but more importantly, we will focus on the right segments, directing more capital, resources, and talent to capitalize on our strength in pickups, commercial vehicles, and utilities, leading in the global electric vehicle market, where we have competitive advantages and scale, expanding our commercial vehicle business with software services that build loyalty and generate recurring revenues, and nurturing, scaling, and integrating new business opportunities, some made possible by Argo AI’s advanced self-driving technology. Today, I will highlight a few key aspects of our plan, focusing on capital allocation, electrification, and connectivity. Back in 2017, vehicle lines accounted for only 60% of our revenue but generated 150% of EBIT, with many of these vehicles exceeding their cost of capital. This imbalance was unsustainable, prompting us to reshape and rebalance our business. We invested in our strengths, divested from underperforming assets, and created a more focused portfolio while enhancing our financial flexibility to unlock significant value at Ford. We have made substantial headway. Over the past year, we invested $7.1 billion in EBIT and $1.6 billion in cash to redesign our global operations, reshaping our portfolio and geographic focus. In our first phase of redesigning in Europe, we emphasized profitable growth in commercial vehicles, where Ford holds the top position, and a more streamlined portfolio of passenger cars within strong segments, including exciting imports like the Mustang and Edge, which bolster our brand and yield good returns. We reduced our manufacturing footprint in Europe, cut regional headcount by 20%, and lowered our annual structural costs by $1.1 billion last year. Consequently, Europe reported its strongest quarterly profit in over four years, boasting a 5.8% EBIT margin in the fourth quarter. Turning to South America, we experienced losses exceeding $4.5 billion over the past decade. In 2020, we exited our non-core heavy truck business in the region, discontinued the Focus and Fiesta models, and cut headcount by over 40% by year-end. Thanks to these efforts, we recorded the smallest loss in South America since 2013 last year. In early January, Ford Brazil announced plans to cease production at three facilities, reducing risks and focusing on a profitable, asset-light model centered around our industry-leading Ranger pickup trucks, Transit commercial vehicles, and vital imports. We remain committed to serving our customers in Brazil and South America, now with a portfolio of exciting, connected, and increasingly electrified SUVs and pickups, including the new Ranger, sourced from Argentina, Uruguay, and other markets. We did not make these decisions lightly and are working with stakeholders in Brazil to mitigate the impact. However, we believe these actions were necessary and are optimistic about our new business model for South America. Before John reviews last year's results and our outlook for 2021, I would like to share updates about Ford’s plans for connectivity and electrification. 2021 marks a crucial turning point for Ford. We now have hundreds of thousands of fully connected vehicles on the road, enabling us to leverage data from these vehicles and utilize over-the-air updates to improve quality and transform the Ford customer experience. This also applies to commercial vehicles, as we have over 100,000 subscribers to our telematics and commercial vehicle software business, known as Ford Commercial Services, and we are just beginning. Our partnership with Google, announced earlier this week, will enhance our capabilities in developing and providing connected vehicles. Together, we are forming a collaborative group called Team Upshift to unlock personalized consumer experiences and maximize data-driven opportunities within our industrial system. This collaboration will significantly improve Ford’s ability to innovate and deliver a consistent, world-class consumer experience while providing powerful technology to modernize our manufacturing and supply chain management, ensuring rapid implementation of data-driven business approaches. As I mentioned earlier, Ford will lead the electric vehicle revolution globally, focusing on areas where we hold strength and scale. Although it's still early in this transition, the trend is unmistakable. In December, one out of ten vehicles sold in Europe was purely electric. EV sales in China are on the rise, and customers in the US are increasingly considering E-mobility. We are determined not to lose ground in vehicle segments where Ford is a recognized leader. We are swiftly advancing our electric vehicle strategies and expanding our manufacturing and R&D capabilities. Additionally, we are enhancing our financial flexibility to quickly adapt and meet the evolving EV needs of our customers. The Mustang Mach-E, our first dedicated battery electric vehicle, which was named North America's Utility of the Year last month, exemplifies our leadership in electric vehicles. It's available now, boasts an impressive design, is fully connected, and is equipped for over-the-air updates, providing an exceptional technological experience. Its quality performance comes at an accessible price in the mid-$30,000 range. Many more dedicated battery electric vehicles like this are on the horizon. Ford remains a global leader in commercial vehicles and is at the forefront of the electric revolution in this sector as well. We will be the first company to launch an all-electric van and an all-electric pickup truck. The E-Transit, arriving later this year, will come in various lengths and heights, including a van, stripped chassis, and cutaway versions, and more information will be shared on E-Transit soon. We plan to introduce the battery electric F-150 around the middle of next year. According to a recent study by Cox Automotive, the all-electric F-150 has the highest consideration rate and is the most appealing among major upcoming EV pickups. Our successful Ford Transit line is a vital component of our electrification strategy. We understand our customers’ needs, and we will provide a diverse range of configurations and dimensions while developing a complete suite of connected services for them. For example, we recognize that the average Transit daily route is 74 miles, so customers typically do not over-purchase batteries. We’ve confirmed this with over 30 million miles of telemetry data from our Ford customers. With this data, we can predict and optimize battery life and offer over-the-air alerts, allowing us to inform customers when service is needed before any issues arise to ensure maximum vehicle uptime. That way, the van remains on the road where it belongs. These are just two examples of how we are using data to support our commercial customers, focusing on safety, efficiency, and profitability while simultaneously gaining a competitive edge for Ford. We enhance the value proposition for our customers by customizing vehicle interiors, digital experiences, and e-service networks to maximize uptime and reduce operational costs. Our solutions offer significant advantages that address customer pain points and create opportunities. No commercial vehicle provider is better positioned than Ford to innovate and scale these services. We are accelerating our plans, identifying constraints, boosting battery capacity, reducing our costs, and increasing the number of battery electric vehicles in our cycle plan. We now plan to invest a minimum of $22 billion in electrification over the next few years up to 2025. That figure solely pertains to electrification. Including our autonomous driving initiatives, our total investment commitment reaches at least $29 billion. Most of our electrification budget will support a growing array of battery electric vehicles based on platforms from both Ford and our alliances. This electrification budget does not factor in potential vertical integration of battery production, either independently or through joint ventures. As we reduce our internal combustion engine manufacturing capabilities, we are expanding our dedicated global battery electric vehicle manufacturing capacity. We have already established a new facility in Dearborn at the Rouge plant for the electric F-150, are building a facility in Kansas City for the E-Transit, and setting up in Oakville, Canada for several battery electric SUVs, while also working in China and Cuautitlan, Mexico for the Mach-E, with more developments anticipated. Our team is busy. Thank you for your time and interest. As you can tell, I am very excited about our future. John will now provide a detailed review of our results and our outlook for the year.

