Ford Motor (F -1.12%) intends to boost production and slash prices on its Mustang Mach-E electric vehicle, following the lead of Tesla (TSLA -0.05%) and diving headfirst into what is quickly becoming an electric vehicle (EV) price war.
The Mach-E has not been profitable for Ford even at higher price points, so the move comes with significant risk. But it also speaks to the progress the automaker has made in ramping up its EV supply chains, and it reaffirms this legacy automaker's commitment not to go the way of the dinosaur as the vehicle power train revolution advances.
Can Ford scale to profitability?
Ford is cutting prices on the full range of Mustang Mach-E trims by an average of $4,500 per vehicle, cutting the high-end GT Extended Range model by $5,900. The move comes just a couple of weeks after Tesla cut its prices by as much as 20%, and Ford execs alluded to the Tesla decision in their announcement.
"We are not going to cede ground to anyone," Marin Gjaja, chief customer officer for Ford's electric vehicle unit, said in a statement. "We are producing more EVs to reduce customer wait times, offering competitive pricing and working to create an ownership experience that is second to none."
The Mach-E has been a hit with consumers, ranking as the third most popular electric vehicle in the U.S. in 2022. But it so far has not been a financial success for Ford. Management said last year that potential profits on sales had been "wiped out" by soaring commodity costs and supply chain issues.
Ford is investing $50 billion through 2026 to develop electric vehicles and build out its capacity, and it said that improvements to its supply chains and its success in securing batteries and raw materials should help it ramp up profitably. The company intends to boost Mach-E production by 67% in 2023 and hopes to benefit from economies of scale as it does.
The Ford vs. Tesla battle is getting intense
The price cuts, like Tesla's, also seem timed to help consumers take full advantage of federal tax credits authorized under the 2022 Inflation Reduction Act. Congress set aside up to $7,500 for the purchase of electric vehicles, but only vehicles that meet certain affordability guidelines qualify for the full credit.
Notably, Ford said that existing Mach-E customers who are awaiting vehicle delivery will automatically receive the discounted price, and customers with a sale date in 2023 and who already have their vehicles will receive an adjustment. Tesla has been the subject of criticism from customers who want its recent price cuts applied to their purchases, and Ford appears to be trying to differentiate itself with this offer.
"Part of our mission at Ford is to treat customers like family," Gjaja said. "We want our customers to know they made the right decision by choosing a Mustang Mach-E, and we'll continue to play a proactive role in doing the right thing for those joining the Ford family."
Indeed, Ford vs. Tesla appears to be shaping up as one of the most interesting battles as incumbent automakers dive headfirst into EVs and try to thwart the ambitions of Tesla and other newcomers. Ford ranked as the second-largest seller of EVs in the U.S. in 2022, with products like the Mach-E and F150 Lightning pickup designed to compete directly with the Tesla Model Y and Cybertruck. But Tesla still dwarfs the EV competition, commanding nearly two-thirds of U.S. market share.
Investors need to fasten their seat belts
It's hard to argue against Ford's cuts. The company is committed to spending billions on its EV transformation, and it needs to move metal in what is becoming a difficult market for auto sales. Ford needs to stay price competitive, and aligning its pricing with the tax credits is a logical move.
That said, nothing good can come from a price war in an industry with high fixed costs and low margins. Ford, along with Tesla and other automakers launching new models into this market, is in for a slow grind in 2023 as inflation and Federal Reserve rate hikes crimp spending and make financing big-ticket purchases like automobiles more difficult.
Ford is focusing on the long term at the potential expense of 2023 margins. Investors interested in the automaker would be wise to do the same.
A decade ago, there was reason to worry that the Blue Oval would go the way of Studebaker, Edsel, and so many other failed automakers who couldn't keep pace in an ever-evolving market. Ford's investment in its future is beginning to pay off, and the company's well on its way toward securing its survival as electric vehicles slowly take over.
Any short-term pain caused by these cuts should pay off over time.
