Chart Of The Day: Imagine The U.S. Auto Industry Without Pickup Trucks

Ford Motor Company (NYSE:F) Wolfe Research Global Auto Industry Conference January 15, 2019 4:25 PM ET

Company Participants

Hau Thai-Tang – Executive Vice President-Product Development and Purchasing

Conference Call Participants

Rod Lache – Wolfe Research, LLC

Dave Tamberrino – Goldman Sachs

Dan Levy – Credit Suisse

Adam Jonas – Morgan Stanley

Rod Lache

All right, our last presentation of the day, I'm very excited to be welcoming Ford Motor Company. Ford is all of you know is now 1.5 years into what's been described as a redesign of the Company's business model and that involves a major reassessment of what regions the company is going to be pursuing. It involves a rethinking of the Company's cost structure. They've suggested that there could be as much as $25 billion of cumulative cost savings by 2022, about half of which is expected to come from purchasing. As head of both Product Development and Purchasing, Hau Thai-Tang, is at the center of many of the changes that are taking place at this company. So we're thrilled to have him with us here.

And with that very short introduction, it's my pleasure to introduce Hau Thai-Tang, Executive Vice President of Product Development and Purchasing. Hau?

Hau Thai-Tang

Thank you, Rod. Good afternoon, everyone. I really appreciate the opportunity to be here and thanks for your interest in Ford. It's a pretty exciting time for us on the heels of the auto show and we really have a fantastic story that we want to share with you about the product transformation that's happening in the U.S. market, our largest and most profitable market. In fact over the next 24 months, we’ll be changing over 75% of our product showroom here in North America and that that transition is well under way.

So what I really want to do today is focus on products, that's my area of expertise. And you guys are very familiar with our creating value of roadmap, framework, and it talks a little bit about our beliefs, our aspiration, and then some of the strategic choices that we're making. What I want to really draw your attention to is the winning portfolio. And what I'd like to do is talk about the products that we've just launched over the past 12 months and share with you some proof points on how well they're doing in the marketplace, specifically in contrast to the products they've replaced.

I think this is the best indicator that I can give you to gain – help you gain confidence in our winning portfolio and some of the strategic choices that we're making. As I go through this, I also want to provide you with a little bit more of the rationale around some of the decisions we're making around where to play and then more importantly, talk to you about how we plan the win. And again, we believe that giving you tangible proof points is the best proxy to help illustrate this, okay.

So, why don't we go ahead and we'll get started. Everything we do at Ford starts by looking outwards. We're focused on the customers trying to really understand consumer sentiments, their unmet needs, how does that translate into purchase decisions and then obviously what does that mean for demand pools on segmentation shift. So if you look at the chart on the left hand side, you could see what's happened over the last decade between cars, utilities and trucks. You can see the crossover between cars and utilities have – has already occurred couple of years ago. And then if you look outwards, you can see the convergence between trucks and cars.

Now on the left hand side, this is purely looking at demand and sales volume. On the right hand side, what's even more interesting is looking at the average transaction price. You can see the uplift between going from utilities – from cars to utilities that's an increase from $26,000 to $33,000 and then it's another $15,000 to go up to the truck. So this is why even though some people could look at this chart and say, well, cars and trucks looks like they're about the same volume, why are you guys focusing on trucks. It's really because of this.

If you go out in the auto show and you take a look at Cobo, you start to see that the cars have really become commoditized. It's very difficult for OEMs to differentiate their products. And the next thing we focus on beyond looking at where the volume and demand pools are is really looking inward at Ford. Where is it that we're strong, where do we have a really strong brand presence and then where do we think we can leverage those trends to win? And for us, it's around these four dimensions: work, adventure, performance and human connections.

Work, clearly it's all about commercial vehicles and trucks; adventure, it's about our utility products and some of the more aspirational pick-up trucks like the Raptor that you see there; performance, we're leveraging halo products like the Raptor and the Shelby Mustang that we've just introduced, but we're taking that brand halo and extending it to differentiated series upgrades like the new Edge and Explorer ST series that we're bringing the market; and then human connection for us it's all about understanding the unmet needs of our customers and then coming up with ingenious product solutions, leveraging technologies to make people's lives better.

So you can see that really this slide highlights how different those strategic choices have translated into capital allocations. So if you look at 2015, this was the cycle plan, over the 2016 to 2020 period, the five-year plan, we basically allocated our capital and our resources in terms of engineering resources accordingly, about a third, a third, a third between cars, utilities and trucks. You can see how dramatically different this plan looks in 2018 really at the under Jim Hackett's leadership the shift around these strategic choices. 94% of our capital and our engineering as a follow-on to that will be allocated to utilities and trucks and only 6% to the cars, okay. And this is really, we've recognized that we have a job to do to be good stewards of capital and we want to make sure we allocate that capital and those resources in areas where we know we can win.

