Ford Motor Company (F) Bernstein Annual Strategic Decisions Conference (Transcript)

Ford Motor Company (NYSE:F) Bernstein Annual Strategic Decisions Conference May 30, 2024 8:00 AM ET

Company Participants

James Farley – President & CEO

Conference Call Participants

Toni Sacconaghi – Bernstein
Daniel Roeska – Bernstein

Toni Sacconaghi

Welcome, everyone. We’re super excited to have Jim Farley, President and CEO of Ford, join us again this year at our conference. I’m Tony Sacconaghi, Bernstein’s IT hardware and electric vehicles analyst. And I’m joined by Daniel Roeska, who’s our U.S. autos and auto parts analyst, and we’re going to do this jointly together. So again, thanks very much for having us, Jim.

James Farley

Thanks for being here.

Question-and-Answer Session

Q – Toni Sacconaghi

So Jim, you were here last year and the year before and we’re indebted to you for your participation. Maybe we could just start by you reflecting on what are the two or three things that have happened in the auto industry that you believe are most notable or have changed to your thinking over the last 12 months?

James Farley

Thank you, and hi, everyone. Good morning. It is a milestone to be here. There are a few things that had become extremely clear that we’re not clear a year ago. The commoditization of the affordable EV cost, the supply chain connected with that has become very clear. Batteries are — the chemistry formats are being commoditized, the kind of design requirements for profitable, affordable EV, the customers’ interest in multi-energy solutions that are more complex than just a single hybrid system that includes EREVs and increased diversity of PHEV applications.

The software road map for attached services has become much clearer relative to the commoditization of ADAS and how quickly the operating domains for standard ADAS features, the pricing power of that being commoditized has become much clearer, the talent war has become much more clear. And so, I come here at this moment in time, like, as a CEO, much clearer about our executional priorities and the way we need to make our way through this successfully to be a great company is a lot clearer than it was last year.

Toni Sacconaghi

And Jim, if I could follow-up on that and just — what are the strategic or operational imperatives that result out of that? Because you said a lot of really interesting things there. One, the commoditization of cost; two, kind of, the road map for software and services. So maybe you could talk about what are the either operational or strategic responses or changes given that increased clarity to you?

James Farley

Well, let’s take one at a time. On the — so there’s just natural law is emerging, natural law in attached technology, like, the software and attached services that comes from tech, which was new to us that natural law, the natural law in our business of cost. You’re going to hear every CEO talk about the EV transition and all they’re going to talk to you about is cost or that’s what they should talk about. So strategically, that requires a legacy company like Ford to completely disrupt the engineering, supply chain and manufacturing standards.

And so it turns out we were maybe smarter than we actually intended to be with our skunk works because the way they’re working is completely foreign to the standard operating procedures of Ford and that was actually not something to celebrate, it was actually required for fitness for cost to use a completely different supply chain, to totally change the design standards for our EV components, to go to vertically integrate and make the sourcing decisions to a lower part of the supply chain.

All those things were actually required now to be fit. There’s not — it’s not something that maybe a year ago, we were like, hey, this is going to be really different. Now I know all those things are required for excellence, on that strategically — basically taking our skunk works team and turning them into the standard for industrial fitness. On the software side, it requires a laser focus with the best talent laser focus on leading the latest — the best, most customer-focused software deployment. So I believe that the China consumer experience digitally is far beyond the west.

What Huawei and Xiaomi have done inside the vehicle is far beyond what we can see with CarPlay and Google Automotive Services. That is the natural law now, in terms of great software. So strategically, how do you — you must have the talent in the company to give the customer that functionality on the software side, but do it in a way that’s compliant with the standards in the west. And that strategically, it’s not about updating your electrical architecture or having a great software team that, that’s necessary.

Sufficiency or winning comes from strategically having the talent who can take that new standard, the best global standard, I believe, and execute it with a Western software tech stack. It’s totally different. Strategically, it’s a totally different thing. And of course, this is all caught up in geopolitics, there will be, which makes it all more difficult or interesting depending on your point of view, but — so I think, what I keep coming back to is, the natural law that you have to have great cost fitness and quality fitness to even have the right to compete and that’s being defined not by here in the U.S., it’s defined by China.

