Ford's $1.9 billion shift in EV strategy is the best decision for the company and investors, according to Ford.

• Prioritizing smaller vehicles is crucial for Ford Motor to achieve profitability in the EV market.
• The automaker plans to increase its offerings of hybrid vehicles and develop more affordable electric models to improve its competitive edge against Chinese manufacturers.
• The cancellation of a large, three-row electric SUV and other changes will cost General Motors up to $1.9 billion in expenses and write-downs.

In the U.S., Detroit's profit engine has long been large trucks and SUVs. Thus, it may come as a surprise to investors that the automaker believes its new path to profitability will be through electric vehicles, starting with smaller and more affordable models.

Ford's plan to expand its hybrid models and create more affordable EVs is an "insurance policy" that will make its electric vehicle business more profitable and capital-efficient, according to Marin Gjaja, Ford's chief operating officer for its Model e EV unit.

"The expert stated that the highest adoption rates for electric vehicles will be in the affordable segment of the lower size-end of the range, and that it is necessary to compete with the entrants by playing in this segment."

Rapidly expanding Chinese automakers, including BYD, backed by Warren Buffett, are entering Europe and other markets.

Gjaja commented on the automaker's updated EV strategy, which will cost up to $1.9 billion, including a $400 million write-down of manufacturing assets and additional expenses and cash expenditures of up to $1.5 billion.

Ford has announced new plans for North America that involve canceling a nearly completed electric three-row SUV, delaying the production of its next-generation "T3" electric full-size pickup truck by 18 months until late 2027, and shifting battery production and sourcing to the U.S.

The company's first new electric vehicle (EV) is predicted to be a commercial van in 2026, followed by a midsized pickup in 2027, and finally the T3 full-size pickup.

Ford CEO Jim Farley and other executives had been promoting the upcoming three-row vehicle as a game-changer for several years, but Gjaja stated that the decision to cancel it wasn't taken lightly.

Ford's "Pro" commercial vehicle and fleet business, which includes vans and large Super Duty trucks, has been a standout for the company and offset billions of dollars in EV losses.

The skunkworks team in California is set to produce the first midsize pickup as part of a two-year project to develop a new small EV platform.

"According to Farley, smaller and more affordable electric vehicles are the way to go for EVs in volume because the math is completely different from internal combustion engine (ICE) vehicles. In ICE, larger vehicles result in higher margins, but this is not the case for EVs."

According to Farley, the high cost and weight of battery packs required for large vehicles like a three-row SUV, which are popular among families for road trips, towing, and hauling, are a significant barrier to EV adoption due to current range limitations and charging infrastructure.

Ford's EVs, including the Mustang Mach-E, F-150 Lightning, and a commercial van in the US, are not profitable overall. The Model e operations have lost nearly $2.5 billion during the first half of this year and $4.7 billion in 2023.

Earlier this year, Ford withdrew its 8% profit margin target for its EV unit by 2026 due to losses, changing market conditions, and business plans.

Despite the expected costs, EV changes have garnered support from investors and Wall Street analysts, resulting in a 2.3% increase in share prices since the announcement earlier this week.

"According to John Murphy of BofA, these changes will enable Ford to capitalize on the growing demand for EVs while leveraging its core competitive advantage. Although this decision may be challenging in the short term due to the significant charge, it makes sense in the medium to long term given the likely subpar economics in the three-row CUV/SUV segment."

More hybrids, less EVs

Ford's electrification plans now prioritize hybrid and plug-in hybrid electric vehicles (PHEVs) to meet stricter fuel economy regulations, in addition to all-electric vehicles.

John Lawler, Ford's CFO, announced on Wednesday that the company's future capital expenditure plans will see a shift from spending approximately 40% on all-electric vehicles to spending 30%. No timeline for the change was provided, but this represents a significant shift from Ford's earlier announcement in 2021 to spend more than $30 billion on EVs through 2025.

Ford plans to offer hybrid options across its entire North American lineup by 2030, including three-row SUVs, to meet tightening emissions and fuel economy requirements. To improve profitability, Ford is also speeding up the production of batteries in the U.S. that will qualify for tax incentives and credits.

The change in Ford's plans aligns with the auto industry's trend of slower-than-expected adoption of EVs and automakers' inability to achieve profitability on these vehicles.

"According to Gjaja, in '21 and '22, there was a temporary market spike where the demand for EVs increased significantly. However, the growth rate is not as high as expected."

Fears exist among industry insiders that Chinese automakers could dominate the market with cheaper and more profitable electric vehicles. Companies like BYD, backed by Warren Buffett, are already expanding their exports to Europe and other countries.

On Wednesday, Lawler countered the notion that the Chinese have surpassed American automakers in terms of firepower. He asserted that Ford's "skunkworks" team was established to demonstrate that Ford can still compete with its Chinese counterparts.

"In the past 18 to 24 months, we have witnessed the emergence of remarkable products and formidable competitors in China, which has been the defining story for us, according to Gjaja. As a result, we must now compete against the most competitive companies in China when examining the competitive landscape."

Ford vs. GM

Ford's new plans are polar opposite of its closest rival, .

Despite delaying and cutting back on spending for its EVs, America's largest automaker has a range of all-electric vehicles available for purchase or soon to be released.

GM was one of the first companies to fully commit to electric vehicles (EVs) by developing a vertically integrated platform and supporting technologies such as batteries and motors.

Besides GM, no other automaker was the first to start U.S. battery cell manufacturing through a joint venture at scale, which the company has consistently emphasized as a cost advantage.

The GM lineup currently features three all-electric large pickup trucks, a Hummer SUV, two recently launched Chevrolet crossovers, a luxury Cadillac crossover, and a $300,000 Celestiq car. This year, several more crossover models and an all-electric Escalade SUV are expected to be added to the lineup.

GM recently confirmed that its EVs will be profitable on a production basis once it produces 200,000 units by the fourth quarter.

A GM spokesman stated on Thursday that the company is still striving to achieve positive variable profit in the fourth quarter.

Gjaja refused to discuss GM's objectives or operations but stated that Ford is acting in the best interest of the company.

He stated that our focus is on identifying the most suitable technologies for our customers that are both affordable for them and profitable for us.