Ford Motor Company (F 0.08%) recently confirmed that it's laying off 3,000 workers as the legacy automaker transitions from building traditional combustion engine vehicles to electric ones. The job cuts will affect white-collar workers and some of the company's contractors, with the goal of both cutting costs and repositioning itself to focus on electric vehicles (EVs).
And as it undergoes these big changes, long-term investors may have to be patient with the company.
Image source: Getty Images.
A shift toward cutting costs
Ford CEO Jim Farley showed his cards a bit in July when he said on the company's earnings call: "We absolutely have too many people in certain places, no doubt about it. And we have skills that don't work anymore ... and we have jobs that need to change."
That was an indelicate way of saying that Ford's workforce has knowledge and skills that may not be relevant over the next few decades.
As the company moves in an entirely new direction, it's trying to find the right footing for not just building more EVs, but also increasing its profit margin.
Ford has set a goal to reach a 10% pre-tax profit margin by 2026. Why is that important to the company? Because EVs could allow automakers to improve their profits compared to traditional vehicles.
For example, Tesla's current profit margin is 14%, compared to Ford's 7.8% margin.
Data source: YCharts.
Cutting costs isn't just a priority for Ford because it wants to be profitable (because, of course, it does), it's also important for Ford to move in this direction because it'll need higher profit margins to stay competitive in the EV market.
Ford's EV goals will be hard fought
Ford has a plan for electric vehicle sales to account for between 40% and 50% of its U.S. sales by 2030. To get there, the company will spend about $50 billion by 2026.
And to reach that goal Ford is trying to cut about $3 billion in costs over the next four years in the areas it thinks contribute the least to its EV future.
The latest layoffs are just one move in that direction, but investors can likely expect more big transitions from the company ahead.
Whether that means more layoffs or not is uncertain. But Ford is simultaneously increasing spending for its EV goals while trying to become more profitable. The transition Ford is making is essentially like trying to overhaul a fast-moving assembly line without shutting down production. It's not going to be easy.
Making matters worse for the company right now are surging vehicle material costs, stubbornly high inflation, and EV production hiccups.
When you add all of this together, it likely means Ford investors can expect more big changes -- and potentially some volatility from the company's stock price -- as the company's EV vision becomes a reality.
