We’re pleased to see Ford rethink its China strategy as it accelerates EV business

By Eduardo Saverin On May 17, 2023

Ford Motor ‘s (F) decision to scale back future investments in China is a prudent step for the automaker whose business there has been struggling to meet Chinese consumer preferences for electric vehicles. In an interview in The Financial Times on Tuesday, Ford CEO Jim Farley said there’s no guarantee that Western electric vehicle automakers in China can prevail ahead of popular domestic EV competitors such as Warren Buffett-backed BYD and Great Wall Motor. Ford’s American rival Tesla (TSLA) also has a major foothold in China. Ford’s business has been struggling in China. In 2022, the company posted a loss of $600 million in the region as a result of its increased investment in EVs. Ford’s internal combustion engine (ICE) business is profitable in China, and its luxury brand Lincoln is what Ford calls the “profit pillar” for the region. But China does not represent a huge business for Ford, which generates roughly 1% of total revenue from mainland China. Facing declining sales in China, where Ford operates eight assembly plants, the automaker may be looking to cut 1,300 jobs in the region, according to recent Chinese media reports . Farley has been reviewing the automaker’s business globally and is stepping back from areas where a path to profitability is not feasible. While Ford does not have plans to exit China, the CEO is taking a closer look at its strategy there. “We’re going to go to a much lower investment, leaner, more focused business in China, with higher returns,” said Farley on Ford’s post-earnings conference call earlier this month. In the first quarter, Ford crushed earnings per share (EPS) and revenue estimates, easing our concerns that the legacy automaker had lost its way. Shares did get dinged in the absence of forward guidance. F YTD mountain Ford YTD performance Tesla CEO Elon Musk is also worried about China — but for different reasons. Musk told CNBC’s David Faber on Tuesday that China’s stated goal of reuniting Taiwan “should be a concern for everyone,” because the Chinese economy and the global economy are like “conjoined twins.” Tesla depends on Taiwan Semiconductor to produce processors. Musk also talked about “some constraints” to expanding Tesla’s business in China but said the company is making as many vehicles as possible. “It’s not a demand issue.” Acknowledging Tesla’s sales and manufacturing presence in China, Buffett’s Berkshire Hathaway has been selling down its BYD stake for a while now. At Berkshire’s annual meeting earlier this month, Buffett and longtime investing partner Charlie Munger said they don’t want to compete with Musk and Tesla. “We don’t want that much failure,” Munger added. Like for Tesla, China is key for Ford because it’s the biggest EV market in the world. “We really see in our presence there is battery tech, digital experience for the customer, and advanced product, both software and hardware integration,” said Farley, who last year decided to split the company’s electric vehicle and ICE operations into separate business units, called Ford Model e and Ford Blue. Currently, Ford’s EVs are unprofitable. But with high demand, the automaker expects that losses will gradually narrow as operations become more efficient. Management has said that Ford Model e, which operates like a startup for now, will be building more and more EVs at scale, with the goal of being profitable by the end of 2026. Bottom line Farley was brave to recognize that the China EV market is a lot harder to penetrate than originally thought given the competition from local EV makers as well as Tesla. While Ford will still have a presence in China as it develops EV batteries and learns from China’s digitally savvy EV consumers, we’re confident that it won’t hesitate to step away if it turns into a money-losing operation. Ford is committed to turning its EVs, a long-term growth part of its business, into a profitable operation. The company not only has a compelling EV lineup — which include the Mustang Mach E and the F-150 Lightning — but it continues to offer its iconic ICE vehicles that continue to perform well and help facilitate its EV ambitions. We look forward to Ford’s annual Capital Markets Day, scheduled for Monday. It’s where investors like us can learn more about the company and its Ford+ Plan for growth and value creation . In a new research note, Deutsche Bank expects Ford to reiterate its previously announced targets. Barring any surprises, the analysts said Monday “could serve as a clearing event for investors to express caution more actively around Ford’s midterm outlook.” Deutsche Bank has a sell rating and an $11 price target. Citi, however, was more optimistic, raising its price target on Ford this week to $12.80 per share from $12.50. The analysts kept their neutral rating. (Jim Cramer’s Charitable Trust is long F. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Ford Mustang on display at the NY Auto Show, April 6, 2023.

Scott Mlyn | CNBC

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