Toni Sacconaghi

Right. If we just — clearly, the — I mean, you haven’t directly said it, but you’ve alluded to it in several of your comments, the standards being set by the Chinese, both from a cost perspective and from a technology perspective are really challenging or pushing the industry. And I think even two years ago, you were the first to say, like, the toughest competitors in Chinese before that was well known, I remember you were saying that two years ago. Does that just make it so much tougher for everyone else? And how do we think about the global automotive industry like 10 years from now?

James Farley

Well, first of all, I think everyone said it, you guys have said it, the community that watches the stocks have all said it that it’s natural law, like in the 20s when the Model T came along, it’s a natural law that with price collapsing, you get industrial fitness, that’s what’s happened in China. And I don’t really see it as difficult. I mean, look, you have leap motors with Stellantis, you have BYD (ph) and Toyota working together in China. You have BW working with Xpeng. You have — I mean, Jolion (ph), I’ll just go down the list, right? Whether — the question is, do you want to delegate that capability to someone else or do you want to develop in your company? That’s the strategic choice.

And as far as difficulty is concerned, I think this is just a natural law, like, you don’t have a choice, if you want to be the best in the world, so the way this could probably play out is, it’s starting with exports today into Europe, of course, Mexico in a lot of other markets. You look at the Thai market and ASEAN, you look at Mexico, you look at Europe and already not just in EVs, in ICE as well, those brands are really becoming dominant. 21% of the Mexico market is sourced in China now. We all could drive to Mexico today, it’s not far from here.

And why does that matter? It matters because of supply chain, the supply chain is there. Supply chain will be in ASEAN, supply chain will be in Western Europe, the supply chain — in Eastern Europe, the supply chain will be in Africa, the supply chain will be in Mexico. And that’s natural law, I guess, in a way. And it — and so I think what you’ll see is companies either moving off their internally developed Gen 1 EV platforms because there’s a new standard, and it’s more fit or they will have, like, Ford has done skunkworks team that tries to take advantage of that opportunity and build the fitness in the company. I believe for Ford, after what happened with Mazda, after what happened with Kia and all the lessons we’ve had, we need that transfer function.

Daniel Roeska

How do you, in your mind’s eye see your relationship with the supplier networks? For Ford, you just mentioned, like, going down the tiers a bit, but we’ve heard from other OEMs that in this transition, they find sometimes their suppliers aren’t moving fast enough to that new kind of skunk work standard. So what role do you think or how would you like suppliers to shape up in the next decade?

James Farley

I mean it’s going to take care of itself. It’s a natural law. What I mean by that is, I keep saying that, but it’s like, when we have a CEO of a part for our skunkworks team, and they’re looking at even a non-EV component, let’s say, an inverter, silicon carbide inverter. And we want to make money at $25,000 or $30,000 cost. So we have to like have a completely new cost delivery. And when we quote this supplier, that supplier, we always start with the challenger and that automatically creates a fitness.

And it’s interesting because our current suppliers often own the design are the design of that part. What we’re finding with the challenger’s suppliers is they’re willing to actually give us the IP of the part, the design of the better itself. And then we work with them on the technology roadmap to make it better and then when we go to our traditional supply chain, we have the design fixed, we know it fits a future technology road map for that challenger supplier. We have our own quality standards, which we have to actually study and verify, whether those are really required to be competitive.

And then, we’ll see how good the traditional supply chain is. And we’ve learned a lot. I’m not going to go into the details of who’s going to win and lose out of that, that’s not the purpose of this talk. It’s just very interesting to me that there’s a new global standard of fitness, and that could be for mega castings, unit castings, something new, new technology like that, where our traditional suppliers actually aren’t used to doing that work to very ordinary things like seeds and IPs.

Daniel Roeska

That sounds optimistic that you think the supply chain or parts of the supply chain will be able to kind of deliver the cost they need.

James Farley

I do. Because the fitness is required in China.