John Lawler, Chief Financial Officer

Thanks, Jim. So, when you analyze our fourth quarter results, or even our second half performance last year, it’s important to key in on the durable changes we’ve made to our underlying earnings power, including an automotive business increasingly positioned to sustainably generate strong free cash flow. Right now, our year-end liquidity of nearly $47 billion provides the financial flexibility to opportunistically invest and grow and even accelerate investments if we choose to in key areas like electrification, connected services, and in our 8% company-adjusted EBIT margin, the target that we’re aiming for; we believe we can generate healthy annual free cash flow to fuel our growth. When we initially set our 8% target, the secular forces accelerating today were still in their infancy. EV penetration at scale was years out, connectivity and digital services were still nascent, and autonomous vehicles, well, they were still largely in labs. So, you fast forward to 2021, and the landscape is vastly different and so are the calls on our capital. Our goal remains to hit the 8% margin and, in doing so, to reallocate profit and capital from a far healthier core business to exciting growth opportunities that will unlock long-term value. Let’s take a look at the fourth quarter performance. In automotive, both wholesales and revenue declined by 9%, driven by a lower industry which influenced both of these metrics, as did the planned changeover in North America to launch our all-new 2021 F-150. Our initial estimate was for a decline of 100,000 units, and we came in right on that number. Fourth quarter revenue benefited from broad-based gains in net pricing and product and series mix, especially in North America and Europe. Let’s examine our individual regions in greater detail, starting with North America. The North America business offset some of its decline in top line metrics with continued growth and an increase in the mix of commercial vehicles. Together, both volume and revenue from Transit and Super Duty vehicles were up 14% and 24%, respectively. With the launch of the new F-150 now complete, we’re building every vehicle we can. EBIT was $1.1 billion, up 53% with a margin of 4.9%. This growth was driven by exceptional yield management and the non-recurrence of the UAW contract cost from the fourth quarter of last year, all of which was partially offset by the lower F-150 volume I mentioned. In South America, wholesales and revenue declined 15% and 10%, respectively, reflecting industry softness and Ford share losses as we refocused our portfolio on strengths in Ranger pickups, Transit vans, and key imports. On a full year basis, Ranger gained 1.8 points of share to 15.6%. Revenue performance in South America was better than wholesale as we took aggressive price actions to offset inflation and currency pressures. As Jim mentioned, in 2020, we exited our non-core heavy truck business in the region, discontinued Focus and Fiesta, and further reduced headcount by more than 40% through the end of 2020. These actions, among others, contributed to the fifth consecutive quarter of year-over-year improvement in regional EBIT, and we posted the smallest loss in South America since 2013. With our recent announcement to exit manufacturing in Brazil, we have fundamentally de-risked this portion of our business and delivered another significant milestone in our global redesign. Shifting to Europe, both wholesales and revenues were negatively affected by lower industry volumes. However, Ford’s revenue in the region was up modestly, aided by higher net pricing and an improved mix. Our commercial business in Europe strengthened its number one position to a 14.3% share, gaining 70 basis points. Ford has the broadest network of commercial vehicle dealers in Europe, including close to 800 dedicated transit centers. During the quarter, the commercial, passenger, and import vehicle businesses were all profitable. The reduced manufacturing footprint that Jim referenced, along with the $1 billion decline in structural costs over the last two years allowed Europe to deliver its strongest quarterly profit in four years, with EBIT of $400 million and achieving an EBIT margin of 5.8%. Now, turning to China. China delivered a 27% increase in wholesales. Retail sales grew 30%, outpacing the overall industry sales growth of 12%. Ford’s share in China grew by 40 basis points to 2.4% with a 12-point increase in the mix of utilities to 36%. The mix of commercial vehicles reached 45% in the quarter, supported by strength in light trucks, pickups, and other vehicles. Importantly, our dealer network return on sales remains positive. While it remains a modest EBIT loss, this was China’s third consecutive quarter of year-over-year profit improvement, aided by an enhanced mix of vehicles, including locally-built Lincoln products. The China-specific Lincoln models accounted for 76% of the brand’s in-country retail sales, up from just 2% last year. Wholesales and revenue results for the international market group varied, but its retail sales increase of 1.8% countered an industry decline of 3%. IMG continues to capitalize on its strengths in Ranger pickups and Everest SUVs, and