The automotive industry’s transition to electric powertrains will generate waves of change, including “very large consolidation,” as investments and experience lower production costs and new technology-driven revenue models take hold, Ford Motor Co. President and CEO Jim Farley said June 1.
“There’s a shakeout coming and I feel like that shakeout is going to favor many of the Chinese new players,” Farley said at AllianceBernstein’s 38th Annual Strategic Decisions Conference. “The old OEMs absolutely will get consolidated. There will be some big winners, some people that transition. Some won’t; many of the small players cannot afford to make this transition. Many of them are not investing in embedded software and electric architectures, which is the heart of this transition.”
Farley, who has led Ford since October 2020 and early this year announced the company will split into separate but co-dependent divisions focused on internal-combustion and electric engines, said the auto sector’s supplier universe will face similar consolidation pressures and see new players emerge in coming years. Many startup EV manufacturers, he added without naming names, will soon run into the hard fact that the market they’re looking to address isn’t large enough to justify their capital spending or valuations. The recent change in financial markets will speed up the realization, he said.
“There are new constraints that will make the new players better. But some of them won’t be able to afford to fulfill their ambition because they can’t raise capital,” Farley told the AB event. “So they’ll look for partnerships and other ways to raise capital. This is going be a very interesting time the next three, four years as capital gets constrained – and I believe it’ll be the best thing for some of these EV startups. They will be forced to solve tough problems.”
Farley’s consolidation comments echo ideas expressed last month by Lightning eMotors Inc. CEO Tim Reeser, whose team electrifies chassis of various OEMs. Speaking after Lightning reported its first-quarter results, Reeser said he is seeing a lot more opportunities than before for joint ventures and other deals.
“My personal opinion, consolidation is going to happen quicker than most people think, and it's going to be […] much broader in this space than most people think,” Reeser told analysts. “There are a lot of very traditional commercial vehicle players in the space that add a lot of value and so [there’s] a lot of supply chain, a lot of vertical integration opportunity.”
Elaborating June 1 on why he thinks Chinese EV companies have an edge in the upcoming consolidation wave, Farley said they are ahead of Ford and other American and European manufacturers in anticipating how the second generation of EVs will differ from today’s first wave—and have thus been able to sell their vehicles at much lower prices. Part of that is relying more on lithium iron phosphate batteries and designing more holistic digital systems.
“The elegance of their engineering is something that I’m very taken with,” he said, while also acknowledging that China’s state-owned enterprises face fewer cost concerns than their peers based elsewhere.
The broader point, Farley noted, is that manufacturers will quickly get their arms around what it will take to significantly lower costs for future generations of EVs as their capacity investments come on line. In Ford’s case, he said, there’s about $2,000 apiece in savings from streamlining distribution models and battery chemistry. The biggest lever, though, will be “a radical simplification” of Ford’s manufacturing process, which will require fewer parts, processes and people hours as the company overhauls its engineering models to use the smallest possible battery.
“This is where the auto companies are very uncompetitive. This is like Apollo 13; we’ve got to get back from the moon. Every watt, every amp matters,” Farley said, using as an example the idea that improving the aerodynamic features of a full-size truck would extend battery range enough to save $3,000 per vehicle. “Re-engineering for the vehicle to minimize the size of the batteries, because they’re so expensive, is going to be game changer for these second-generation products.”
Right around the time Farley was speaking, Ford rival General Motors Corp. said it is lowering the price of its Chevrolet Bolt for 2023 by about $6,000. GM officials said the move reflects high demand for EVs—although Bolt sales have struggled, hurt in part by a large recall—and their desire to show that “affordability has always been a priority for these vehicles.”
Other topics touched on by Farley at the AB conference included:
• As a number of his peers have said—Stellantis’ Carlos Tavares is eyeing more than $20 billion in software sales by 2030—advanced driver assistance systems and other technologies are a massive sales opportunity, “the biggest, most exciting land grab of revenue in our industry since the Model T.” Farley compared where the auto industry is now to where mobile phone makers were about 25 years ago.
“When I see the pricing power for ADAS–not just at Tesla but all of us–[…] it feels like that’s the first shippable software that we can send to a car that customers are really willing to pay a lot of money for,” Farley said. “We’re about to change the ride just like Apple and all the smartphone companies changed the call. And I believe, when that happens—when you can ship a lot of software to the car and you have great sensors [and you can] really change that experience and be a lot more productive—there will be a large revenue expansion.”
• Auto advertising as we’ve known it for decades could soon fade into the history books. Farley said that model “is messed up” and suggested Ford will shift its spending on post-purchase customer services and updates.
“We should be doing stuff like that instead of doing Super Bowl ads,” he said.
• While predicting a big consolidation wave, Farley also said a cohort of technology companies could enter the transportation market—particularly on the commercial side, where the addressable market is 10 times that of personal transportation—once autonomous-driving platforms prove their viability and value.
“When autonomy becomes democratized, […] they will use their very powerful consumer brands to integrate into their digital experience […] and we will have a new wave of competition,” he said. “If anything, that’s what keeps me up at night. How do I compete with them?”
Shares of Ford (Ticker: F) fell about 1% to $13.55 June 1, in line with the broader market. Year to date, they are down about 35%, shrinking the company’s market capitalization to about $55 billion.