All right, so I want to talk a little bit about how to win. I talked to you – I want to focus on these three elements. The first one, we've touched on already: work, adventure, performance, leveraging areas where we're strong. These are areas where we have very strong iconic nameplates with fantastic favorable opinion and very strong pricing power. So if you look at F-Series, if you look at Explorer, if you look at Mustang, not only are they the market share leaders in their competitive set, but they also command a pricing premium against everybody else. This is something that we really want to lean into and embrace.

The second element of our strategy is really to add incremental growth products to expand our product offerings and go into more profitable growing segments like the products you see they are the Aviator and the Ford Ranger. And then the last element of our how to win strategy is, improving the mix, and that’s leveraging products like Raptor, like the ST, Black Label in the case of Lincoln and driving up not only the average transaction price, but the average contribution margin for the products that we’re bringing to market.

So what’s been at the heart of how Ford has been able to do really well in these segments? It gets back to really understanding the customers, having a deep, long-lasting visceral understanding of the customers and because we have that we’re able to innovate and lead. And I want to use this example of we entitled the slide, A Century of Truck Leadership. Basically, this is a segment that we own. We’ve been the market share leader for 42 years with F-Series sales volume and then 37 years as the best-selling vehicle in the U.S. So this isn’t something that’s cyclical, it’s not tied to the introduction of one new product that’s been sustained for a very long period of time. And you can see as a leader, we’re always constantly innovating to try to ensure that we protect that leadership position, maintain the mode.

And I’ll just highlight a couple of examples. In 2010, Ford introduced the Raptor pick-up truck. We basically created a new segment with the performance pick-up truck. The average transaction price is almost double what we have with the base entry vehicle. The margins are really high. And as you can imagine it’s something that our competitors are going after. This isn’t just a niche product. We sold more Raptor last year than Chevrolet sold Corvette. So if you think about the level of engineering, investment, F&T that goes into doing a bespoke product like a Corvette that’s on a standalone platform to facilitates the plant, we can do a Raptor of the F-150 and sell more of them at a very, very high mixed rate.

In terms of another examples the year after, we introduced the Direct Injection Turbocharged downsize EcoBoost engine. Many experts, some of the folks in the room even, maybe challenged the convention of the truck customers would actually give up their V8 and you’ll hear things like, there’s no replacement for displacement. These customers will never give it up. Today, the majority of the trucks we sell are EcoBoost, 60% of our F-150s have EcoBoost engines in them and it’s been a huge enabler for us to meet the regulatory requirements.

And then in 2015, we made a very strategic decision to switch over through a high-strength military grade aluminum alloy body construction over traditional steel. We did this not only for fuel efficiency, but we recognize that for the truck customers, they value improved performance, they value the increase in payload and they value the increase in towing. And that translates into pricing power. And we’ve done that now for the rest of our lineup with Super Duty and then Expedition and Navigator.

Let me share with you the results of that change. So on this slide, what I’m showing you is combined F-Series, F-150 and Super Duty. And you can see in November of 2014, we did this change over to the aluminum body and then we followed on in September of 2016 with Super Duty. And now take a look at the average transaction price between 2015 and 2018; you can see the increase from $42,000 to $46,700. We increased our market share at the same time. So not only did the ATP go up, but we actually gain 2 percentage point of share and we widened the gap from the second place competitor Chevrolet almost double going from 180,000 units to 324,000 units.

F-Series is a fantastic success. We sold 1 million F-Series last year. Our PR team did the math. We sell one every 29 seconds. So by the time we’re done with this session, we will have sold another 120 F-Series. So it’s something that is really a fantastic product for us. So not only has the price gone up, I can tell you with conviction that our profitability on the F-Series after we’ve made this change is better than the outgoing products. So it’s a fantastic product.

We talked a little bit about mix and I just want to share with you an anecdote. 30% of our F-150s are comprised of Lariat up through Raptor. That’s how rich the mixes. And we joke within Ford that this is our luxury products in terms of pricing, okay. So we talked about adding incremental products, this is a great story. You can see on the right hand side, the growth of the Mid-Size Truck segment in the U.S. in terms of hundreds of thousands of units.

You can see the growth that we're projecting all the way through the planned period. We have this great range of products coming off, one of our flexible architectures that we've launched in global markets outside of the U.S., now we're bringing it into the U.S. We're in the midst of the launch so far. The reception has been fantastic by the media as well as by the dealers.

And we're very confident it's going to be successful. And this is not because we're – we have too much hubris, it is because we know from our track record in markets outside the U.S. that this product has been really well received against products like the Colorado and the HiLux.

So, if you look to the right hand side, when we started this program in 2011, we were fourth in global sales. After we launched the product, we're now second in global sales without having a presence in the largest pickup truck market in the world, which we're now – we've now taken care of that with launching it in the U.S. So we're very confident that's this product will do well since the launch we've had 280,000 hand-raisers, which is also growing and there is pretty strong demand based on our experience.

Okay. Let's talk a little bit about utilities and I showed you that chart earlier on why we were making such a big, big commitment to utilities. In 2020, if you look at external forecasts from people like IHS, one out of every two vehicles sold in the U.S. will be a utility vehicle. And we are attacking this space from products as small as an EcoSport all the way up to an Expedition. And we’ve changed over our Expedition last year. It was very well received.

