Beating China, and the storm nobody sees

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JIM FARLEY: The car business in most industrial countries is the heart and soul of the manufacturing base. It creates a lot of jobs. It has a bigger impact. For every job you create in a factory, there’s tenfold that gets created in the economy. Today, the Chinese car industry, the new vehicles sold there every year total about 29 million, but they have 50 million units of capacity. They’re now the largest exporter in the world. The production capacity in China is so large, it could basically take care of the entire North America market.

BOB SAFIAN: That’s Jim Farley, CEO of the Ford Motor Company. With the Strait of Hormuz in the spotlight and gas prices high, I wanted to talk with Jim about how the auto industry is being impacted. Jim’s answers surprised me, focusing as much on China as on the Middle East. We also talk about the challenge and responsibility of leading an iconic American brand right now. Plus, Ford’s big bet on a new vehicle platform, his dissatisfaction with some of Ford’s own products, and more. So let’s get to it. I’m Bob Safian, and this is Rapid Response.

[THEME MUSIC]

I’m Bob Safian. I’m here with Jim Farley, CEO of Ford. Jim, great to see you again.

FARLEY: Thank you so much for having me on your show. I really have been looking forward to this.

SAFIAN: You were a big supporter of Fast Company when I was the editor there and you were running Lincoln. I still have much gratitude for that. I remember coming to Detroit 12 years ago to interview Bill Ford onstage about the future of mobility. You talked about connected vehicles and autonomous vehicles. All the seeds of today were there.

FARLEY: Yes, you got it right. It’s been a long and winding road, as the Beatles would say, but things happen in fits and starts, not linearly. Automated cars are here. Advanced electric architectures are here. Software-enabled vehicles are here. The public mobility solutions, all the innovation we were thinking about, grid to car and intelligent cities, intelligent parking, a lot of that didn’t happen. But electrification sure has. From my perspective, after 40 years in the industry, we always think about these moments like we’re going to be in the fifth inning as we start the game, and we wind up realizing that there are actually four innings before that. Then there’s a lot of ball to play, so to speak, and it just takes time.

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SAFIAN: The big question mark looming over everything right now is the activity around Iran and the Middle East, what happens with the Strait of Hormuz, and oil prices. You’re on the front lines of all that impact in your business.

FARLEY: Yes.

SAFIAN: What are you seeing? What are you feeling? Are there any strategic adjustments you’re making?

FARLEY: It’s been an interesting couple of weeks. It’s very asymmetric around the world. Ford is still a global company. A lot of our North America competitors have left Europe. We’re the biggest pickup truck maker in the world in Thailand and Australia — these are huge pickup markets—even China now. And we face off with Chinese companies in all these markets. Two things are happening while this war is going on. In the first quarter, the Chinese market, which is a third of all new vehicles sold on the planet, was down almost 30%. And they’re already the largest exporter in the world, far beyond the Japanese and South Koreans. Their exports are up 43% this year, and they are already No. 1. So the war is happening, and the electrification in the first quarter is happening. Of course, fuel price is way up. In places like Australia, where they get a lot of the oil through the straits, they’re out of fuel.

Most companies are asking people to stay at home. Many provinces are giving away free transportation because you just can’t get fuel. In places like the Middle East, the business has completely stopped. And that’s very important for logistics. Commodity costs have gone up—not just oil, but all commodity costs have gone up. So we have to adjust to the higher cost level. But I would say what we’ve really learned is that electric cars are very vibrant. Prices have gone up almost $10,000 in the US for electric cars, and electric cars are now up to 7% of the US industry. That’s not a small amount, with no government support. But what’s selling in EVs is more important, which is that the truly affordable EVs are more popular. Used EVs are super popular right now. So the market has changed. I like to look at the used market even more than the new market to understand what consumers’ mindset is, and they’re more interested in hybrids.

SAFIAN: Is that because of affordability right now, like everyone, people are moving to the used market first? Or do you always look at the used market more?

FARLEY: I always look at it. Why? Because it’s twice as big as the new market. It also is a better predictor of consumer behavior because the prices are all lower for used cars. So you get to see the market play out before it actually does. And it’s super instructional when our capital cycle is four or five years. We have to make these decisions way in advance of where the market goes, or even the certainty of government regulations. In our case, we have to make them against the Chinese players.

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SAFIAN: Late last year, you announced some scaling back on some of your electric vehicle production. Do these changes and the surge in pump prices make you rethink any of that, or is what you’re seeing the same in the marketplace that you were reacting to?

FARLEY: Thank you for asking this question. Everything that we’ve seen with escalating fuel prices in the US is reinforcing our choices. Not because I’m the CEO of Ford and we’re always right. It’s because we moved first among all the competitors—before Toyota, before GM, before all the traditional OEMs. We were No. 2 to Tesla for three or four years in EVs. We moved really fast, but these were designed the wrong way, let’s put it that way. So they lost a lot of money, but we got to see how customers choose. And we also came out with the hybrid F-150, America’s best-selling truck. We hybridized it before Ram, and they still don’t even have a hybrid. So we got to learn, Bob, before any of our competitors, where the EV market was already going. And with the escalated fuel price, it’s only reinforced it.

