The Angle from T. Rowe Price: The Long View: Jim Farley, President and CEO of Ford

And it was encouraging to me that, you know, in a way we were rewarded for getting honest with our business. It was a real moment for me as a CEO. It was kind of a cleansing moment.

Good to be here.

Oh, nice. Yeah, it's an old Ford Ranger with a camper top on the back.

Oh, okay. Which I know is something that's near and dear to your heart. Love it. Alloy wheels. You went for it on that one.

My dad was a banker. He worked at Citibank, and I just always loved cars. I can't really explain why. Bought my first car when I was in my teens, drove across the country, so, always worked on cars. Interestingly enough, Ford, even though I wound up working at Toyota, I wound up putting myself through graduate school at a car restoration shop, that was owned by Phil Hill, our first Formula One champion in the US, in Santa Monica. So I've always worked in car repair shops, restoring my own cars. But then I decided to take a chance and, frankly go to Toyota, actually go to Lexus. It was just a small group at the time when we were starting Lexus, and I was a product planner. I got offers from the domestic car industry. I remember the F-150 offer was for a financial planner for the rear differential on the F series. And I had this offer to be the product planner for Lexus. I was like, 'Whole car versus a differential?' So I decided to do that, much to the chagrin of my family 'cause my grandfather, as you said, worked at Ford. He wound up owning a dealership, then became a supplier late in life. And my mom grew up in the east side of Detroit. My dad fought in World War II, so working for Toyota was, you know, not a very popular move in my family. Actually it was kind of, you know, a serious thing, awkward for a few years, but then Toyota really took off, and my family, you know, thought that I had made a good choice. But the first couple years it wasn't as clear. And then after all those years, about 20 years, I decided to, when I met Alan Mulally, that here was a domestic company, the one I loved the most, Ford, where my grandfather worked. He was just such a good leader. Soon as I met him, I saw his One Ford plan, I was like, this is the right opportunity to leave Toyota.

20 years. Yes. It was, I had lots of opportunities to leave. I had decided I was gonna stick with cars. It was just as you said, my passion. I was always scared that going into the car business would ruin my love of cars. But it never did, and, coming back to Ford in '08 was very challenging, but I really wanna see what kinda leader I was really made of. I really felt like Ford was an opportunity where I'd be tested more than Toyota. And little did we know, I know that that would be more true than I could ever imagine.

It was very difficult. I was at Toyota, and we never reduced production in 20 years. So every month we increased production. So I get there at Ford, wasn't sure that people really wanted me to be there. Alan did, but a lot of my peers at Ford were like, 'Well, who's this Toyota guy?' The way I thought, the changes I wanted to make on the revenue side of the business were very different than the Ford approach, but Alan and I saw things eye to eye, whether it was, you know, we really liked dealers. We really felt like we could grow, we could democratize the brand and expand the brand globally. And so it was very exciting and terrifying at the same time. We shut down our truck plants when gas prices surged before the great financial crisis. Then, thankfully we had borrowed a lot of money, and we had a good restructuring plan. Our competitors went bankrupt. We didn't. All came to life in the hearings in Washington, DC. It was a trying time because our competitors could kind of write off their assets, close brands, close dealerships, and we chose a tougher path, which wound up being great at the beginning because many customers turned to the Ford brand when they turned against the other brands. But at the same token, you know, they were a lot cleaner financially. Borrowing the money was really smart. We borrowed probably way more than we thought, and we needed every cent of it. That was the story of the GFC. Everybody that borrowed early was in a better spot. We wound up having to sell PAG, simplify the company, really focus on the Ford brand, and then we got busy expanding our product portfolio, and most of it didn't work and some of it really did. We were very small in China. Our competitors were making a lot of money in China after that. And so we had this great resurgence, but then the cost came back in the business, and our overseas operations started losing a lot of money. And there we were again, you know, having to fix the company all over again. And two CEOs later, you know, we made the transition. Then mobility became a big deal. So there's been a lot of changes in the last 15 years.

