A massive round of layoffs is usually seen as a sign of trouble at a company, but Ford (F -0.45%) is trying to prove otherwise.
In an email sent internally on Aug. 22, Ford said it will cut as many as 3,000 jobs this week alone, including salaried as well as contract workers involved primarily in its traditional business of fuel-burning vehicles. That last bit is important, as it explains why the company says it needs the layoffs.
Ford wants to be able to produce 600,000 electric vehicles (EVs) annually by late 2023 and more than 2 million units by 2026. It's no easy task: The company will require a $50 billion investment to achieve its 2026 goal, and it's already behind in the EV race.
The company is making quick, aggressive moves to free up cash to invest in the future. Its latest layoffs are part of those plans. Ford is cutting costs to boost the profitability of its legacy business to fund its transition into EVs.
Ford's transformation is already underway
The company has been improving profitability considerably since 2019 thanks to a shift in its product mix and consistent cost-cutting, among other things.
In its second quarter, for example, the automaker's revenue surged 50% year over year, and it turned an operating profit of nearly $2.9 billion (versus a loss in the prior year's second quarter) helped by surging wholesale volumes and a tight grip on costs. Ford drove its adjusted operating margin higher to 9.3% in the 2022 second quarter from only 3.9% in the year-ago quarter.
The company still has a long way to go as it navigates cost and pricing pressures while ensuring it has the money to pour into EVs.
The real challenges ahead
In July, Ford's EV sales totaled 7,669 units, up 168.7% from a year ago, with the F-150 Lightning pickup trucks clocking their best month ever. The company also sells the Mustang Mach-E and E-Transit van, both of which had robust sales last month.
Ford's EV sales growth (albeit off a small base) has outpaced the industry average in recent months, a trend it expects will continue. Between 2021 and 2026, Ford expects EV sales to grow at a compound annual rate of more than 90% compared with the estimated global industry average of around 36%.
The challenges are not with EV expertise, production capacity, or demand. Instead, the issues are raw material supply and funding. And that's what management is trying to address.
More layoffs ahead? Here's how you should react
In July, Ford said it had secured contracts for 100% battery capacity for the 600,000 units it expects to produce next year and has already garnered 70% of the battery capacity required to produce 2 million EVs in 2026, all from third parties. With the Inflation Reduction Act that President Joe Biden just signed into law also offering tax credits to buyers of EVs with locally sourced components, Ford now also has an incentive to set up battery plants in the U.S.
To fund its EV ambitions, Ford is restructuring its legacy business to turn it into a cash machine for just that purpose. While investors might need to brace for more layoffs to hit the headlines in the near term, in the long term, they're probably necessary.