Ford: One Excuse After Another As Changing Business Strategy Stymies Supply Chain (NYSE:F)

Ford (NYSE:F) provided guidance that 40,000 to 45,000 vehicles should be in inventory at the end of the third quarter because of a lack of parts to finish them. Adding insult to injury, Ford said that supplier costs will be $1 billion higher in the third quarter than expected due to rising inflation and persistent supply chain problems. Those vehicles are “largely high-margin trucks and SUVs.”

The F-150 pickup produced at the Rouge uses more than 800 types of chips, requiring dependence on specialists.

Ford’s chief industrial platform officer, Hau Thai-Tang, noted “Ford’s embrace of so-called just in time inventory – in which warehouses are kept lean to minimize costs has been driven by the capital markets and is focused on return on invested capital.”

This just in time inventory (“JIT”) was largely established by the semiconductor industry to prevent a meltdown that occurred in 2000 when rumors of a DRAM shortage caused end users to double-dip on purchases to avoid allocation of chips for largely PCs.

But manufacturers worldwide use this JIT management strategy that aligns raw material orders from suppliers directly with production schedules. Over the past few years, Ford has modified its EV strategy, which has caused confusion among its suppliers, particularly second and third-tier suppliers.

In the early 2000s, the US vehicle makers, in particular, moved to source more low-cost parts from Asia, in the process undermining some long-established companies in the US supplier base. Hence, we had problems with the supplies coming from China during the Shanghai lockdown in Q2 2022.

The big Tier 1 systems integrators supply directly to the vehicle makers, often from supplier parks conveniently located close to vehicle assembly and manufacturing facilities, but there are multiple tiers of smaller suppliers below the top tier.

Ford’s Changing Vehicle Strategy

On Jan. 4, 2022, Ford CEO Jim Farley tweeted:

“In Sept., due to huge demand for #F150Lightning, we doubled our production plan from 40k to 80k trucks per year.

The demand keeps growing, so we’re doubling it again and now plan to produce 150,000 annually.”

On March 2, 2022, Ford announced today that it is separating its electric vehicle and internal combustion businesses into two different units. Ford Blue and Ford Model e will operate as distinct businesses, but share relevant technology:

• “Ford Model E will be Ford’s center of innovation and growth, a team of the world’s best software, electrical and automotive talent turned loose to create truly incredible electric vehicles and digital experiences for new generations of Ford customers,” Farley said.
• “Ford Blue’s mission is to deliver a more profitable and vibrant ICE business, strengthen our successful and iconic vehicle families and earn greater loyalty by delivering incredible service and experiences. It’s about harnessing a century of hardware mastery to help build the future. This team will be hellbent on delivering leading quality, attacking waste in every corner of the business, maximizing cash flow and optimizing our industrial footprint.”

On July 31, 2022, CEO Farley said that Ford sees a path to reducing that cost disadvantage – which he estimates at around $2,000 per vehicle – by keeping dealers’ inventories very low and by shifting the way Ford markets its products.

Farley estimated that the low dealer inventories and online ordering will make up roughly $1,200 to $1,300 of that $2,000 per-vehicle cost disadvantage while ensuring that Ford’s dealers remain profitable. The plan will free dealers from having to carry costly inventories, allowing them – in theory, at least – to focus more on service and customer education.

On Sept. 14, 2022, Ford dropped the gauntlet on its dealerships.

Ford is telling its dealer network they have to invest, evolve, improve, and offer new services if they want to be a Model E dealership and sell electric vehicles.

Ford is giving its dealers until Oct. 31 of this year – less than two months – to make a decision that will have huge implications for the future of the franchise. The company is offering its dealers three options:

1. Become a Model E Certified Elite dealership

At a minimum, Model E Elite dealers will need to install two high-powered DC fast chargers and a level 2 charging station, as well as offer at least one DC fast charger available for the public to use. Ford estimates the all-in cost for dealers to become Model e certified elite to be between $1.0 and $1.2 million, with as much as 90{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of the cost attributed to the cost to purchase and install the required charging infrastructure.

2. Become a Model E Certified dealership

Model E Certified dealers are only required to install one DC fast charger, and it must be made available for public use. However, Model e dealers will have a hard cap on the number of EVs they are allowed to sell each year, and that number will be the same for all Model E shops, regardless of annual volume. Ford estimates the cost for dealers to become Model e certified will be about $500,000, again, with as much as 90{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of the cost attributed to charging infrastructure.

3. Discontinue selling Model E vehicles effective Jan. 1, 2024.

If they choose that route, they give up the right to sell any fully electric Ford vehicles for three years.

The Shortages and ICE Vehicles

U.S. new-vehicle sales in the second quarter struggled, up only modestly from the first quarter and down more than 20{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} from Q2 2021, as shown in Chart 1.

What’s important to note is that EV sales of battery-powered electric vehicles – pure EVs – jumped to 196,788, a record high and a 66{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} increase from Q1, 2021. In contrast, ICE vehicles, with a greater range of models, at lower prices, and with gasoline stations on every corner, decreased about 20{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} over the period.

Chart 1

In 2021, global EV sales increased 108{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} YoY while the total automobile (EV and ICE) increased just 4.6{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}. In North America., less than 10{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of vehicles are EVs, and the 3.8{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} growth for the total market would be about 3.4{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} for ICE and 96{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} for EVs, according to The Information Network’s report entitled “Global and China EV Batteries and Materials: Technology, Trends and Market Forecasts.”