You can see some of the third party accolades and feedback from the media there, in terms of performance in the marketplace. This was a segment that we really under invested in and our competitors took full advantage of it. That product has been around for a very long time, but you can see the impact of the changeover.

Our average transaction price increased by $12,600, we increased our market share, segment share by 50%. We went from 12% to 18%, and then you can see the conquest from GM increase by 3%.

Now we plan to attack our largest and highest volume SUV product, the Explorer. Explorer was launched in 1991 over that period of time we've sold 8 million Explorers. And in our business we know how much the product freshness has an impact on sales performance, Explorer is one product that actually has bucking the trend.

If you can look at the image on the right hand side, the current generation Explorer that's in the marketplace today in the dealerships, we launched that in 2011. It's seven years old. Yet the sales volume continues to grow. We're just starting to see it fall off, but it's had a great, great sustained run. And we're really bullish that when we introduce the all new product that we showed earlier this week, that it's going to do really well.

This is a completely brand new product using our new rear wheel drive, unit size, body architecture, flexible architecture, you can see the very athletic stance, much more sporty, more capability. It's also smarter. It's got a lot of very innovative smart technology including driver assisted technology like lane censoring, lane keep assist, automated parking emergency, automated emergency braking in both drive as well as reverse.

It's a completely connected. You can connect up to a 10 different devices to the modem and we're also broadening the lineup. So you can see, we'll have our traditional line up all the way up through platinum, but we're introducing a full hybrid that has over 500 miles of range, and can tow up to 5,000 pounds and an ST sport version. Again, taking advantage of that halo from our Ford performance team and products like the Shelby Gt500 and the Raptor.

I want to share with you some data. So we launched the ST series on the Edge last year and before that the last generation Edge, we had a sport series. We decided to use the ST series similar to what we've done with a Fiesta and focus and now we're extending to our utilities. The last generation Edge Sport sold at about a 10% mix. The new Edge ST has doubled that we’re selling that at about a 20% mix. And we expect this trend to continue with Explorer at much higher volumes. So another example of how we're using mix to improve our profitability.

I know one of the questions that's been raised in the past is whether or not the utilities segments will become commoditized. And if you go to the auto show, you can see everybody's launching products into the segments. And we really believe that we want to stay ahead of that. One of the ways we want to do that is really do a better job of offering very tailored, differentiated products, that targets people's emotive needs, their emotional needs.

So, the example I want to use with you is the current generation Escape, that's shown on there. We'll be changing this over and launching it over the next 12 months. This is coming off our front wheel drive, all wheel drive, flexible architecture. And it's going to be repositioned as an urban active utility vehicle. So much more expressive and styling, but really targeted towards the urban customers. Then we take the same flexible architecture and introduced an incremental product that's completely differentiated with a new silhouette and top hat that's going to be targeted towards an off road, rugged off road customer.

So the segment that we used to go to market with one product, we’ll now have two, much broader coverage and then more bespoke focus in terms of target customers. This is going to allow us to defend our position and mitigate any risk of being commoditized.

Let's talk a little bit about Lincoln. So, the same change we did with Expedition we did with the Lincoln Navigator. This is an all new product that's really the flagship product for Lincoln, fantastic reception you can see it was named North American truck of the year last year. It was also scored the highest results ever on the J.D. Power APEAL Survey, beating out all of the premium players in Europe as well as in Asia, so a North American product from Ford, one, the overall highest score and J.D. Power APEAL.

Let's take a look at the market performance and the financial results. So same data here. Look at that increase in average transaction price. $55,900 to $83,000, $83,000 from $55, 900. At the same time we increased our market share by 11 percentage point from 13 and the conquests from Cadillac almost tripled from 4% to 11%. In terms of mix, this factoid will – I think surprise you. 80% of Lincoln Navigator sold or Reserve or Black Label. Our high F-series, Reserve or Black Label make up 80% of the volumes we're selling.

So obviously, typically when you launch, you expect the rich mix, but this really surprises in terms of how rich that is. The other thing that's really exciting about this for the Lincoln brand is we're conquesting a lot of new customers, much younger customers to Lincoln. So, 60% of the sales are coming from customers who are new to Lincoln. They've never owned a Lincoln product before, 60% of the Navigator customers.

So we want to build on that success. We know that for some customers in some cities, the Navigator is still maybe a little bit too large. So we want to introduce a product with just below it called the Aviator. This is launching in 2019, it’s a 2020 model year. So, within later on this summer and it's going to be an incremental product that expands the Lincoln portfolio into this very fast growing premium utility segment. So think of this as the Lincoln variants are coming off the same rear wheel drive architecture as the Explorer I shared with you. It’s going to be a fantastic product we have one on our stand, if you get a chance, please take a look at it, if you make it to the show.

And the same results that I shared with you on Navigator we expect to have with this product, I think the team really knocked it out of the ballpark. So I just gave you a very, very quick glimpse of the products that we've recently launched or are about to launch. As I mentioned at the beginning, 75% of our product portfolio will change, including these three incremental products that we don't have today. We talked about the small off road utility vehicle that's going to help us expand our market coverage along with the Escape.