Toni Sacconaghi

And so — but is the — I mean you can view that both ominously or excited, right, kind of, only the fit will survive. I know we’ve talked in the past about you’re seeing consolidation going forward. Is that consolidation through people dropping out of the industry or these partnerships that you alluded to becoming stronger and there being consolidation from an investment perspective, perhaps out of necessity or perhaps just to bolster up to be able to be stronger in this more competitive world? If you just think of industry structure, do you see fewer car companies? Do you see car companies — established car companies consolidating or not making it? How significant is this fitness threshold and does everyone pass?

James Farley

No, I don’t think everyone makes it through. And the most interesting case studies there are the ones in the short run are the all EV brands who don’t have a nice profitable business where the capital markets they’re facing a lot more challenging access to capital, whether that’s in China and the U.S., those are kind of the most natural ones to look at. I think they have to get fit because they don’t have Pro. I have this amazing business called Pro. I wish everyone would value it like it deserves to be valued. But they don’t have that opportunity.

I think you’re also going to see the state-owned enterprises in China. They’re all at different points and so that’s going to have to be rationalized. There’s 53 million units of installed capacity in China and the local market is 29 million, and they built that capacity probably partly for export. So I wouldn’t call it overcapacity. But on the same token, it’s like incredible amount. I mean, that gap between the local market and the total capacity is larger than the entire North America market. It’s larger than the entire European market, so it’s not small.

And so that pricing pressure is going to be there for the all EVs. So I think that will happen in a lot of forms. But the most important part of this consolidation is talent walking, walking from one brand to another, that’s the most exciting opportunity we’re seeing in this consolidation. Talent, good talent wants to work for the best companies with the best strategy and the best execution. And so what we’re seeing is talent changing, changing teams, putting from one shirt to another shirt. And that’s happening right now in a large, large way.

There’s another thing that’s happening in China, everywhere really, it’s actually happening everywhere where partial electrification is becoming more a bigger part of the solution. I don’t know if regulators — we’re going to have to talk to all the regulators because they really bet on pure EVs, but EREVs in China are really the growing part of the EV market. And when you see reported new energy vehicles, they including EREVs and EREVs in the U.S. could be 120 miles of all electric and they drive like EVs, they don’t drive like combustion vehicles.

So you get an EV and you have 700 miles a range, you don’t have to — you’d have no range anxiety for a long term, you don’t have to rely on any chargers, and those vehicles have half the batteries. So they’re very profitable. And they’re different than PHEVs, which are traditional combustion vehicles. So I think the other thing the fitness test is how quickly can some of the players adopt these kind of in-between solutions that customers really are excited about.

A year ago, we were covering the cost premium for a hybrid with the price that customers paid us. We are now. So many of our hybrids in the U.S. are now more profitable than their non-hybrid equivalent. That was not the case a year ago. Customers are voting. They like these in-between solutions. We still have a lot of work to do with regulators because they’re not there. And that’s another part of the consolidation.

Can you — do you have the resources to offer customers the choice that Ford does. We’re number three in hybrids in the U.S., we’re number two in EV and we’re the most popularized brand with vehicles like, F-150, depends on the month, of course. So that choice is super important. It turns out, being a company if you’re open, you have the option, but I believe partnerships will be huge. You’re just going to see a ton of partnerships.

Toni Sacconaghi

And just on the hybrid side, do you — I mean, do you view it as a five or seven year interim solution and you mentioned policy regulators, like, do you think California is going to change its view on hybrid into 2035 or do you think Europe is going to change its view or do you feel like this is a five or seven year bridge, seven years, you’ll have lower cost curve some batteries, you’ll have higher range, you’ll potentially have solid-state batteries that the need for hybrids will go away? How do you think about that?

James Farley

That’s a good question. I think we should stop talking about as transitional technology on the powertrain side. I mean the first generation Prius, I was at Toyota, it’s 20 years ago, Ford launched the Hybrid Escape and here we are talking about the exciting hybrid market. It’s 25 years old now. It’s not — it’s — so maybe PHEVs could — traditional PHEVs that go 60 kilometers, 100 kilometers could be a transitional technology, but I don’t see hybrids. Why?