According to Cox Automotive:

The total U.S. supply of available unsold new vehicles stood at 1.23 million units at the end of August, up 31{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}, or about 287,000 units, from the year before.

August 2022 days’ supply was 40. At the end of August 2021, the supply was 930,000 vehicles for a days’ supply of 27.

The average listing price was $46,624 at the end of August, above the revised $46,426 at the end of July. The listing price is running 11{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} above August a year ago.

Ford is not alone

Recently, General Motors (GM) had temporarily closed down the Silao, Mexico, plant that builds Chevrolet’s Cheyenne and Silverado pick-ups. The Bowling Green Assembly in Kentucky also suspended operations for a week, affecting delivery of the Chevrolet Corvette Stingray will record delays.

Back in April 2021, GM had to shut down for two full weeks the Spring Hill Assembly in Tennessee, which manufactures the Cadillac XT5, Cadillac XT6 and GMC Acadia. It also halted production of the Chevrolet Blazer at the Ramos Assembly in Mexico and the Chevrolet Traverse and Buick Enclave at the Lansing Delta Township factory.

All GM vehicles affected are ICE cars, not EVs. GM has four EV models right now:

• GMC Hummer EV
• Cadillac LYRIQ
• Chevy Bolt EV
• Chevy Bolt EUV

Where’s the Semiconductor Shortage?

Automakers have been struggling with various supply chain issues, specifically a shortage of computer chips, which has choked off vehicle production for much of the last two years.

Automakers like Ford canceled chip orders early in the COVID-19 pandemic as demand for new vehicles plummeted. Meanwhile, tech companies bought up all the chips as plants were shut down, and by the time production ramped back up again, the entire industry was facing months-long wait times.

Chart 2 shows IC shipments between July 2019 through July 2022. It shows a three-month moving average (3mma) of unit shipments, which have a strong positive trend line (dotted line). Unit shipments show a drop beginning in January 2020 through June 2020 what was initially a result of cyclical trends and then a large impact of Covid-19. It also shows MoM unit production. Again, it shows (orange line) a significant drop in production since May 2020 followed by a recovery.

Chart 2

Chart 3 shows unit shipments of different types of chips, including microcontrollers (red line). Here we see that starting in September 2021, MoM shipments of a variety of chips, including microcontrollers dropped. However, they recovered in March 2022 but dropped again due to Shanghai lockdowns in China and have since recovered. Remember that most chips going into electronics product production are sent to China for placement into completed end products. The Shanghai lockdowns prevented these products from being sent to and from China.

Chart 3

In June 2021 my analysis of the “semiconductor shortage” was published my findings in a June 17, 2021 Seeking Alpha article entitled “Microchip Technology: Benefiting From Strong Microcontroller Demand And Shortages.” I attributed microcontroller shortages in Japan.

“Significantly, an earthquake in February 2021 halted the production located in Hitachinaka, Ibaraki Prefecture for a few days, trimming inventory. Then, on March 19, 2021, a fire broke out in the N3 building at Renesas’ (OTCPK:RNECF) Ibaraki-based component fabrication site. The blaze destroyed 23 pieces of semiconductor manufacturing equipment and contaminated over 6,400 square feet of industrial production space. Production recovered to reach 100{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} capacity in mid-June. The Japanese chip-making factory owned by Renesas Electronics Corp., accounts for 30{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} of the global market for microcontroller units used in cars.”

Investor Takeaway

One doesn’t need to look further than a gas station to understand the “semiconductor shortage.” The clear focus of the current government administrations around the world is the elimination of fossil fuels for ICE vehicles to be replaced by Green renewable sources – EVs.

“The average electric vehicle has about 2,000 chips, roughly double the average number of chips in a non-electric car,” noted U.S. Commerce Secretary Gina Raimondo in late 2021. So, ICE vehicles, which use half the number of chips were roughly 100{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} impacted.

Table 1 lists Revenues and Net Income for select automobile manufacturers for 2020 and 2021. Ford’s revenues increased 7.2{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} YoY, which is higher than most competitors, except for Tesla (TSLA) increasing revenues by 70.7{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9}. Stellantis N.V. is a multinational automotive manufacturing corporation formed in 2021 on the basis of a 50-50 cross-border merger between the Italian-American conglomerate Fiat Chrysler Automobiles and the French PSA Group. Financial data for the company for 2020 and 2021 were compiled by the company using accounting adjustments.

The second half of Table 1 in red is the critical issue, which undermines the contention that the “semiconductor shortage” had a negative impact on the automobile manufacturers, resulting in plant closures and empty car lots. What it really shows is the Net Income skyrocketed in 2021 as car companies generated income by eliminating incentives, selling cars above MSRP, shuttering production of ICE vehicles, and reducing dealerships (9,955 in 2021 compared to 10,717 in 2020 at Ford).

Shown in Chart 4 are Ratings Summaries and Factor Grades.

Chart 4

Ford’s vehicle revenues have been a positive for the company, as shown in Chart 5. Net income and revenues are increasing, and Seeking Alpha’s Factor Grades illustrate this financial improvement.

Chart 5

This expansion of its SUV lineup, including a top-selling Bronco, has given Ford a broader appeal to drivers looking for this kind of vehicle. Just like its pickup trucks and EVs, Ford’s move seems to be paying off. The company sold more than 102,000 Ford Explorers and almost 74,000 Ford Escapes during the first half of 2022, placing both SUVs among the 25 most popular models in America.