We're also bringing to market a fully a bespoked battery electric vehicle. This is going to be a performance utility vehicle inspired by Mustang. Again, leaning in and leveraging that brand equity that we have with Mustang and then of course bringing back the iconic Bronco as well as an incremental product.

So just a quick recap, we feel really good about the decisions we made around capital allocation in terms of where to play. You can see it's focused in these categories, work, adventure performance and human connections where Ford is really strong with strong brands and favorable opinion. And then our strategy on how to win is to leverage those iconic brands, add in incremental growth products in the fastest growing segments and then at the same time improve our mix.

So with that, I would love to take any of your questions and see if I can shed any more light on our strategy.

Question-and-Answer Session

Q - Rod Lache

Great. I have a few questions maybe to kick this off. Maybe just the first one just looking at Ford’s successes over the past few years and the direction that you guys are going. A lot of it is really enrichening the mix driving average transaction prices higher. Product development is obviously a very long lead time sort of endeavor and you have to take a view on where is mix going to be in the next couple of years. So when you go through that process and you're clearly adding content for things like Aviator and Explorer. How do you think about what the consumer is going to be willing to pay and where the rate environment is? How does that factor into your product planning?

Hau Thai-Tang

Yes, Rod, I think that's a great question. You may have heard last year we made as part of our org redesigned, smart redesign. One of the changes we made was we created this enterprise product line management organization. And this was really trying to get at the question you're asking is, how do we have a team that has P&L ownership for the vehicle lines rather than looking at it as a business unit and then looking at it end-to-end so in the now, near and far. Historically, with Ford we would staff up a team to work on the next-generation product. So the next Explorer, the next F-Series, the next Mustang and as soon as we’re done launching it we disband the team and then we ramp up the team again when we do a fresh thing.

And that ownership end-to-end of the total life cycle of products didn’t really exist. So we want to do that. And by doing that we’ll have not only a much deeper visceral understanding of the customer, but we’ll be able to make much faster adjustments around mix. The other thing we’re doing is we’ve invested really heavily in our data analytics capability and we’re going to be able to enhance that now that 100% of our products in the U.S. market will be connected. We can tap into those connected vehicles and get a better understanding of what customers are using. So I can tap into that data and tell you, are you using your paddle shifters as an example. Maybe you are if you are driving a Mustang, maybe my wife in our flex doesn’t know what it is, how many times is Sabrina adjusting her pedals in her vehicle. That data we can now mine and then use that to make decisions.

And then the other thing we’re doing is we’re calling it yield management, but looking at within markets that historically we’ve treated as homogeneous, like the U.S. market, we can look at the average term rate between Louisville, versus Miami, versus LA and adjust our product’s mix accordingly to have more dynamic pricing and then adjust the contents and inventory accordingly. So that was a really key driver behind the creation of this Enterprise Product Line Management organization.

Rod Lache

So there will be some flexibility in terms of content based on how the market evolves.

Hau Thai-Tang


Rod Lache

Can you talk about another observation that’s pretty clear going to this auto show or any auto show recently is every automaker out there now is pursuing a strategy of aggressively growing their truck portfolio? Maybe that’s not as much of a threat to Ford in some key areas, body-on-frame trucks and things like that. But in crossovers we’re seeing proliferation. What’s your view on, will that segment be as profitable as we think three, four years from now as it is today?

Hau Thai-Tang

Yes, there is certainly a lot more competition, and anytime you have more competition there’s going to be pricing pressure. And that’s why we are very cognizant of that risk and we are trying to ensure that we continue to innovate, have a very differentiated go-to-market strategy, tap into customers’ emotions because that’s where you get the pricing power. Anytime you become – you’re selling just based on cost of ownership, durability, reliability, quality, those are all very important things, but they are basic expectations. It’s very hard to differentiate based on those things.

So that’s clearly our strategy what we’re trying to do. And then we’re also looking to innovate. What’s going to be next after utility vehicles? What’s going to be the next silhouette innovation? And that’s been a big focus for between Jim Farley’s team and myself in terms of identifying that next trend and in some cases creating that next trend.

Rod Lache

And then lastly and I’ll open it up to two additional questions. The burdens on the industry are increasing broadly and I think Hackett talked a little bit about the bill that the industry is going to be facing. And maybe some of these things that are in that bill are not the kinds of things that you would do ordinarily if it was just purely – the plan was purely to maximize returns on invested capital. I’m thinking about electrification as an example and you talked about ramping up to over $2 billion a year in spending there. So how should – how are you guys thinking about that? And do you think that that’s something that actually could be supportive of returns in margins based on some of the actions you’re taking with Volkswagen and others?