Well, first of all, hybrids aren’t what everyone thought they were going to be. Hybrids used to be super-efficient powertrains. And although, we have done a Maverick and its super popular, 35-mile per gallon small pickup truck, our fastest-turning vehicle and our lowest-cost vehicle, the company in North America. But we also have Pro Power on board for F-150 hybrid, which is now 25% of our F-150 sales. Our competitors don’t — my competitors don’t even have hybrid and I sell 25% of all F-150s, the second largest consumer product in the U.S. behind the iPhone in total revenue is hybrid and why?

It’s not — even though the powertrain is very efficient for towing, it’s Pro Power onboard, exportable power. That’s what those batteries allow you to do, power job site. Look what happened in Texas last week, power your home when there’s a grid outage. People — so hybrid isn’t just what people thought it was, it includes exportable power. So that’s why I don’t think it will be transitional. The regulator question is a bit different because the big decision is going to be EREVs, it’s an electric vehicle, but it has a combustion engine, but it doesn’t power the car. That is really a big decision for us as an industry and for regulators.

Is that an EV or isn’t it? It has a smaller battery, but 95% of the trips are going to be all electric. And then you don’t have range anxiety and the infrastructure is taking time to fill out. So it’s a good solution, that’s why it’s popular in China, that’s why it’s doubled its sales in China and we really like that solution.

Daniel Roeska

Three years ago, you made a big bet on the kind of EV, non-EV drivetrain segregation within Ford and you created a kind of Model E on the go. That was the discussion we just had, is that still as relevant to split it exactly that way?

James Farley

Yeah. It’s a good question. I think, certainly, the way we look at it is EREVs, something with a plug that’s like a Model E product. Yes, it’s actually more important now than we did it, not because we did it, but because of the focus I’m seeing in the team. If you take the powertrain during this transition, and you put it in your businesses, let’s say, Pro and non-Pro, if we split it that way. I don’t think you would have the laser focus in a legacy auto company in getting to this fitness level, because the pain is so high right now, the urgency is so high that — it’s an all hands-on-deck company project now to turn around Model E.

And if you have — if you don’t do that, some car companies will create CO2 benefits for the EV business. Actually, Ford did that to get the original funding for EVs, we actually did that. We said, if you — we created a carbon trading model inside the company to allocate the capital. That’s a dangerous thing when you’re running a business. We don’t believe that EV should be subsidized. We believe that we have to get to that fitness level as soon as possible because it will move our company to a good company to a great company. And so I believe this was one of the most important things we’ve done, but it is one of the most painful things we’ve done.

Daniel Roeska

And if we zoom in on that, you kind of just pushed out, say, the time line on Model E and the progression a little bit. What are the building blocks from where you are today to that future state, like, what is the one, two, three to get to that profitable Model E?

James Farley

Okay. I mean that’s longer than 26 minutes. But the high hard ones on that would be, look, we’ve kind of shrunk the company around where we can make money. But to be a vibrant company, we have to grow. And to grow, you have to have competitive cost. You have no rights to grow unless you’re competitive on growth — on cost. But that’s not the only fitness, but that’s the kind of entry ticket. So the first thing — so inevitably, it’s going to be this cost quality thing to solve for. But we know customers really well in work and in enthusiast iconic products like, Bronco and Mustang and F-150. We now have the Maverick. We have now a new Ranger. We have a new F-150 coming out, and we have a new Super Duty.

We’re globally the number one in pickup trucks. We know pickup truck customers. We know work. We are dominant in Pro, not just competitive, we are dominant. And so the most important thing is to not launch in customer segments that are generic for us. We go to the places where we can use the innovation and the cost leverage to customers we know well. Look at Maverick’s success. It’s — I think, the first down payment on Ford growing again globally. But we can do it globally, so that’s one. Compete where you know the customers really well. Because for software innovation, which we haven’t really talked about and all the digital transformation of our industry, which is most exciting for me, integrated services, that’s where you can win.

