Ford’s investment is entirely necessary, as auto companies must have an electric vehicle lineup to remain relevant.
The $5 billion investment indicates that the current slowdown in investment in the EV industry is temporary.
Reducing the upfront cost of an EV is highly likely to boost sales volumes, as EVs have much lower running and maintenance costs than internal combustion engine vehicles.
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If Ford‘s (NYSE: F) recently announced $5 billion investment in creating the “Ford Universal EV Platform and Ford Universal EV Production System,” looks like an all-in bet on electric vehicles (EVs) and sounds like one, it’s a pretty safe assumption that it is one. It’s a bold move, and makes perfect sense in light of CEO Jim Farley’s long-term strategic decision-making.
However, the move’s significance extends beyond Ford and speaks directly to investors in EV stocks such as Tesla(NASDAQ: TSLA). Here’s why.
Image source: Getty Images.
It’s no secret that EVs are winning market share in car sales, and that all the major car companies are pursuing the market. It’s the growth area of the auto industry, and Ford’s investment serves to confirm several key factors that investors need to consider when making decisions about the EV sector.
If an automaker isn’t relevant in the EV sector, then it’s not relevant in the auto market.
Despite a slowdown in EV investment in recent times, automakers will need to invest in EVs to produce new models and capture market share in a growing market.
Ford’s emphasis on “affordable, high-quality electric vehicles,” with the first breakthrough product planned to be a “midsize four-door electric pickup with a targeted starting price of about $30,000” and getting to customers in 2027, highlights the importance and opportunity inherent in reducing the upfront cost of an EV.
The claim that Ford will produce vehicles with “lower cost of ownership over five years than a three-year-old used Tesla Model Y” highlights who is actually winning in the EV market right now. It’s Tesla.
Ford’s emphasis on affordability and cost of ownership is an implicit recognition of a critical point in the evolution of the auto industry, namely, the upfront cost of an EV. It’s sometimes mistakenly viewed as a challenge, but the evidence suggests it’s actually much more of an opportunity.
Let’s put it this way. If the cost of fueling and maintaining an EV is markedly less than that of an internal combustion engine (ICE) vehicle, then a reduction in the upfront price of an EV will have a disproportionately positive impact on the total cost of ownership of the vehicle.
Instead of thinking of EVs as suffering a competitive disadvantage to ICE vehicles due to a higher upfront cost, investors should consider the opportunity to reduce production costs (and subsequently the upfront price) and how that could increase sales volumes. However, to enter the virtuous cycle of low prices leading to a significant increase in sales volumes, which can then result in decreased production costs per unit and ultimately more sales or margin expansion, automakers must invest in EV production — exactly what Ford is doing.
Ford’s news confirms a large part of the investment thesis for Tesla. Ford doesn’t have the dominant market position of Tesla; Ford currently sells almost seven times fewer EVs in the U.S. than Tesla. And it’s highly unlikely to close the considerable gap without this sort of investment.
On the other hand, Tesla’s more than 46% share of the U.S. EV market gives it the scale and brand recognition to produce affordable cars and sell in volume. CEO Elon Musk appears to have misstepped in releasing a refreshed Model Y in 2025 rather than a lower-cost Model Y — an argument supported by the strong sales growth of the budget-friendly Chevrolet Equinox this year.
Still, Tesla has a lower-cost Model Y planned for the fourth quarter; this is, at least in part, a reaction to the market trends this year. In addition, Tesla’s robotaxi concept is an integral part of maximizing the lower running and maintenance costs of EVs by operating them more frequently, either via dedicated robotaxi vehicles (Cybercab) or converted Teslas in the future.
Image source: Getty Images.
While Ford’s decision is the right one, there’s no guarantee it will work, and Ford’s track record (Ford’s Model e segment lost $5 billion last year) isn’t great. Still, that doesn’t mean Farley isn’t correct in taking this path — it just means it’s a risky but necessary bet. It would be much riskier not to invest in developing EVs.
That said, I can’t help but think that the same logical process that leads to that conclusion also leads to an awareness that Tesla is much better positioned in the EV market and is several steps ahead of Ford.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
Why I Can’t Stop Thinking About Ford’s Next $5 Billion Investment was originally published by The Motley Fool