Ranger was the best-selling 4x4 pickup in Australia. This week, we announced a $1 billion investment to modernize and upgrade our Ranger pickup plant in South Africa, which is an important low-cost export hub that supplies 100 markets, including Europe. This investment paves the way to significantly expand production for the next-generation Ranger starting in 2022 and profitably grow this key business for us. Excluding the impact of India, IMG was profitable in the quarter, led by Australia and Vietnam. In December, Ford and Mahindra jointly decided not to complete a previously announced joint venture. This outcome was driven by the fundamental changes in global economic and business conditions caused in part by the global pandemic. While we continue our independent operations in India, we are actively evaluating alternatives and reassessing capital allocation for India. Turning to mobility. We now plan to invest at least $7 billion in autonomous vehicles through 2025, including the $2 billion we spent through 2020. Our plans include launching our commercial AV business by 2022 to move both people and goods, and we believe that Argo AI’s self-driving system remains among the leaders in autonomous technology. With improving unit economics, we continue to grow our Spin scooter network, which has become more relevant in a COVID world as people explore alternative modes of transportation. Indicative of the strength of our city relationships, Spin won the majority of all scooter permits it applied for in the US municipalities last year. Now let’s turn to Ford Credit. Ford Credit delivered another strong quarter, with EBIT up almost $300 million to $900 million, a record fourth quarter. Improved auction values drove the performance, and we continue to experience strong credit performance with a low loss to receivables ratio. All told, we delivered $1.7 billion in adjusted EBIT in the quarter, up $1.2 billion with an adjusted EBIT margin of 4.8%, which was up 3.6 points. Considering how the first half of 2020 unfolded, I’m incredibly proud of how the Ford team came together to finish the year with such strength, setting a firm foundation for this year. Let’s turn to 2021. The global semiconductor shortage situation is fluid, and we’re evaluating and updating the potential effects on our business in real-time. We want to be transparent and prudent. Therefore, we think it’s premature to size what the ultimate impact will be on our full-year results. That said, we ended 2020 having achieved positive lasting change in the underlying trajectory of our earnings power, including the ability of our automotive business to generate consistent levels of strong free cash flow over time. For 2021, we are on course to earn between $8 billion and $9 billion in adjusted EBIT, including a $900 million non-cash gain on our investment in Rivian. That scenario anticipates continued EBIT improvement in each of our regional businesses, except for South America, where we expect to be flat through their transition this year. We anticipate mobility to be flat, and Ford Credit EBIT to improve. We also expect to generate between $3.5 billion and $4.5 billion in adjusted free cash flow. However, the global semiconductor shortage is creating uncertainty across multiple industries and will influence our operating results this year. The situation is changing constantly, so it’s premature to predict what the shortage will mean for our full-year results. Currently, supplier estimates support a scenario where we could lose 10% to 20% of our planned first-quarter production. Should this scenario extend through the first half, it could adversely impact our full-year adjusted EBIT by between $1 billion and $2.5 billion, net of reasonable cost recoveries and some production makeup in the second half. We should expect full-year cash and EBIT effects to be about equal, with quarterly cash implications more volatile given the mechanics of the company’s working capital. Our team is working with our suppliers around the clock to optimize the constrained supply, minimize the profit impact while also prioritizing customer orders, new vehicle launches, and compliance with our CO2 emissions regulations. For example, as with other actions we’ve already taken, we are adjusting shifts next week at our Dearborn Truck Plant and Kansas City Assembly Plant. These actions are contemplated in the 10% to 20% loss scenario for the first quarter volume that I just mentioned. We will provide you with an update on the semiconductor issue when we report our first quarter 2021 financial results on April 28. Before we open the call for Q&A, I will conclude where Jim began. It cannot be overstated; 2020 was a year like no other in our lifetimes. The Ford team responded exceptionally, both personally and professionally. We’re exceedingly proud of all of our colleagues around the world. We made tough, strategically sound decisions in 2020 that have created durable beneficial changes to our underlying earnings power, including an automotive business that is increasingly positioned to sustainably generate strong free cash flows. This financial flexibility will allow us to make the right investments for long-term profitable growth and value creation.