Look at Pro. We have three quarters of our software subscriptions are on Pro. And I believe it’s a marker for the future industry. The second thing is, we have to get to a radically different engineered product with a different supply chain and manufactured radically more efficiently and that’s a necessity. And the standard, again, is not global OEM. It’s a different standard, and it’s brutal, and it requires a completely different approach, at least at Ford did. I think the next thing is, you have to have the talent on the digital side to differentiate your product. You can’t just look at the digital transformation is, like, I can make some money, that’s not sufficiency. Sufficiency is you have to win, to have a winning mindset in software and digital. Yes, you have to have an advanced electric architecture, it has to be competitive in cost, you can’t have it too expensive, but you have to have software that really differentiates your car.

When I look at China, was there for the last 10 days, so it’s very fresh in our minds — all of our minds. The competition is so high in China for new energy vehicles that you’re seeing sub, sub, sub-segments that you don’t see anywhere else. And many of those competitors see the digital experience so compelling that you don’t have to drive the car, that the experience inside your car is so compelling that it’s your new third space. That is what you want in your digital experience. You want movies projected for the second row, you are content, you want ADAS to come to life in a way that — you want AI systems in the car. And why do you want that? Because Level 3 is going to give us time back.

And when we get Level 3, the car is effectively stationary, so that’s the next thing. We have to get our digital capability in the company differentiating. And that’s why Pro is so important for the company because we can do it with productivity. Customers will pay for 24/7 uptime and productivity. And that’s what we’re learning as a company that I think a lot of OEMs aren’t because we have Pro. The biggest gift, I believe, for Pro is not just this year’s profitability, it’s that it is showing us what fitness will look like in terms of growth and revenue power and kind of derisking our revenue that’s what it’s learning. But when — to do that in the retail world, look at Microsoft and Apple, like, it’s a different game to win in the retail software business. Those are the key ones.

Toni Sacconaghi

So Jim, if I could just follow up because you talked about sort of playing in segments that you know well and you clearly have very established competencies in certain market segments. But you also talk about doing really well to grow. Are those implicit trade-offs? And if you did have to trade-off profitability versus growth, what is more important to you over the next five years? Is it getting that cost fitness dominating in the niches where you are and being super profitable or even if that means you don’t really grow or is growth more imperative and how do you think about that trade-off?

James Farley

It’s the first. But it’s an interesting predicament because if we compete where we have that advantage, you could argue that our fitness won’t have to be as high.

Toni Sacconaghi

Okay.

James Farley

And I think that’s the dilemma. So the key strategic bet for us is to compete in those places, but at the low end because we can grow. When I joined Toyota a long time ago, four years ago, we sold 400,000 small pickups. The average small pickup in the U.S. — and so why? Well, that’s — there were Civic and Corolla customers then, but there were a lot of customers who said, hey, this pickup truck is cheap enough. It was called the 8100 truck. It was before the chicken tax. And that told me as a future executive that people really like pickups. And if it’s the same cost as a Civic or Corolla, there’s going to be some Americans who switch. So we believe there’s some growth there, actually. But the most important thing to get the fitness is you’ve got to force yourself to compete at the low end, that’s the hard part.

Daniel Roeska

How you see Ford’s involvement…

James Farley

Now I’m giving away a product plan.

Daniel Roeska

How do you see Ford’s involvement in an international markets, like, going beyond the U.S., right? And the fitness…

James Farley

That’s where the games can be played.

Daniel Roeska

The fitness in Europe and China probably looks different. You’re just going back to Europe, so talk us through that a bit.

James Farley

Europe, our strategy — well, first of all, I think we’re really fortunate that we stayed in China, but we had a low cost, low capital strategy. That wand up being actually really smart, but maybe not totally intentional. We just didn’t want to lose a lot of money. We’re making money in China now, a lot of people aren’t. And in Europe, our answer is pretty simple. Like, we believe the Pro business is so strong there and we’re just kind of getting started. We really haven’t gone on the low end. We’re just launching our low-end vans now. And the attach rates for services there are not as high and for parts.

So it’s kind of a harder business for Pro on the attached side. So we think that’s a fitness test for us, too. So we really believe Pro and like, we’ll do kind of niche iconic models there on the retail side. Pro is our future there. And the Pro market is huge there, especially small van market where we’ve never been successful. Stellantis is very successful, and they have a huge industrial scale. So I think Pro — we’re just building VW’s partnership is coming to life. We are now fully building the one-time van with them and the same for Amarok and Ranger, and we’re number one in pickup and one-ton van.