Hau Thai-Tang

Yes, absolutely. So we recognize that the three key trends that are going to shape our industry over the next decade, electrification, increase in levels of connectivity and then more autonomous driving technologies, very asset intensive. We’re trying to obviously improve our fitness to help fund some of that spending. So you referenced the work that we’re doing as part of our redesign and help free up the spending to do that. We’re looking at things that we can do in conjunction with other people, so alliances. As an example, you heard the news today that we’ve announced on VW as a way to defer that. Certainly the work that we’re doing with Argo and looking at other potential investors is something we’ll pursue.

And then with respect to whether or not we think it’s going to bear fruit, absolutely. There’s no doubt connectivity is here to stay, it’s going to be persistent. We view it as a wonderful opportunity. Historically the business model in our business is we sell you a car, you drive it off the lot and we hope to see you in six years to buy another one. The only time we deal with you in between is when something bad happens, like we have a recall. Now that the vehicles are connected, we have the opportunity to own that relationship throughout the life of the product and for us it’s a profound shift. It’s no longer thinking about a transaction model. It’s now a use model.

And the ability now to provide services through that pipe and then also provide over-the-air updates is game changing for us. So we’re very excited about that. Electrification, it’s not a question of when, it’s just how fast. And certainly we have to do our work to help build the demand and educate the consumers and then drive the cost down. NAV is a tremendous opportunity in terms of the profit pools. We just have to solve the little technical challenge.

Rod Lache

At this point though, when we’re talking about things like EV, the efforts that you’re making is more cost mitigation as opposed to something that’s promising in terms of…

Hau Thai-Tang

No, I wouldn’t characterize it as that Rod. We are certainly working very hard on cost because that’s a huge lever there, but our product that we’re launching will be contribution margin positive. We’re not – this is not a strategic action to make people feel good. It’s going to have to deliver its demand on capital, yes, interesting.

Dave Tamberrino

Hi, Dave Tamberrino of Goldman Sachs. Appreciate you outlining the percentage luxury and high trim series that you have, particularly on the pickup trucks. I’m curious how defensible do you think that market share is with some compelling products coming from both of your major competitors on the lot right now? And it’s my first, I have a second.

Hau Thai-Tang

Yes, we feel really good about our products. Obviously we are working to stay one step ahead. So our teams are working on the next-generation F-150 as an example. The folks are introducing their products, so we’re never standing still. We do market research, so we actually researched our next-generation truck against the competition and it actually did really well. We won the research. And then we even did an adjunct against their newest truck. And the gap increased, which is very rarely. The last time I remember seeing that happen was when we tested Mustang against Camaro. So, we feel very good about the strength of our truck products. We never underestimate our competitors, but if you look the sales results, it’s a battle for second place.

Dave Tamberrino

Anything specific to call out with why the gap widened?

Hau Thai-Tang

We have a really good understanding of our customers. We offer them solutions that they’re willing to pay for. And the example I gave with the lightweighting, it’s about payload, it’s about towing, it’s more than just fuel efficiency. And connectivity is going to be a big part of that. We’re building on our leadership we’ve already announced we’re going to introduce a hybrid F-150. We’re launching a diesel as well. So we’re just trying to always stay one step ahead of the competition.

Dave Tamberrino

Got it. And second question, what’s the percentage of parts commonality between your North America F-Series lineup and your global Ranger platform?

Hau Thai-Tang

Right. So we’ve mentioned that we’re trying to get from the nine platforms down to five flexible architectures. So right now, we have a – within four, we call it T3 and T6 the plan is to converge them onto one common flexible architecture. So going forward the commonality will be very high. Right now they’re off two different platforms.

Unidentified Analyst

Hi. I’m going to ask a more strategic organizational question. How have you evolved your approach to product development kind of incorporating, if any lessons learned from agile development and the whole kind of Silicon Valley approach to minimum viable product in the iterative development?

Hau Thai-Tang

Yes, did Jim Hackett put you up to that question?

Unidentified Analyst

No. I asked the same question one of your competitors? So I welcome down the answer.

Hau Thai-Tang

No, this has been one of Jim’s biggest, biggest areas of focus is really challenging the way we work. And we talk about the smart redesign, it’s not just about headcount reduction that, we know how to do that. You just give everybody a budget task and they cut heads. What Jim’s – really the reason why he’s calling at smart redesign is rethinking the way we work. And one of his big fundamental beliefs is he refers to it as design thinking, but it’s all about understanding consumers, recognize their unmet needs, ideating different ideas, and then doing very rapid prototypes, testing it with customers using minimal viable prototype so that you’re not bought into – you don’t have too much equity in the answer and then using that to speed up the process.

So let me give you some examples. Our battery electric vehicle, we created a team within Ford called Team Edison. We basically try to disrupt ourselves. We took engineers, designers, scientists, marketing people outside of the mainstream organization. We put them down in a unique building in Corktown and we basically said, your job is to disrupt Ford, challenge all the rules and the conventions.

And I'm so excited to, when you see the products, you will see the difference in terms of not only the product execution but the way we've done everything like the technology, the human machine interface, its game changing. It's something you never would have expected from a company like Ford. Then as part of the smart redesigns, we're taking the learnings from Team Edison and then trying to bring that back to our mainstream organization. But that's very much fundamental to the smart redesign we're doing right now.

