Ford’s CEO Farley Takes a Long Journey to Rebuilding Old Automaker

(Bloomberg) -- Ford Motor Co. Chief Executive Officer Jim Farley faced intense investor pressure to spin off his company's electric-vehicle business to unlock the rich values awarded to pure-play EV outfits like Tesla Inc. Instead, he decided to squeeze more out of Ford's 118-year-old combustion engine business.

The historic reorganization Farley announced Wednesday cleaves his company's carmaking in two, creating a “Model e” unit to scale up EV offerings and “Ford Blue” to focus on traditional internal combustion engine vehicles.

The radical restructuring relies on gas burners to fund Ford's EV ambitions, which are vast. The automaker now says it will build 2 million EVs a year by 2026, a giant leap from the 27,140 battery-powered Mustang Mach-Es it sold last year. And it raised its margin goal for earnings before interest and taxes to 10%, from a previous target of 8%.

To get there, Ford is planning to boost profit from its traditional business -- selling fossil-fuel-powered F-150 pickups and Bronco SUVs -- by slashing costs in its legacy operations, which could include layoffs, Farley said. Rather than seek greater access to capital markets through the clean break a spinoff could bring, Farley said Ford will transform its traditional internal combustion business into “a profit and cash engine for the entire enterprise.”

“The most important thing is our core ICE automotive business,” Farley said in an interview with Bloomberg TV. “It needs to be a lot more profitable. We think we're going to have to take about $3 billion out of our structural cost to make that business fully competitive.”

Farley, 59, has taken a long journey in his short 17 months as Ford's CEO to reach this point. His moves to accelerate Ford's plug-in plans reversed a six-year slump in the stock, which is up more than 170% since he took over -- including an 8.4% gain Wednesday. The performance has given him personal cachet to try new things, such as radically reshaping the company Henry Ford founded in 1903.

Farley's family has been part of that story. He joined Ford in 2007 after a successful career at Toyota, where he rose to run the Lexus luxury division, but going to Ford was in some ways a homecoming. Farley's grandfather, Emmet Tracy, was employee No. 389 when he hired into Ford's Model T factory in 1914.

Pushing EVs

Farley raised the automaker's wager on EVs months after taking over as CEO. Bloomberg News first reported last month that the company was contemplating a further increase in expenditures toward EVs, and that Farley had wanted to wall off electric operations from the internal-combustion engine business.

To push the boundaries of what had been considered possible at the old company, Farley in September poached Doug Field from running Apple Inc.'s secretive car project. Prior to Apple, Field had been Tesla's chief engineer and the man behind its top-selling Model 3 sedan. Farley put him to work reshaping the company.

Together they exhaustively examined ways to spin off either the EV business, the internal combustion business or both to find a way to get Ford -- or some of its separated parts -- to be viewed in the same league as Tesla, the world's most valuable automaker.

“We certainly looked at a spinoff,” Farley said at a news conference. “But No. 1, we have enough capital. We can fund this ourselves.”

Farley said he didn't want to separate his nascent EV business from the industrial expertise of Ford's century-old combustion engine business, which can efficiently spit out millions of models a year.

“The new startups would love to have the industrial knowhow of this company -- why would we spin out Model e and risk that?” Farley said. “We looked at it carefully and this leverage is really the key point.”

Another challenge Farley would have faced in the spinoff scenario would be winning over the founding Ford family, which continues to control the company through a special class of stock. The family, which holds three seats on the board led by Executive Chair Bill Ford, is loath to lose influence of a company they've held sway over for five generations.

Separate P&Ls

Keeping the changes internal assuages those concerns, but it also creates a complex corporate construction where one quasi-independent unit -- Ford Blue -- funds another quasi-independent unit -- Model e. Each operation will have its own profit and loss statement starting next year. Farley contends that each semi-independent unit will flourish with more time to home in on the particular task at hand.

“We can't compete with the very best of the ICE or the BEV world by working on battery-electrics from 9 to 10 in the morning,” Farley said in the interview. “We have to be focused.”

Farley also is boosting Ford's bet again on EVs, adding another $20 billion to take the total tab up to $50 billion by 2026, as Bloomberg previously reported. And that cash will come from the legacy business, where the F-Series pickup alone generates $42 billion a year in revenue, making it larger by that measure than McDonald's Corp., Coca-Cola Co. or Starbucks Corp.

“We just raised our volume essentially by a million units” to 2 million EVs a year, Farley said. “With that comes lots of capital” for battery plants, new vehicles and platforms, tooling, and raw material for batteries, he said. And those demands meant that Ford needed to keep its “profit engine” traditional business yoked to the upstart EV operations.

Market Reaction

And so far investors like what they see, driving shares up Wednesday by the most since Jan. 4.

“We are positive on the change as we do believe it better aligns internal Ford stakeholders to drive towards being more competitive,” Joe Spak, an analyst with RBC Capital Markets. “We wouldn't be surprised to see other OEMs follow a similar template.”

Ford's split represents a “better allocation of dollar and human capital,” BofA Securities analyst John Murphy wrote in a note to clients. The move will also allow Ford to attract more EV talent and gain access to a lower cost of capital including through green bonds, said Murphy, who has a buy rating on the stock.

What Bloomberg Intelligence Says

“We assume that a potential separation wouldn't happen until after 2026, making longer-dated issues at Ford Motor the most exposed. But Ford could consider a variety of mechanisms, including another debt tender or raising debt at the new company, as a tool eliminate longer-term debt.”

-- Joel Levington, BI credit analyst

Under the new structure, Farley will also assume the role of president of Ford Model e, while Field will be the unit's chief EV and digital systems officer. Kumar Galhotra will serve as president of the Ford Blue business and Hau Thai-Tang will lead product development, supply chain and manufacturing engineering as chief industrial platform officer.

“Is this about winning? 100%,” Farley said on a call with journalists Wednesday. “We want to beat the old players. We want to beat the new players.”

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