So — and we’re just launching our new products. So we have a really strong future in Europe. I’d say the real interesting question is, in South America, Africa and South Africa specifically for us in ASEAN and Thailand, where we have two plants and growing Ranger business. All those places we’ve restructured dramatically to be profitable, which we are now very profitable. And yet the Chinese competitors are coming in with ICE vehicles too there. And we have a choice between do we grow and how profitable is that growth or do we stay where we are.

We think we have to future-proof that business. We think that just staying where we are with Ranger and Everest could be a risk. We believe that the competitors that we’re seeing there in all those markets now are very fit, and we don’t want to do what happened in many markets for Ford. So we need to compete in the low end, and we need to future-proof the electrification of those products. And we’ll do it smartly where we can make money, and we’ll be thoughtful about partnerships.

Toni Sacconaghi

Jim, you had talked a little bit about having a software stack and a digital experience that’s compelling and what you had observed in China. And Ford Pro is probably the best example in the industry of kind of beyond the box revenue to use kind of the technology example. But how do you think about creating and more importantly, monetizing the beyond the box revenue on the consumer side?

James Farley

Okay.

Toni Sacconaghi

Because the pro side and you’re welcome to share some of the numbers because they are pretty compelling and this contributes to the outsized profitability of Ford. But how do you — are you — how do you think about beyond the box for consumer? How does it manifest itself? And are you more or less excited than you were like two or three years ago.

James Farley

You won’t let me talk about Pro. I really…

Toni Sacconaghi

No, I said you can talk about Pro. Pro is all the numbers. And then, let’s talk about…

James Farley

No, let’s talk about…

Toni Sacconaghi

No. Definitely. Pro is a great story to talk about.

James Farley

Yeah. It turned out, actually, the parts business is exciting as the software business and Pro because it’s a kind of — it’s a system, it’s an ecosystem with prognostics on the vehicle now that we can make the vehicle predict its own failure and a parts business that’s 30%-plus margin. And then a software business that’s 40% to 50% margin, it all kind of works together for productivity and uptime and that’s where of the 770,000 subscriptions, 560 are Pro. And it’s all productivity software from fuel car fraud to now we can control the speed of the vehicle, we can control the access to the vehicle that the Telogis and the third-party telematics can’t compete with us.

They don’t have control over the vehicle. And now about 13% of our EBIT on Pro is attached services. And we think it will be 20% in a couple of years and already Pro is easily the most profitable part, 16% margin in the first quarter and we see a lot of upside. So retail, I think it’s going to be pretty challenging. Maybe I think, more challenging than I thought. But I don’t think it’s so challenging that you can’t build a great business around it. It just — what we’ve seen where ADAS is pervasive in China. The lower operating domains, let’s say, hands free, no turn lane, that’s getting commoditized, maybe faster than I thought.

And so, ADAS is still a huge, I think, the largest profit pool in this first inning of consumer digital revenue for auto companies. ADAS is big. It’s really big because it has a lot of pricing power, but what we need to do is make sure we lead on ODD, the operating domain, like, we need to get to Level 3, not like the Mercedes system at 35 miles an hour with the car in front of you, but like 80 miles now on the highway as most Americans will want it to be, and you give those kind of empty calorie miles back to the customer in terms of time. And you have an experience inside the vehicle with content and productivity and all the other things that you could do at home, you’re like, wow, I got all this time back and its super productive for me as a consumer.

I think that’s very compelling still. But if you are just buying your system from a supplier and there are 12 other car companies that offer the same digital experience, you will not have a lot of pricing power. You have to be at the — you have to be at the leading edge of the ODD and you have to have kind of your stationary product experience, so to speak, so good that people want to be in your car versus other people’s brands. So I think ADAS is good. We’re just starting with safety and security. OnStar has been out there for many years, but it’s a different tech stack. Safety and security as an auto retail, I think, has some pricing power, but I think that will commoditize really quickly.