Ryan Brinkman, Analyst

It looks like even after adjusting for the Rivian gain, you're guiding to 2021 profits well above consensus, presumably helped by the volume, pricing, and mix benefits of a number of highly anticipated new products, including the new F-150, the Bronco, Bronco Sport, and Mustang Mach-E. I know you have a lot of confidence in these vehicles. But are there any objective measures that you can share with investors as to why they should also be confident in the profit contribution of these models? So I know it's early days. But do you have any anecdotes about how quickly the vehicles are turning on dealer lots? How pricing has been trending for the new F-150? What the earlier customer reaction has been to the Mach-E? Are you doing a lot of test drives? And I realize the Bronco still has yet to even launch, so maybe there are fewer metrics there. But maybe you could tell us a bit more about the waitlist for example, whether it continues to grow or how trim levels or options have been tracking relative to expectation or what the general community response has been?

Jim Farley, President and CEO

Thanks for your question. Regarding the F-150, we're starting the year with a day supply level we haven't seen in a long time, which presents a significant opportunity to increase both wholesale and dealer inventory. Currently, we have a 53-day supply. The mix of high series is about 20 points higher than what we typically see with the outgoing model, indicating strong demand. Super Duty demand increased by 14%, and while it also saw improvements, the F-150's growth appears to be even larger. We're turning F-150 vehicles in just 6 days. As for the Mach-E, demand is strong, with around 70% of customers being new to Ford, some of whom haven't owned a Ford in 15 years. Customers are cross-shopping against models like the Porsche Boxster, Porsche 911, and Mercedes E-Class. We're also noticing a higher-than-expected all-wheel drive mix in reservations, along with greater popularity for the extended battery. Additionally, we have 127,000 federal tax credits available, each worth $7,500, which helps with pricing. Demand and early orders for the Mach-E are robust. For the Bronco, the Bronco Sport is turning in approximately 6 days, and we sold every unit wholesaled to dealers in the fourth quarter, totaling over 5,000 units. Similar to the F-Series, the Bronco is moving quickly. We're approaching 200,000 reservations, and we're starting to convert those into orders. The interest in Bronco is encouraging, with not just high orders but also a stronger mix than we expected, particularly for the 2-door version, which accounts for about a third of the interest. The overall demand at dealerships and through our reservation system for Bronco remains very strong, with Bronco Sport exceeding 8,000 units in January. That illustrates the demand side well. John, do you have any additional comments about the overall performance?