We got out of our high-end EVs, but what we decided to do is double down on our affordable ones, and that is what’s selling today around the world, not just in the US. You look at Australia, you look at China, you look at Europe. All those markets are moving to a pure EV being more of a commuter-type, low-cost vehicle. That’s really where the market has already gone.

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SAFIAN: You mentioned China a couple of times, and I think for folks in the US, it’s often surprising or confusing because there aren’t as many Chinese vehicles here, and there’s blockage of certain Chinese vehicles coming to the US. But you’ve had some amazing quotes—”the most humbling thing I’ve ever seen,” “an existential threat”—referring to their EV prowess. It sounds like that has not slowed down.

FARLEY: It’s sped up. You’re absolutely right. Look at it this way. I could argue that the car business in most industrial countries is the heart and soul of the manufacturing base. It creates a lot of jobs. It has a bigger impact. For every job you create in a factory, there’s tenfold that gets created in the economy. And it’s very hard to make a car. It’s tens of thousands of pieces from all over the world, and it takes heavy manufacturing and know-how. So these are really important jobs. Today, the Chinese car industry sells about 29 million new vehicles there every year, but they have 50 million units of capacity to build cars.

So their factories would be half full if they just made cars for their own market. It’s not excess capacity because they built that for a reason. They’re now the largest exporter in the world. And in fact, their production capacity in China is so large, it could basically take care of the entire North America market. Their average Chinese vehicle has $4,000 to $5,000 of subsidies, indirect and direct, from the government.

SAFIAN: I was going to ask if that’s what keeps the price down—the scale of the manufacturing they’re doing—or how much of it is the subsidies that they’re getting.

FARLEY: Both. The Western companies made a lot of money in China for a long time—not Ford, but many of our competitors. They made billions and billions. And I think the Chinese government is very practical. They said, just like solar and other industries, we want to really dominate global automotive. So we’re going to bet on this change of propulsion, electrification. And they made this bet many years ago. The thing about cars that everyone knows, but when you point it out, they’re like, oh yeah, I guess that makes sense, is that these cars have 10 cameras in them. They have sophisticated communication. They’re all connected. They’re autonomous in many ways. So these vehicles should be reviewed by the Defense Department for national security. They have sensitive PI information. They have camera images of your whole life, where you drive, including a military base, an electrical substation, all sorts of stuff.

SAFIAN: You were personally driving a Chinese EV, which someone could see as a diss to Ford-branded vehicles. But it seems like maybe that was the point—to motivate everybody to say, “You’ve got to get in this game.”

FARLEY: Xiaomi, yes, the SU7. If you’re an American and you want us to beat the Chinese in the car business, you’re all going to want to pay attention, not necessarily to Tesla. Nothing against Tesla—they’ve been doing great—but they really don’t have an updated vehicle. The best in the business for us, cost-wise and competition-wise, supply chain, manufacturing expertise, and the IP in the vehicle, was really BYD. And BYD became the highest-volume brand in China, not VW or the Western brands. Last year, Geely actually just surpassed it. If we’re smart, we’ll take the cost competitiveness of BYD and then compete with that platform in parts of the market where we know our customers really well. In this next cycle of EV customers in the US, they want pickups and utilities and all these different body styles, but they want them at $30,000, not $50,000. Like the first inning, they want them affordably.

That is the gift that China gave us: to be fearful and respectful enough of their progress that we could not organically just phone it in. We needed to do what Americans sometimes do great, which is use innovation to compete against the best in the world.

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SAFIAN: For the listeners here who may not know, can you make sure you explain what the UEV project is, the Universal EV project?

FARLEY: Sure. The UEV is kind of the Model T of the modern Ford. When Henry invented the Model T, and my grandfather worked on the line then, he brought a lot of innovation. He brought the moving assembly line. Cars were not made that way. He got the best materials, but he applied them to the most affordable vehicle. The universal electric vehicle platform was developed not by Ford, but by a Skunk Works team out in California, mostly motorsports and Tesla folks whom we had hired. We said to the team, “You can do anything. We just want you to engineer the most affordable, most efficient electric vehicle on the planet, better than BYD.” And they got to work. They didn’t use the Ford system to develop the vehicle and the platform, and it turns out that wound up being a really good bet.

The UEV is three parts. There’s a large unit casting in the front and the rear, and then the center is a battery. So it’s a radical simplification of the vehicle, about 30% fewer parts. We don’t build the car all in one sequence like we have for 125 years. We actually build the front of the car separately from the rear of the car, separately from the middle of the car, and at the end we join them together. We’ve never built a car like that. To get the cost down for our customers, we needed to radically shrink the size of the battery. If we couldn’t beat BYD on cost, we might as well out-innovate them on efficiency.

So we radically engineered the vehicle for efficiency. Those are just some of the examples. People will learn more. The vehicle comes out next year. We’ll probably show it late this year. I’m really excited. It’s a platform, not just one vehicle, so there’ll be multiple vehicles off this platform. It’s kind of a Model T moment for us.