And beyond that, I think this productivity kind of experience — stationary experience is a big thing. So like all the pieces working together from content, productivity doing, conference calls, all of that is going to be – like, you have to be a leader there. And I don’t think it gets monetized in like a connections prime payment you make to Ford, although, we’ll try, I don’t think it’s going to be like huge. I think you’re going to monetize it on your pricing for ADAS.

Toni Sacconaghi

Is it your pricing for ADAS or is it just people want to buy your car? Because they know your ADAS is good, but they sit in the car and they go, wow, this is fascinating. Cool, like I got to buy this car or you charge a little [Multiple Speakers] for the car?

James Farley

Yeah. And how ironic is that the monetization of that may be really low marketing costs.

Toni Sacconaghi

Right. But the ADAS itself, you talk about Level 3, and I get that, right? We could go on a long-term — it can be a productive [Multiple Speakers] fun and how quick technically and regulatorily do you think we get to Level 3? And we talked about maybe you monetize through better sales of the car, but what do you think the pricing power is on Level 3?

James Farley

We’re having that debate right now in the company. So it’s an active discussion. Technologically, we always saw hands-free as a technology gateway to eyes off. We always thought that being a leader in hands-free with BlueCruise even though technologically, it’s actually quite a different road map that, that would be a really big important winning marker for our ability to win in Level 3 is BlueCruise.

And we have like 26 million hours now on BlueCruise. I mean we know all the disconnects, when do people disconnect? Is it lane change, lane centering, what is kind of natural for humans where the car to do lane centering, especially on tolling roads with trucks and stuff. I’d say technologically, I’d be surprised if the leaders in Level 3 aren’t out in the market in two years in the U.S. So it’s soon. It’s right around the corner.

Toni Sacconaghi

And regulators approving that?

James Farley

Yeah. I think we’re having a discussion in the company about what that means, but Ford has always been — I mean, we’re a 120-year-old company. We know the regulators really well. We want it to be a win for them too. We know this is going to be good for customers. And so we’ll work really closely with the regulators to make sure this is the right — that’s not only safer than a human, but it works.

And it’s important for us because our reputation to be aligned. We see data privacy and the system working safely is like a differentiator for us as a company. So we want that to work well for regulators. And no, I think it’d be pretty hard to say no. I mean, hands-free is pretty close, right? You got lane centering, you have proximity. I mean all the basics are there. The next thing is just doing it at 80 miles an hour. And I think the question is going to be the ODD expansion.

When you snow, hail, heavy rain, when does the operating domain kind of — how do you prove that the operating domain is safe, that part is a little bit less clear to me. But I think on a sunny day in the Tri-State area, I think in two or three years, there are going to be quite a few people pushing that button right here, and it’s going to be a pretty big pretty big opportunity. As far as pricing is concerned, it’s a good question. I really don’t want to get into that.

Honestly, we could spend a lot of time on it. We only have 7 minutes left. I think that for a while, it’s going to be incredible pricing opportunity. I know when I sold my Prius, when I left Toyota, the HOV sticker was worth $5,000. And so I know at least 16 years ago that people are willing to pay $5,000 to driving the HOV lane in California for a couple of minutes a day. How much are people willing to pay to get 45 minutes back in their life? I think for a while, it’s going to be a pretty good run.

Daniel Roeska

Maybe take a step back, you talked about the capabilities and talent needed for that software journey.

James Farley

Yes.

Daniel Roeska

How do you set this up organizationally for Ford to deliver kind of that pathway? What do you need to do to kind of [Multiple Speakers] environment for you to deliver that product?

James Farley

We’re way beyond the A players attract the A players, but that’s a necessity. It’s safety critical. So you can’t just take someone from Apple and Google. You can’t fire an airbag from the cloud, even though it may be more efficient.

Daniel Roeska

You could, but it might be late.

James Farley

Yeah. You don’t want to do that if you’re Ford. So I think the — this is a really important and difficult question to answer in a convincing way. So I’m not going to try to be convincing. It’s — I think the most important thing is to have talent and to have that talent be heavily integrated into the legacy part of the company because we have a safety product. And so we purposely did not do what others did and broke out this organizationally like model or something, no. Because the biggest opportunity for us in this digital transformation in the industry is our ICE business, our Pro business.