John Lawler, Chief Financial Officer

Yes. I'd just say, Ryan, that when you look at it, Jim went through the portfolio transformation, but the global redesign is starting to take hold in de-risking the business. We're starting to see some strength in China. The localization of key products there, especially Lincoln, is improving our cost structure by localizing. We’re leveraging capacity at the JVs to build Lincolns and commercial vehicles. We're partnering to share investments and improve scale, you saw that with the announcement we had with the Ranger and a VW pickup now coming out of that facility. So I think we're starting to see strength across all the areas we've been talking about. But we're also focusing on the basics of the business, right? We've renewed our focus on our quality improvement. We're leveraging all of our connected vehicles to identify issues faster, improve our warranty expense, and enhance our ownership experiences. We're also leaning into electrification, as Jim said, with the Mach-E being on the road, the E-Transit coming, and the F-150 BEV next year. We’re transforming the team as well; we’re bringing in new talent and organizing ourselves to grow our core businesses and expand that through connectivity and digital services. When you look at all of that across the business, and you start to see some strength take hold, it gives us confidence in the year, allowing us to move forward with confidence in our projections. There are a lot of positive changes occurring here.

John Murphy, Analyst

I just wanted to ask a question, Jim, just around the transition to EVs, perhaps using the F-150 as an example. When do you think the tipping point will occur for consumers where they see enough EVs on the road, making your ICE vehicles less desirable? How do you plan to navigate through that transition? And specifically around the F-150, how do you position this as a performance enhancement, particularly around torque for trucks, where you can actually charge a substantial premium similarly to how you did with EcoBoost? I mean, what's your view on the tipping point where the competition for your ICE vehicles might be triggered, and how do you envision managing that transition? What’s your perspective on your position in EVs?

Jim Farley, President and CEO

Thank you for your question. It's stunning how fast the industry is changing. I watch the market closely in Europe where 10% of new sales in December were pure battery electric. Our time is now at Ford. We're not discussing aspirations; we committed to California and the Paris Accord and carbon neutrality long before it was easy, and I'm proud of that. This year, as mentioned earlier, we're launching Mach-Es—vehicles that we believe are true competitors to Tesla. The F-150 Electric is experiencing robust interest from our loyal customers. We sold 780,000 F-150s last year, and within that base, we are identifying duty cycles that align with electric capabilities for some of those customers due to the scale of our business. The Transit Electric is also seeing significantly high interest. This is our stronghold in the market. We’re launching multiple configurations for customers in the Transit lineup. We know from our experience that all of our transits will receive updates, helping us maintain close connections with our customers. How do we navigate the move? This is a really good question, and while we may not have all the exact answers, the costs are decreasing quickly. The electric shift is not simply about batteries and motors; it’s about creating a digital vehicle and enhancing customer experiences, no matter if it’s the F-150 ICE or the electric version. We are leveraging our commercial vehicle manufacturing capabilities that are adaptable while being flexible to allocate resources and investments accordingly. This is our moment; we have compelling offers, and I believe it’s on us to deliver innovative products to customers. Ultimately, the real success metric for us won’t be just sales in the first year, but how well we perform two years post-launch with the same customers.

Rod Lache, Analyst

So $22 billion is a pretty significant commitment to EVs. I would appreciate it if you could share your goals regarding the target volumes expected. It sounds somewhat similar to another company targeting about 1 million units. Can you also discuss your cost competitiveness and the trajectory for EV costs? Do you share the expectations of cost per kilowatt-hour decreasing to the $55 to $80 range in the next five years? Lastly, considering your earlier comments about capital allocation to businesses with strong returns, do you anticipate reaching comparable profitability and returns in EVs by 2025 as you do in ICE?