Well, I would say as a competitor to Ford, I had realized, I was part of the Tundra project. So we built a brand-new plant in San Antonio, Texas. We developed a brand-new product to really take on the F-150, the Tundra. And it was one of the largest global projects, right on par with, I would say, Lexus. And it didn't work. And I really learned how good the domestics were on pickup trucks. Not just because of the chicken tax, but because they were really focused on quality and the customers, and that was a big learning for me as a competitor. So when I came to Ford, I was always curious about this F-150 Super Duty business. And it turned out that the Super Duty business was actually even more attractive than the F-150 business. F-150 we have 20, 30% market share. Super Duty Ford has 40 to 50% market share. We're actually, our truck business, we're bigger than our two next competitors combined. And I, as a CEO, I had watched the company kind of treat this as a sales channel. And when I went to Europe, we actually reorganized Europe business around trucks and vans, in that case, vans. And I saw that when we put human capital behind it, we really started to focus more on the services parts, kind of the upfitting process. And I was like, 'Why don't we do that at the company level?' So I had this intuition going into being the new CEO that Ford Pro should really be something different, and that the electrification, but also the software-defined vehicle, would really affect the B2B business actually more than the retail business because those customers would buy productivity software. They would be more interested in using their fleet more efficiently. They were actually gonna be more, they would be leaning into the changes in our industry faster than the retail industry. And then, obviously, Blue, we really started to bet on more emotional products. We had just started to launch the Bronco lineup. We started to get serious about Raptor as a brand. And we really believed that Ford could compete in a narrower part and really own off-road and on-road enthusiasts. And then of course, electrification we really saw as a different animal. We wanted to manage the business differently. We thought it would be different platforms. We thought customers would be quite different. Even the distribution could be different. And so it became very clear to me early on, hey, we need to separate these businesses so we manage them correctly. There'll be some overlap in the industrial side, but really these are actually more different than they are similar.

Yeah, there's two big trends in our industry, electrification or lower CO2, you know, degrees, pure electric all the way through partial electric powertrains, PHEVs, EREVs, hybrid, all the way to traditional ICE, and the second is software-enabled vehicles, where the vehicle can be updated, we can sell software tied to it, but it requires a huge investment in electric architecture to make the vehicle software-defined. And those two changes, including automation tied to the software, is, like, you know, what's really running our business now. It turned out that electrification was very lumpy around the world. Places like China were 50% pure electric. Other places like Europe were more like 25 to 30%, and the US was very little. Especially then the government policy started to change around the world. The Chinese government completely bet on pure electrification. Europe was somewhere in the middle, and the US, you know, the policy completely changed here 12 months ago with getting rid of really any customer support for electrification journey, pure electrification, and even the tailpipe emissions that have always been part of our industry, you know, really were completely released. So basically what we were left with in our core market, the US, was the actual customer's duty cycle. How do they use the vehicle with these different powertrains and the software-enabled vehicles? And it became very clear to us quickly because we were number two to Tesla for three years. We were the second-largest electrified brand here with Mach-E and Lightning and E-Transit that we had kind of put in the market as fast as we could. Our competitors were coming after us with their electric lineup. We learned before everyone else, hey, these really expensive electrification vehicles, the battery cost did not come down to the cost we thought, and the customers, they don't wanna pay for a 30 or $40,000 battery. And so it became very clear to us, electrification in the US, especially after the policy change, is really gonna be left with the customers who actually drive a duty cycle that makes sense for pure electric, which is basically people who drive their vehicles for commuting short distances. And we had bet on the Skunk Works project, UEV, so we continued with that investment. But the rest we stopped developing those vehicles. We had a great, next-generational electric Lightning and lots of SUVs planned that our competitors had just come out with. We canceled all of that. We stopped it all.