Rod Lache

So you also are in charge of purchasing. So I was just curious as we think about sort of the relationship with suppliers and you lean on them from two aspects. I mean, is there any opportunity in the near-term to maybe lean on them for a little bit more cost savings in a more traditional sense?

And then over sort of the long-term is the opportunity to lean on a little bit more for technology and in cost sharing in the future, particularly as we get into EVs and AVs and as you think about sort of that future technology, how much can they bring to the table and how much you need to control? I mean, it’s power train, as all the OEM, but with new power trains and new autonomy, I mean, where do you kind of draw the line of what you're willing to buy the full system from them?

Hau Thai-Tang

Yes. So it's very hard to generalize, but the key to how we think through that as we do a very thorough commodity segmentation of all the things we buy. So our annual turnover is an excess of $100 billion every year. But we have – I'll give you maybe two bookends. You have something that's truly a commodity, maybe an A pillar trim part, plastic injection molded, not a high-pressure mold. Everybody's got that equipment. That's a product where we would design it and we would market tested, we would introduce low cost suppliers from places like Mexico, India, China, and drive the price down. And just leverage the market competition to drive the pricing down. That would be appropriate for a commodity like that.

On the other bookend, if you're working with a partner around, let's say Level 3 autonomy. You're not going to take that approach. There's only a handful of suppliers that have the capability to do that for you. And in those cases, we want to find the right partner. We want to engage them very early. We're giving them the design requirements. So what the performance requirements but we’re letting them dictate how they want to design it, the recipe that they want to use and then whether or not they can meet our targets per function as well as costs.

And then there's everything in between. So it really varies in terms of how we think about working with them. In terms of the opportunity to get more cost up, absolutely, I mean, you guys know covering the industry, the margins of our most suppliers are twice that of the OEMs, that's not sustainable over the long run, right. So there's got to be some parity and equity and we're working with our supplier partners to deliver the best value for everyone, because it's not healthy for them to see the OEMs underperforming in the long run either.

Rod Lache

And I just asked this question of Jim this morning on the call, but I'll ask it for you again. I mean, when you look at the global range or you said it was number two and it doesn't even participate in the North American market or the U.S. market specifically. In sharing that with VW, is there any risks that you're slightly opening the door, the competition on what is Ford's core strength on trucks? And it just seems like a slightly dangerous for a – to sort of embark on with an event?

Hau Thai-Tang

Yes. That's a great question. So I want to use the opportunity just to clarify the scope of the alliance. In terms of pickup trucks, the sharing is only in three markets: Europe, Africa, and South America. It does not extend into markets like Asia-Pacific. So as you know, we build the Ranger in ASEAN for the Asia-Pacific region. It does not extend into North America, where we've just launched the Ranger. So it's in markets where we already compete with them. And the products will be differentiated and we have different brand positioning. So we think it'll be a win-win for both teams.

Dan Levy

Dan Levy, Credit Suisse. Before I ask any question on Lincoln. We've now seen one of your cross-town rivals go through another call it reinvigoration of their luxury brand, something that's maybe, they've lost some of their brand heritage. They're trying to find it, but it's been a struggle. I think that, one could make a similar case that Lincoln is still trying to, I guess, find its way in the industry. I see, obviously, there's good product out there with Navigator and Aviator. But how much more do we have to go on Lincoln? How long is the path to really finding that right niche for it in the market?

Hau Thai-Tang

Yes. So I think we feel really good that we have a differentiated positioning for Lincoln in terms of within Ford, we don't use this as an external advertising mantra. But within Ford, we've referred to it as quiet flight. We're not trying to be a European driver’s car. We're not trying to outdo somebody else. We want to be differentiated and be Lincoln. It's really focused around delivering American luxury in a way that's maybe not over the top.

And so that positioning we feel really good about. It's differentiated. Nobody is really trying to do the same thing. We know from our analysis of the industry and we've looked at proxies with, if you look at Audi. If you look at some of the premium players and the near premium players, it's a difficult journey. It takes at least two product cycles, if not three to reinvent the brand. So there's a lagging effect.

The product could be there and if you look at the third-party accolades that I've shared with you, we feel like the product is there. But the customers, it will take time for the customers to appreciate that, recognize that, and then reward you for that in terms of pricing and sales volume. The good news is we're making headway. So the fact that our mix is so strong, the fact that our ATP went up to $83,000 from $56,000, the fact that 60% of those customers are new to Lincoln, those are green shoots for us of the progress we're making.

The great news is the company is committed to it. We're not going to be impatient with it. We're not going to pull the rip cord on it or switch directions because we know it's going to take two or three product cycles and we're in the middle of maybe 1.5 product cycles. You have to be patient.

Dan Levy

Okay. Just a follow-up, in terms of adding technology, connectivity and ADAS Level 2, Level 2 plus content vehicle. I want to understand to what extent is the technology that you're adding something that customers are willing to pay for versus technology that you're adding, where you're really able to get a price premium from your customers. And obviously, as you know, regulatory mandates make this a little more commoditized. How do you stay ahead of the curve? So that you're continuing to add technology that customers are willing to pay for as opposed to something that's just commoditized and there’s no value to you?