John Lawler, Chief Financial Officer

Hi, Rod. We clearly need to see improvements in the cost structure consistent with your comments on that $55 to $80 range for kilowatt-hour packs. That transition must happen, and we are actively working towards it. The ICE and BEV segment profitability and competitiveness will indeed converge as time goes on. Yes, we do believe they will be profitable; for instance, the Mach-E is already profitable today. The challenge lies in driving down the cost structure for our BEV offerings. We are aiming for synergies to maximize growth in these segments. With respect to that $22 billion commitment to EVs, as Jim indicated, we are focused on BEV, expanding growth, and enhancing the digital customer experience with our vehicles. As we transition, we plan to target larger segments where we already have established customer bases. However, we are not ready to provide specifics regarding unit volumes and timelines at this moment.

Jim Farley, President and CEO

To complement John’s remarks, expect us to share more detailed specifics in the spring. We're not delving into granular specifics right now, but we assure you that we are enthusiastic about communicating our BEV strategy. We want to illustrate how we’re implementing our capital allocation strategy.

Joseph Spak, Analyst

One question. You mentioned a couple of times that the landscape is quite different from when you first outlined your timeline for achieving 8% EBIT margins. You're significantly increasing investment levels, which is objectively positive. While I know you're still targeting that level, is the timeline being adjusted?

John Lawler, Chief Financial Officer

Yes. I can confirm that we continuously put pressure on ourselves to accelerate that timeline as swiftly as possible. Therefore, it is indeed shifting. Our focus remains on expediting improvements to the business while continuing to invest in our growth areas. We anticipate seeing improved performance in 2021, as evident in our guidance, barring the chip issue. We are working diligently to achieve those targets, generating good healthy free cash flows that we will reinvest in the business. Yes, we are pushing hard for progress.

Dan Levy, Analyst

Jim, I'd like to ask a question regarding partnerships. It appears that during Jim Hackett’s tenure, a core focus has been on fostering partnerships, and we’ve seen collaborations with VW, Mahindra, and others. However, there have been recent developments where plans with Mahindra and others have been terminated, and Rivian appears to be demoted in importance recently. Conversely, your partnership with Google seems to be more emphasized now. Overall, how do you envision using partnerships in your agenda? Specifically, regarding EV?

Jim Farley, President and CEO

Thank you for your question. This is indeed a fundamental approach that we remain committed to. We support RJ’s efforts at Rivian and see it as a strategic rather than a transactional investment. We'll keep you posted on that. Our partnership with Google is equally fundamental. This arrangement transcends exclusive relationships; we also want CarPlay to seamlessly function in all vehicles. Our collaboration with Google is guided by three main shifts. First, we recognized the financial strain of maintaining competitiveness on a generic vehicle experience and understood that leveraging Google's robust platform economically makes sense. This enables our teams to focus on differentiation rather than generic functionality. Second, we’ve gained confidence in managing our customers’ data, understanding it’s paramount to maintain Ford's brand integrity and trustworthiness. Third, we’ve moved our enterprise services toward a cloud-first approach, and the competitive edge provided by their cloud solutions is enticing as it links to our ambitions for deeper AI/ML integrations. This collaborative approach with tech companies is pivotal for enhancing our digital experiences and fortifying our operations to harness vehicle data for quality improvements and greater customer satisfaction. We recognize that the landscape of partnership is evolving alongside our electrification strategy, and in the coming weeks, I anticipate sharing even more insights. I hope this clarifies your inquiry.

Emmanuel Rosner, Analyst

One follow-up on the increased electrification spending: While I understand you're not quite ready to share specifics, could you provide guidance on your overall direction? What goals are you trying to achieve? Are you developing a dedicated modular architecture for your EV lineup? Do you aim to speed up your EV rollout? Additionally, will your electrification strategy focus primarily on commercial customers, or will there be a strong emphasis on high-volume passenger vehicles as well?

