Ford takes the hybrid road | Hotter Commodities

As part of the change in strategy, during the week ended Friday August 23, the company said that it intended to drop its plans for a three-row electric SUV (with three rows of seats rather than the usual front and back only) and to delay production of its next-generation electric pickup truck at a new plant in the US state of Tennessee.

The changes mean that Ford’s annual capital expenditures dedicated to pure EVs will decline to 30% from about 40%.

It all comes down to the cost of the battery pack, according to Jim Farley, chief executive officer of the automotive manufacturer, based at Dearborn in the US state of Michigan.

“An affordable electric vehicle starts with an affordable battery,” Farley said on August 21. “If you are not competitive on battery cost, you are not competitive.”

He is not wrong.

The domestic cost in China of manufacturing Chinese carmaker BYD’s lithium-iron-phosphate (LFP) cell – known as the “blade battery” because of its shape – was estimated by Fastmarkets’ battery cost modelling team to be close to $50 per kWh, excluding profit margins. The calculation was based on average material spot prices in July.

According to Muthu Krishna, senior analyst in the Fastmarkets team, making the same cell in a gigafactory of equal maturity in the US would cost as much as 53% more, due to the higher production costs of the cathode active material as well as the cell, along with tariffs on imports such as graphite for the anode active material.

But with tax relief from the US Inflation Reduction Act (IRA), the cost of a US-made cell would fall to $42 per kWh, lower than in China.

So Ford is now positioning itself to qualify for more of the incentives available under the IRA, particularly the Advanced Manufacturing Tax Credit.

In its new strategic plan, LFP battery production is on track to begin in 2026 at the BlueOval Battery Park Michigan, the first automaker-backed LFP battery plant in the US. It will qualify for IRA benefits and give Ford one of the lowest-cost battery cells available in North America.

The company is also planning to relocate production of some of its Mustang Mach-E batteries, which it makes with LG Energy Solutions, from Poland to Michigan in 2025, to qualify for IRA credits.

Ford is also now banking on the emergence of lower-cost battery technology and other cost breakthroughs, while it delays its EV plans.

As for its agreement to license technology from Chinese battery maker CATL for its LFP batteries, that remains unchanged, the company has said.

But the strategic change is not going to be cheap. Ford has revealed that it will take a writedown of roughly $400 million related to manufacturing assets for the now-cancelled three-row EV, and could see additional charges of as much as $1.5 billion.

Hybrids winning

One of the things that automotive original equipment manufacturers (OEMs) have got wrong over the past few years is believing that the bigger the car, the greater the margin. That may be true for vehicles with internal combustion engines (ICEs), but the situation is the opposite for EVs: the larger the car, the bigger the battery – for which customers will not pay a premium.

This is a key reason why the growth of battery EV sales has stalled over the past six to nine months, after the first bout of buying by early adopters and corporate incentives reached a plateau. Cost and range anxiety are often cited as the two main deterrents to buyers of EVs, and batteries – as well as the infrastructure to charge them – lie at the heart of both these issues.

As a result, hybrids have emerged as a growth area, offering a middle ground in which drivers seem to be comfortable that the combination of an electric motor with a liquid-fuel engine provides a longer overall range.

In the US, the best-selling hybrid is made by Japanese carmaker Toyota, which accounted for a 48.4% share of total hybrid EV sales in July, according to data from the US Department of Energy’s Argonne National Laboratory.

Toyota’s hybrid EV sales accounted for about one-third of its total sales in the first half of 2024, the company said recently, with battery EVs just 1.1%. The company made a clever move into hybrids in 1997 and it is paying off.

Ford’s hybrid sales are also making gains, rising by 56% in the second quarter of this year, and marking a new quarterly sales record since Ford first offered hybrid models more than two decades ago.

But this is nowhere near close enough to achieving the US government’s goal that half of all new vehicles sold in 2030 should be zero-emissions vehicles.

Ford backed that target, announced by US President Joe Biden in 2021, along with nearly the entire US automotive industry, as well as the United Auto Workers trade union.

There is still a long way to go. In the first half of 2024, Ford’s EV sales accounted for 4.2% of its total sales for the period, while hybrid sales were around 8.8%, and ICE cars made up the remainder.

Matching the cost of Chinese carmakers, especially on affordable EVs, is going to be a key criterion for Ford’s future success. But, as Ford’s Farley acknowledged during the company’s second-quarter earnings call last month, it will not happen any time soon.

“Overall, the EV journey has been humbling,” he said. “But it has forced us to get even more fit as a company, including applying it to our ICE business, and that will pay off in the long run… in the long run.”

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.