How Ford's most profitable business is defying the EV slump

General Motors Co. introduced its Envolve commercial service a year ago, which includes electric BrightDrop vans. Rivian Automotive Inc. has a big contract with Amazon.com Inc., its largest investor, to supply it with 100,000 electric delivery vans by 2030.

Stellantis NV recently introduced the Ram Professional division and is aiming to have commercial vehicles account for half of the automaker’s revenue by 2030. The new head of sales for Ram Professional recently told fleet buyers at a work truck trade show in Indianapolis that his “mission” is to “crush Ford,” according to trade publication Fleet Owner.

That may not be so easy, given Ford’s head start, says Olivier Blanchard, an analyst at Futurum Research.

“I don’t think you’re going to see huge market share shifts with other companies entering the arena,” Blanchard said. “What you will see, though, is more adoption of EVs in commercial fleets.”

It will be hard to pry away customers like Ecolab Inc., a water purification company with $15 billion in annual revenue that’s been doing business with Ford since the days of the Model T. In January, the St. Paul, Minnesota, company signed a deal with Ford to purchase 1,000 EVs over the next 18 months. Ecolab expects to see a 50% savings on fuel and a 20% increase in the time the vehicles are on the road in service.

But what really sealed the deal were the deep price cuts that Ford, like other EV makers, have been making to stimulate demand. Ecolab is looking forward to prices dropping even further as it seeks to electrify its entire 11,000-vehicle fleet by 2030.

“We haven’t hit the bottom yet, there’s still pressure on some of the EV pricing,” said Mike Hauge, Ecolab’s fleet electrification manager.

Even for the work truck business, EVs are a loss leader because battery costs remain high and sales volumes are still relatively low. While Ford doesn’t expect to make money on sales of commercial EVs until its second-generation vehicles debut in 2026, the automaker is countering some of those losses by upselling buyers on connected-car logistics and servicing contracts.

Ford already has a half-million commercial customers signed up for business software subscriptions and telematics services to manage and maintain their fleets more efficiently. Farley predicts software and services will make up 20% of Ford Pro’s profits by 2026, bringing to reality a much-deferred vision to make money from smartphones on wheels entertained a decade ago by industry leaders.

Growth in those areas, along with strong sales of traditional internal-combustion engine vehicles, helped boost Ford Pro's earnings before interest and taxes by 80% last year. Ford is projecting its commercial unit will become its most profitable division in 2024, earning between $8 billion and $9 billion on that basis.

Ford doesn’t have that kind of software revenue stream yet to sop up red ink flowing from its retail EV sales, which stand to lose as much as $5.5 billion this year. Investors will get an update when the company reports first quarter earnings on April 24.

B2B wins

The automaker is working to maximize business-to-business division profits to help offset those losses, and to play up its success in the commercial segment. When the carmaker announced in early April the postponement of a pair of mass-market EVs — a three-row SUV and a full-size pickup — it noted a new EV for Ford Pro is still on track to start production mid-decade in Ohio.

EV transition among fleet buyers — which includes government clients, public utilities and small businesses — has been aided by Ford’s efforts to market them to its large commercial customer base. Commercial EV sales are eligible for the full $7,500 federal tax credit to stimulate zero-emission vehicles. Ford is further sweetening the offer with 0% financing on some e-Transit van models. It even created a step-by-step “eGuide.”

For now, the bulk of Ford Pro’s profit comes from selling old school gas- and diesel-fueled pickup trucks and vans. That helped give Ford Pro an earnings before interest and taxes margin of 12.7% last year — the best in the company and higher than Tesla Inc. on that basis.

This year, Ford sees that margin reaching the mid-teens as it realizes the full benefit of a redesigned Super Duty pickup that rolled out slowly last year due to the United Auto Workers’ six-week strike.

Ford Pro’s performance seems to be flying under investors’ radar, as the company’s shares are flat so far this year. But Morgan Stanley analyst Adam Jonas compared the unit to Ferrari, the value of which was largely overlooked until it was spun off from parent Fiat. “Ford has a Ferrari, it’s called Ford Pro,” Jonas said during Ford’s latest earnings call. “People are ignoring the cash cow.”