Oh, good question. A couple years before, we had come out with the Mach-E. It was number two to the Model Y, selling very well. Good-looking vehicle, for sure. People loved it, very high loyalty. But when we actually looked at the actual engineering and Doug Fields came from Apple and Tesla, it became very clear to us when we tore apart, you know, the latest model, Model Y, Model 3, actually before the Model Y came out, that we had completely developed the vehicle with an ICE prejudice. Where, you know, electric architecture, we just go out and bid a wiring loom to a supplier, and with the battery, you know, think about it as like Apollo 13. If you think about the battery as this huge budget, and you can reduce the size of the battery by $300, it may make sense to spend $200 extra on a wiring harness that is, you know, much lighter. Same with the braking system for regen or the electric motors. You know, the battery is like a huge budget, a $30,000 budget. And we saw our competitors like BYD and Tesla completely change the way they engineered the vehicle around that budget. They were spending much more than we were on many of the systems to shrink the battery. Interesting. And including aero. And we said, 'Oh, my gosh.' So at that point we decided, let's build a Skunk Works team in California with no ICE prejudice. Don't have any of them work for Ford, although they can interview Ford people, most of them came from Formula One or racing or from Tesla, and let's develop a low-end, very affordable EV with no ICE prejudice. And the team, the way they approached the problem was completely, thank God we did that. 30% less labor content, you know, it's just a radically different platform than we did with Mach-E. It was an eye-opening moment for me as an automotive person to know that, frankly, my ICE team really had such strong prejudice that the Model E business they could never really support with a competitive platform.

Yeah. Well, first of all, we were in love with the products. And in the automotive business, it's very capital intensive. When you fall in love with products, the management intuition is to keep going. So this was a very difficult decision even emotionally because we were so proud of these products. Yeah, the Lightning, the Mach-E. The next generation would have blown people away. I mean, some really innovative stuff. Cool stuff. So, it was very difficult because people had dedicated three years of their life to develop these vehicles, and they were very excited that they would really change the industry. But as a CEO, I knew that we would never, ever get the return on capital. And I could not really stand, frankly, converting these plants over to these products and for literally 20 years making a mistake every 56 seconds. So I knew we had to make this choice. Thankfully, we got the support from the board and Bill Ford to make this decision. It was very difficult for our suppliers. You know, a lot of the value creation in our industry is our suppliers. They had also fallen in love with these products. And these are the same suppliers, some of them, that we work on with the traditional vehicles, so it would be very disruptive to our relationship. But anyways, you know, as a CEO, as a team, we just knew this was never gonna work. The customers, as you said, the customers would never pay the prices written down, and this would be a 10-year, 20-year problem. And so, you know, we made the choice. As far as how it was received in the company, there was every emotion you can imagine. Some people were relieved. Some people were against electric in the first place and said, 'Well, you know, finally they came to their senses.' Told you so. But most people, majority of people in the company said, 'It was worth a shot.' Let's get focused on what's really gonna work, UEV and hybridization of our lineup, plus EREVs and our new plan. What was impressive to me was the efficiency of the investor base. They kind of already made the choice that this was never gonna work. And so when we announced it, they're like, 'Duh.' We had already modeled that out. Yeah, exactly. So you guys had figured it out. That's all the charges? We were rubbing our hands and fretting about this for a long time. And I think it restored a lot of confidence to me in the investor community, that you guys know what you're doing, that you kinda know what companies should do over the long haul, even the midterm. And it was encouraging to me that, you know, in a way we were rewarded for getting honest with our business. It was a real moment for me as a CEO. It was kind of a cleansing moment. I feel like. You know, I'd been away at a retreat. We were really struggling with this decision. But as soon as we made it, we were committed, and, you know, I could see kind of the clouds parted. As a management team, everyone just got focused.

It is. Yes. You're exactly right. As a leader, one of the most important decisions we make is what do you have your team focused on.

