KEY POINTS

  • In a week, Ford will let go of 3,000 employees.
  • By doing this, the company is trying to take on its number one obstacle to EV growth.

Although investors typically believe a large round of layoffs to be a precursor to failure at a firm, Ford’s latest layoffs attempts to disprove this belief.

In an email sent to its staff on Aug. 22,  Ford (NYSE:F) said it plans to cut 3,000 jobs this week, including salaried and contract workers. This is significant because these are the individuals who are a part of its fuel-burning vehicles business. This is important to note as it explains why the company needs the layoffs in the first place.

Ford aims to manufacture 600,000 electric vehicles annually by late 2023 and more than 2 million units by 2026. It’ll be an arduous task. The firm will require $50 billion in investment, and it’s already lagging in the EV race.

The firm is making rapid, aggressive cuts to free up money to invest in the future. Those efforts are part of a larger strategy. For example, Ford is reducing expenses to improve its legacy business’s profitability so it can finance its move into electric vehicles.

Transformation in process

The firm has seen a dramatic boost in profitability since 2019, owing to a change in its product mix and continual cost-cutting, among other factors.

For example, the company’s revenue grew 50% year over year in the second quarter. It also posted an operating profit of nearly $2.9 billion (versus a loss in the prior year’s second quarter), aided by rising wholesale volumes and tight cost control. As a result, in the 2022 second quarter, Ford increased its adjusted operating margin to 9.3% from 3.9% in the previous year’s second quarter.

Ford still has a long road ahead as it tries to balance cost and pricing pressures while ensuring it has enough cash to invest in electric vehicles.

Challenges ahead

In July, Ford sold 7,669 electric cars, up 168.7% from a year ago, with the F-150 Lightning pickup trucks recording their best sales month ever. The corporation also offers the Mustang Mach-E and E-Transit van, which had excellent sales in July.

Ford’s EV sales growth (while still small) has outpaced the industry average in recent months, a trend it believes will continue. Ford projects that EV sales will increase at a compound annual rate of more than 90% between 2021 and 2026 compared to the global industry average of around 36%.

The difficulties are not due to a lack of electric vehicle know-how, production capability, or demand. Instead, the problems are raw material scarcity and financing. Management is attempting to deal with that.

More layoffs ahead?

Ford has announced that it has acquired the contracts for 100% battery capacity required to produce 600,000 units next year. They have also garnered 70% of future battery needs‑2 million EVs in 2026 from third parties. However, with the recent Inflation Reduction Act signed into law by President Joe Biden offering tax credits to buyers of EVs with locally sourced components, Ford now has an incentive to set up its battery plants domestically.

To finance its electric vehicle plans, Ford is restructuring its original business model to generate more cash. This might result in negative headlines regarding Ford’s latest layoffs in the short term. However, it’s ultimately necessary for the company’s long-term success.

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