Hau Thai-Tang

Yes. It's a very fine balance and its part of our jobs and the work that I do in terms of partnering with Jim Farley and the global markets team. The way I think about it, it's sort of like, if you were a surfer, I grew up in New York City. So I can only imagine what it would be like to be a surfer. But if you paddle too slow, you missed the wave and if you're too far ahead of it, the whitewash will eat you up. So for us, if we're too slow and it become a regulatory mandate, like pick something, seat belts or ABS brakes, you have no pricing power, very limited pricing power. If you're too early and the technology is still not mature enough and the cost is too high, no one's going to buy it.

So for us it's all about finding that sweet spot of being ahead of the regulatory mandate, but at the scale and price point, where customers will find value in it. And the autonomous technology is a fantastic test case of this. So there are systems out there that are really good in terms of function. Some of our competitors across the street have fun, but if you look at the price point and the package, it's like $5,000. There are very few Ford customers that would pay $5,000 for a feature.

So for us, what Jim Hackett has been challenging us on is, you have to start with the market demand and use that to drive the technological solution. You can't engineer a Rolex watch and then try to figure out how to price it in the marketplace. And that's been our approach. We think right now in the near-term over our business plan period, the sweet spot is going to be in that Level 2 plus range in terms of affordability and attractiveness in terms of volume – sales volume. So we can do – we can certainly, we have the technology to go beyond that, but not at a price point that's going to be sustainable.

Unidentified Analyst

And I had just one or two follow-up questions if I may. The North American business has been a success story. There's no question about it, what you've achieved so far, the truck franchise, where you're going looks very compelling with a new Ranger, Navigator and Aviator and Bronco. Where things kind of went off the rails a little bit for Ford obviously is markets like China and Europe and in South America is a different story, but China and Europe are markets where there is a commitment clearly from the company to address this organically. And I was hoping you can just talk about that from a product development perspective maybe each market separately. Europe, it seems like you're just in the wrong markets, markets that are most competitive, Brexit obviously heard too. In China you didn't have enough new product maybe and something happened with the brand. So, what's your perspective on those?

Hau Thai-Tang

Yes. I think the markets are different as you’ve stated. We have different causal factors. So maybe we can start with China. So beyond just the kind of the macro market forces, we clearly had a product line up that was aging and we didn't have the right products in the right segments. The good news is we're in the midst of fixing all of that. We're going to be launching 12 new products this year in China many of them are in the right segments, utility products that are coming online. We're also leveraging our joint venture partners to help us fill gaps in our product portfolio in terms of price bands, especially in where the growth is happening in those tiers four, five and six cities of territory would be a fantastic example of that.

So we're pretty confident in that. I think the long-term plan for China is we have to really be more autonomous in China. That market is changing at such a fast rate, and in many cases that's leading the rest of the world in the areas like connectivity and electrification as an example. So you'll see us really empower the team there more in terms of capital allocation decisions around where they want to play and how they want to win, around design decisions and around sourcing decisions, and really lean into our joint venture partners and tap into their knowledge of the local market.

Anning Chen, our new leader, even though he's a former Ford employee, he spent quite a bit of time outside of Ford at Chery. He brings in really very fresh China centric perspective and we just have to give him time to have an impact. So, we're pretty excited about that.

Europe, you know, the heart of the market is still in the B and C cars. There are segments that are very, very competitive. We – Bob Shanks, which shared with you in the past, the kind of the bubble charts of where we have products that are returning the cost of capital that are meeting our long-term EBIT margin targets and the ones that are not and the decisions we've announced recently have been a good first step to really streamline that. So you're going to see us essentially focus our product portfolio around three key areas, commercial vehicles. So that's not only the commercial van, but also the Ranger pickup, we categorize that as commercial vehicle in Europe.

Passenger vehicles’ been a much more reduced presence in segments where we know we can win. And then imported products, products like the Edge and the Mustang that we can bring in with very little spending and we're going to leverage our alliances to help us restructure. And then certainly there's going to be a bit of restructuring that has to happen in terms of taking out capacity and headcount in Europe.

Rod Lache

From a product perspective, is this something that we should be thinking is a couple of years? Because you just recently started to reconfigure and change strategy in these markets. Or will we see some – sounds like China has some products in the pipeline?

Hau Thai-Tang

Yes. So, we just launched the Focus in Europe. So that product has been really well received. We have an incremental, very emotive product coming online that will be launching over the next year. And then we're working right now on our commercial product lineup and changing that over. So, I think it's a similar story. There's products in the way. So it's not like you have to wait three or four years to see new products, but we're thinking beyond. The next three years is really the cycle plan that we're deciding on now, it's maybe five years out in terms of where to play.

Rod Lache

Okay. And can you just talk a little bit about, a little bit more detail on how this Volkswagen arrangement works that you announced this morning?