Well, Ford is the most American car company for sure because we build the most, we export the most, we have the most UAW workers. But on the other hand, you know, a third of our business is global. A lot of that is in Europe, but a lot of that is in Southeast Asia. Actually, we're number two to Hilux globally with Ranger. Interesting. A lot of people don't realize that we're not only, we're the largest pickup maker in the world, and a lot of that is Ranger. And the reason is because we built the Bronco off the Ranger platform, and so Bronco is basically our Ranger. I see a lot of Broncos. So Bronco, when you see a Bronco, think of that as a Ranger. But for the rest of the world, we have four, five factories around the world just building pickup trucks, and in many markets, big markets like Australia, New Zealand, we outsell Hilux, which has been the industry standard for emerging market pickups forever. So, you know, we feel the Chinese. We made the tough decision three years ago to stop investing basically big capital in China. You know, we didn't pull out, but what we decided to do is export from China. Now that's wildly profitable for us. We export around the world, our Chinese vehicles, but we don't really invest a lot of capital in China for China. So it's kind of an export only and it worked great. A lot of competitors continued to invest in China, or they pulled out. We did something totally different than both of them. We actually built our China business for export only, and it's worked really well for us. So we watch China really carefully because we are actually competing with them outside of China, exporting just with them. The market is 29 million. Approximately a third of all vehicles sold on this planet are sold in China, and their capacity is 50% higher than their local market. So they're the largest exporter of automobiles. By far, it's been a couple years now. Most of Russia market, 25% of Mexico are sourced in China now. But what really happened that you see and I see is the local brands. The BYDs, the Geelys, the Nios, the XPeng, these companies, that China market was dominated by Western brands. That's over now. The whole market is not only the biggest market and the most important and the most advanced for electrification and software-defined, it's also dominated by Chinese companies, the local brands. And those local brands, BYD was the first, but all those local brands are now moving from just serving China, which was big enough, to really focusing on export and then now localization. And what's accelerating their move globally is the pressure on CO2 and electrification. They bet on electrification. They have the best IP. They have the best cost structure. Their government bet on that, and these Chinese OEMs, I have no doubt some of them will be the top five globally like Toyota and Volkswagen have been. And they're now not only exporting in huge volume, they're now starting to localize production in Europe and Southeast Asia. I just got back from Australia. Australia is no different than the US, people use their vehicles like we do in the US. Pickup trucks, SUVs. That's Australia. What's different about Australia is they have no local brands. They gave up on local manufacturing. And there are no tariffs essentially. And they're pushing electrification heavily. So it's a wide-open market. Wide-open market. There's 50 Chinese companies there. The Chinese in Australia, just got back, was 10 points of share two years ago, and they're now 20. On their way to 50. I would not be surprised in Australia if 50% of the market is Chinese companies.

It started non-electric. A lot of it is electric now, but most of it is partially electric. PHEV, EREVs, hybrids.

Sure. EREV is a really important technology for all American car buyers, especially those that tow or use their vehicle for work. A pure electric vehicle is really not great, it's terrible for towing. You have to have a huge battery, and any time you have a lot of weight in the vehicle, you have to add a lot more battery, and the battery extinguishes really quick when you're towing. An EREV is a really interesting technology that was actually developed in China, but now I think will be very prominent in all the markets, including the US. Basically, it's an electric vehicle. Think about a heavy vehicle, like an Explorer or an Expedition, or a Super Duty. It's all electric. So it drives like a Lightning. It's fast. It accelerates great. Simpler drivetrain and all that. Yes. But unlike a hybrid that has actually two powertrains, it has a small industrial engine, three-cylinder, four-cylinder, that runs at a constant RPM and charges a battery. There is no transmission for the combustion engine. There's no axles. There's no drivetrain at all. It's just a small combustion engine to charge the batteries. And for a Super Duty or an F-150, you can get 700 miles of range out of these vehicles. You can maybe have 100 to 150 mile of all electric, so for 90% of your trips, you're all electric, but then when you wanna take a long trip, you do not have to plug it in on your trip. You just fill it up with gas. It goes 700 miles. It's not super efficient when you're towing because the engine is always on.