See, at Ford, we kind of think of the digital transition first at Pro. And if — so most of the Pro vehicles are still ICE or hybrid or partially electrified, that’s going to work best for a tradesman which are the dominant part of the Pro business. So the most exciting part for us digitally is actually we don’t differentiate between ICE and non-ICE on digital because we have this incredible Pro business that will increase and will continue to be ICE. Why would we want to restrict ourselves for our digital revenue to be just EVs.

Now those customers are very oriented on the retail side for buying software. But for our Pro customers, that would be so bad. So organization, I’d say the big bet we made was to not differentiate it and really tie it to new energy vehicles. And then to make sure that the safety orientation of the company and this new software team work really closely together. But I’d say of all things that keep me up at night in execution, landing and advanced electrical architecture in time is one of the biggest. It’s really hard. It’s really hard.

Daniel Roeska

Now we’ve talked about Pro here and there.

James Farley

Yeah.

Daniel Roeska

So we’ll give you the opportunity to dive in a bit more. But I’m going to ask the question slightly differently, all right. If you were a competitor looking at your profits in this segment right now, what capabilities would that competitor have to build to have — be as successful as you are?

James Farley

I see. First, they should give up. There’s no reason to even try. No, I think, it’s actually the stuff that’s not super sexy. It’s like upfitters and your physical repair network. Like, we — it turned out that it’s pretty hard to recruit technicians and build big buildings to repair Ford commercial Super Duties and Vans 24/7. So we now have 3,500 mobile trucks that do service at our Pro customers. And that was a pretty quick way to expand our service capacity. Like, if I was a competitor, I’d be working with all the upfitters because that’s one of the biggest moats we have. I’d be really working on my fitness of my repair network, which is not [Technical Difficulty] but like if you don’t have that, you cannot fulfill prognostics.

So a specialized field force working with those dealers to make those investments and real expertise on operating — recruiting technicians, getting them loyal, getting complicated problems fixed in the field, very — it’s really nuts and bold stuff like a [indiscernible] or Penske leasing have to go through. That’s the first thing, I would do. Second thing is I would pick my places to compete against Ford really carefully, like, you could invest in pickups. I’m not sure you would want to, but small van, interesting; new formats, interesting. So I pick where to compete with a company like Ford and I would try to just be really good for those particular customers.

On the digital side, I’d probably do a lot of partnerships to get up to speed. I wouldn’t try to build it inside the company. We have a three year head start. It’s pretty hard. We’re now getting into vehicle control. So — but there’s still a lot of customers who just want basic telematics and there are some good companies out there. That’s probably what I would be doing if I was a competitor, giving up.

Daniel Roeska

And you just mentioned kind of the smaller format or different format. Is that something you see for the Pro business as well, right? We’ve got the trends that we’ve got the pickups. How valuable do you think the Pro model lineup will be five or 10 years from now?

James Farley

I think pretty valuable. It’s a growth opportunity for us. And again, as I ask my friends, how’s Ford doing? And they’re like, well, there’s no Fords in New York City, they’re just Audis and taxi cabs. Yeah, we’ll look at all those white vans. We got a really good market share in New York. So it’s all the Pro business is kind of invisible in a way, even my friends don’t even think that — but there’s parts of the business we are not yet really dominant in. And we have all the rights to compete there.

I’m very respectful of what Carlos has done on small van. And you look at the small van in Europe, he’s got Toyota on the platform Citroen, Peugeot, and Vauxhall and Opel. I mean that’s five brands. That’s good industrial scale. So I think there — and also the Chinese are big in pickups. People don’t realize that how quickly the pickup market is evolving for SAIC and great wall outside of China. So we have some opportunity maybe there outside of the U.S. for Pro. So yeah, Pro is great. I wish we had more time to spend on it, but I think people are starting to figure out Pro.

Toni Sacconaghi

I think we’re out of time. So thanks, Jim, for your candor as always and for participating in the conference. Thanks, everyone for joining.

James Farley

Thank you.