Hau Thai-Tang


Rod Lache

So product – it sounds like there's product that's coming out in 2023, product in 2024. So there's – this is – again, it’s a long lead time kind of thing and maybe it’s product cycle limited, right, because you have certain plans. Things can't happen that quickly there, but in the near-term there presumably is some kind of financial relationship with them and there's some product development.

Hau Thai-Tang

Yes. So it's basically centered on three products. We have a commercial van product in Europe, it's our Transit Custom truck, and they have a facing product that we will be engineering – designing, engineering for them and sourcing it. So that's really important. We didn't call that out. So the Ford Mighty will be leading the sourcing awards to all of our suppliers for the combined volume and we will be building this for both companies. The same is true with a pickup truck. Again, the focus on the commercial vehicle is in Europe, the pickup truck is in Europe, Africa and South America.

Ford will be designing the truck. We're going to engineer it, we're going to source it and we're going to build it for the two partners, and then VW will have the same role on the smaller commercial van. So for us it's our Transit Connect, for them it's the Caddy, but that's again for the European market. So for us, we're already, as part of my engagement today with our supply base is dimensioning for them, the scale opportunities as you can imagine our combined volumes, we will be the market share leader. So it's a tremendous windfall for our suppliers in terms of scale efficiencies and revenue opportunity, and it's a way for us to really mitigate some of the potential risk in terms of dealing with the suppliers as we shrink in some of the other areas around the world. Yes, so, we're very excited about it.

Rod Lache

In the interim, does Volkswagen reimburse you for developing these products for them and vice versa?

Hau Thai-Tang

So Ford encouraged the engineering, we would get it back through the transfer price.

Rod Lache

When the vehicles produce?

Hau Thai-Tang

Yes. And that's why you're seeing us give you the guidance that it's going to be in the 2023, in fact, 2024 timeframe. But we would have been incurring to spending anyways, right? So it's not like it's incremental, it was in our plan. We're just now able to recoup more of it when we go to market.

Rod Lache

With all the new product you’re launching, I wondered if you've done and if you're willing to share, if you have done any cannibalization research, because presumably someone who was in a focus is not going to go buy Bronco. Now maybe some of those – some of that comes from a competitor, but some of it also comes from the explorer. And I guess specifically as you launched the Ranger, how does that interact with the low-end work truck F-150?

Hau Thai-Tang

Yes. We actually view this as an opportunity. We talked a lot about the mix and how much the average transaction price has increased when we changed over to the new architecture. The downside risk of that is you run the risk of not being affordable. And in some cases, we were compressing our margins to keep that customer, that work customer. We now have the ability to target that customer with another product in a much lower cost base.

So, we feel like there's very little cannibalization. Certainly, we've looked at industry proxies in terms of what our competitors have done. We know, for example, you know the cross shopping and the cannibalization between Colorado and Silverado in use. We can use that as a proxy to understand what would happen to us, but we feel like it's not going to be a huge risk of anything that's going to be an opportunity for us to have more coverage and maintain the pricing premium on the F-150.

Adam Jonas

Hey, it's Adam Jonas from Morgan Stanley. So, I think it's been probably four years ago when GM decided to exit Europe and I can tell you that they're loving it. They love not having any employees there. You have 54,000 employees in Europe right now. Could you do a agenda?

Hau Thai-Tang

Could we do it? I think it's technically possible. I don't want to speculate. I think we have to be careful, Adam, because we are in a period of sustained economic growth. And you guys who covered this industry, you know how the cyclical nature of it. That cyclicality happens across markets and regions as well. And if you have all of your eggs in one basket, you lose the ability to have that hedge. And so for us, leaving Europe is not something that we feel like is the right thing for Ford. It's still a very attractive market in terms of volume and profits, but it's also strategic for us in terms of technology and innovation and it gives us a hedge if there is a macro economic issues. So technically I'm sure, we can do it, there'll be some considerations, but it's not in our plans.

Rod Lache

Just a follow-up. By the way, I think you've sold about 112 F-150s so far, so good job. China, how long do you – do you see any risk that as the cars become connected, taking photographs, collecting data, becoming part of a utility, a transport utility that foreign firms, particularly U.S. firms might be limited in their ability to participate in the best parts of those ecosystems?

Hau Thai-Tang

I think we recognize that the China market is different. The entire digital ecosystem is different and there are different partners. So our solution in China has to be unique to China. We're trying to be intelligent about that in terms of how we design the hardware and the software architecture so that we don't incur a lot of unique engineering. But what we want to do is design the upper layer and partner with local players because it's not going to be Android and Apple CarPlay and Google, it's going to be VAT, and so that's been our approach.

What we're really bullish about is we feel like China has the rate of development in that space in China. China is now leading and the opportunity for us is to take those learnings and actually apply it to other markets. And you guys have spent a lot of time there. You're seeing that first hand. And so we think it’s another reason why we want to be in markets outside the U.S.

Rod Lache

Well, I think, we’re out of time anyway. Thank you.

Hau Thai-Tang

Thank you, Rod.

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