Jim Farley, President and CEO

Thank you for your question. Indeed, this accelerated investment will go towards product development and scaling those products. We acknowledge in our guidance that there is more spending related to our battery vertical integration strategy, though specifics are still pending. We have two dedicated battery-electric platforms that will cater to high-volume passenger vehicles. Aligning with our stated intention, we are making investments in segments where we hold strength and substantial market share. Beyond the vehicles, enhancing the digital experiences and physical services is also crucial. Over the years, we have learned that Ford’s strengths lie beyond standard product offerings. Our distribution network, maintenance services, and upfitting capabilities all play significant roles and will contribute as we advance our electrification agenda. Furthermore, we have an ambitious vision, as demonstrated by our FCS software business—which is growing rapidly. That service includes telematics and commercial supplementation, ensuring that as we electrify our offerings, we are not only increasing product availability but also enhancing our digital and physical service capabilities. This broader strategic approach will ensure we effectively electrify our strong-selling nameplates and segments using our established reputation.

Adam Jonas, Analyst

Jim, first off, I just have to say the Mach-E is impressive. I rolled up in mine, and Lynn can attest, I ended up regretting not driving the Mach-E after spending some time in it. This product will certainly move quickly, so my compliments to the team. My question prompts a reflection on cell supply. What's your latest thinking on manufacturing your own batteries or entering into joint ventures, versus pure outsourcing? This is crucial since many on this call recognize the potential for demand to significantly outstrip supply, which could hinder an OEM’s EV volume target if not resolved. Are we going to have to wait until late spring for clarity on this, or can you provide insights now?

Jim Farley, President and CEO

I appreciate your positive feedback on the product. To me, the ultimate test for our performance on the Mach-E will take place over one to two years after launch, focusing on aspects such as range, performance, and overall quality. Regarding battery supply, if we view this as a nine-inning game, we believe we have effectively played our first inning. We strategically chose to procure the best technology during a time there was excess battery supply. However, as we transition into a more aggressive electrification plan, the need for a robust battery strategy becomes imperative to avoid scenarios similar to current semiconductor supply constraints. From Ford, anticipate upcoming announcements regarding our battery electric initiatives, including opportunities for vertical integration. Various paths exist—starting from in-house production to joint ventures and leveraging existing suppliers. We are carefully considering all options to secure our supply and ensure we are prepared to meet the upcoming demand as the market shifts. We will provide you with additional updates as we progress.

Philippe Houchois, Analyst

I have two questions, one for Jim and one for John. Jim, the alliance with Google is intriguing; a couple of weeks back, we observed Renault entering a similar agreement in Europe. A few years ago, Google was viewed as competitive, something that car manufacturers needed to sidestep. What has shifted? Is it simply that the cost of developing software has surged, leading you to determine that it’s more efficient to authorize Google to deliver connectivity to your customers? Or has the commercial arrangement with Google evolved regarding revenue-sharing that makes engagement with them less threatening than previously?

Jim Farley, President and CEO

To answer your inquiry directly, we see three shifts that have influenced our stance regarding Google. First, this is not an exclusive partnership; we still want CarPlay and other digital services functioning seamlessly in our vehicles. Three primary factors impacted our decision to partner with Google. Initially, the resources allocated to maintaining competitive digital experiences in our vehicles made their offering's economics much more attractive, allowing us to pivot our internal efforts toward differentiation. Secondly, we have grown increasingly confident in our ability to safeguard customer data, which is paramount to maintaining Ford's brand integrity. Thirdly, using Google’s cloud infrastructure will assist us in transitioning our enterprise to a more efficient technology stack, enhancing our efforts in AI/ML applications across our vehicle network. Our collaborative endeavor aims to generate substantial digital experiences while enhancing our core manufacturing and operational capabilities. Ultimately, these emerging partnerships will help foster advancing our electrification strategy and customer services.

John Lawler, Chief Financial Officer

The scenario we described is based on ongoing discussions with our supply network, and as we know, the situation is very fluid throughout the industry. We estimate the potential loss to be between 10% and 20% of production planned for the first half of the year. Considering this uncertainty, our full-year outlook is affected; we anticipate between $1 billion and $2.5 billion of negative impact. Our estimates account for reasonable recovery efforts and our capacity to balance some of the lost production later in the year. The net yearly effect would remain within the range of $1 billion and $2.5 billion, depending on how the situation develops in the first half. We hope to provide clearer insights as we move through this quarter. In April, we anticipate having a greater understanding of how this scenario unfolds.

Operator, Operator

Thank you. At this time, we would like to thank you for dialing in for today's Ford Motor Company Fourth Quarter and Full Year 2020 Earnings Conference Call. We appreciate your participation and ask that you please disconnect.