If you were asked how much money Ford Motor Company (F -0.41%) makes on each electric vehicle (EV) it manufactures, what would you guess?
If you channeled your inner Price Is Right contestant and said $1 dollar, you'd have over bet by about $66,000.
That's right, Ford -- like most manufacturers not named Tesla -- is losing a staggering amount on each EV sold. So how do the folks at the Blue Oval turn a profit on its EV program by 2026? Let's dig in.
By the numbers
To be clear, this exercise is using simple numbers to get a basic grasp of how unprofitable Ford's Model e EV program is -- which is to be expected at this point in development.
Ford's EV sales grew a sizable 41% during the first quarter to 10,866 EVs, and its Model e segment lost $722 million in adjusted earnings before interest and taxes (EBIT) during that same time frame. That essentially shows each vehicle that Ford's EV segment produces loses more than $66,000.
It's also fair to note that Ford's EV profitability is expected to get worse before it begins turning a profit in 2026. In fact, Ford Model e losses jumped from roughly $900 million in 2021 to $2.1 billion in 2022. Those losses are expected to reach $3 billion in 2023 as the company heavily invests in new models and factories to build scale and eventually turn billions in losses into billions in profits.
The question now is: How does Ford actually get to profitability in just a few short years?
Let's take a walk
The key factors for Ford's Model e turning a profit are ramping up scale, improving design and engineering efficiencies, lowering battery cost, and crossing its fingers there are no EV price wars and that raw material costs improve.
More specifically, the biggest factor is Ford accelerating scale. Per Ford's "Teach-In" presentation, the Model e segment is operating at roughly (40%) margin, half of which can be erased by its expected ramp up in production and scale.
Already Ford has targeted its popular F-150 Lightning and Mustang Mach-E to reach annual run rates of 150,000 units and 210,000 units, respectively, by the end of 2023. Ford is targeting a global run rate of 600,000 EVs by the end of this year, with that figure reaching more than 2 million by the end of 2026.
Another 15% of margin points can be gained through maximizing commonality and reuse of technology and engineering, and improving design efficiency. Another 10 points of margin can be found by simply vertically integrating, securing battery materials through 2026 and beyond, and accelerating scale of battery production.
Those three factors should alone, per projections, get the Model e segment to profitability, as you can see below.
Image source: Ford Motor Company March, 2023 "Teach-In" presentation.
The remaining margin points to reach its 8% target by the end of 2026 might be a little more uncertain. Ford expects dealer standards, software and service, and better raw materials costs to add a few extra margin points while anticipating competitive pricing to offset some of those gains.
Is profitability in 2026 reasonable?
In short: yes, Ford can generate profits from its EV program by the end of 2026. It has the popular nameplates driving current sales and demand, new EVs on the way, and improving scale for not only its vehicles, but also its batteries.
In a short time Wall Street has moved from asking automakers to have a big EV strategy to demanding big EV profits -- but it's reasonable for almost all automakers to be a couple of years out from that goal. Losing over $66,000 on each EV is a big number, and savvy investors should keep an eye on this critical Ford segment going forward as it's an integral part of Ford's long-term investment thesis.