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SAFIAN: You’ve always been known for your candor. You’ve talked about no more boring products, which implies at least some of Ford’s products are boring. That doesn’t necessarily have to do with the technology of it, right? Maybe it has more to do with the design, the passion.

FARLEY: I would say I believe that Ford is best naturally working on what I would call vehicles with deep passion—work, off-road, on-road passion vehicles. I have the Mustang GTD right behind me. Mustang is a passion vehicle. But a two-row crossover is kind of—I’d say Wolfgang Puck said, “There are a lot of really nice restaurants, but it’s hard to do a buffet in Vegas.” If you want to do a two-row crossover in our industry—RAV4, CR-V, whatever—you can make it that, or you can make it a Bronco Sport. I think Bronco Sport fits our brand. I don’t think the past Escape did. It’s not that it needs to be fancy or expensive or super performance-oriented. I don’t mean no boring products that way. I just think some of our products were not differentiated, so we don’t want to phone it in. We want vehicles at Ford that are truly differentiating for their customers.

SAFIAN: And if not, stop making them, which is hard to make that call sometimes when there are stakeholders who are bought into that. But sometimes you’ve got to move away.

FARLEY: Especially when you compete in the middle of the market and you don’t have a cost advantage. I really believe Ford is about to launch a number of affordable vehicles, not just the UEV platform but a number of them. You’ll see that come out in the next couple of years. I wish we could have done affordable vehicles or sedans a long time ago, but we decided not to come out with sedans in the US because we didn’t have a competitive cost base. Until our company got serious about cost and quality, we really didn’t have the right to compete. I can’t allocate capital to a Fusion or a Focus if I know I’m going to lose $4,000 a vehicle compared to a Corolla or a Civic. I need to transform my costs, go back to the mountain, figure out how we radically get the cost out of the platforms, and then we can compete. And if we do compete in those, I would say, ubiquitous segments, we better bring something new to the table.

SAFIAN: Jim’s urgency is pretty intense, but as he explains, it’s a competitive market with a lot at stake. So is being an iconic American brand an asset or a complication in the current environment? We’ll talk about that more after the break. Stay with us.

[AD BREAK]

Before the break, Ford CEO Jim Farley talked about fallout from war in the Middle East and how China is changing the auto business. Now he talks about the responsibility of leading an iconic American brand, his focus on what he calls the essential economy, and why Ford has reengaged with Formula One. Let’s jump back in.

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You mentioned Ford as a brand a couple of times. Ford is a quintessential American brand, which can seem like a double-edged sword right now. Domestically, the country feels divided. Everything gets politicized, even the Super Bowl halftime show. Internationally, the US isn’t as embraced as it once was.

FARLEY: Yes.

SAFIAN: I’m curious how those realities come into your calculations.

FARLEY: We see people in America wanting authentic companies that are who they are and that have principles. Ford is a principled company. There’s a reason why we dominate the work sector. We’re 45% of the work vehicles sold in the United States. We earned our American credentials. We did not go bankrupt in 2008. Our employees did not let the company go bankrupt. And a lot of Americans do care about that. We don’t make one F-150 outside the US. Our competitors all do. They make them in Mexico and Canada, and you can’t tell. They don’t want you to find it, but you go to that windshield and you look at that VIN number and you do a search, you’ll find out.

So I think we’re proud of our American credentials. When people think of Ford, there may be a $300,000 GTD, but they know it’s the same company that makes the white F-150 for their electrician or the cop car or the first responder vehicle. And that’s a positive because they don’t associate our Americanness with politics. They associate it with jobs and our understanding of how Americans use vehicles.

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SAFIAN: Ford is back in Formula One after a 22-year absence, partnering with Team Red Bull.

FARLEY: Yes.

SAFIAN: I’m curious why now, because there’s F1’s cultural growth, its move into hybrid engines and sustainable fuels. What’s the motivation?

FARLEY: We got into it for a couple of reasons. Number one, the rules were changing. They were going to 50% electric, as you said, with sustainable fuel. We like that. It’s also a sport that’s really captured the imagination of Americans, like football and other sports. It’s an indigenous sport to our company. We don’t make shampoo, we make cars. Cars get raced, and the ultimate racing is Formula One. So we like that, but we really like the tech transfer. It is predictive failure of components, which we can apply to our work vehicles. We have almost a million subscriptions now at Ford. Most of it is productivity software. Predictive failure is definitely the next wave of our commercial software productivity. We want customers to know when something’s going to fail on their Ford, and Formula One is really good at that. They have to do that. Look at our UEV team. We would not have the talent on our UEV team if we didn’t have a connection with Formula One.

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SAFIAN: I know you’ve said some bracing things about the US workforce overall, that America is sort of sleepwalking into a crisis for essential blue-collar workers and that AI will hammer white-collar workers. It’s sort of this double whammy. I’m curious where you are on that right now and what you feel can be done or should be done, whether that’s in Washington, in Silicon Valley, and corporate America overall.

FARLEY: We call this sector of jobs the essential economy. Think about it: the electricians, the plumbers, the truck drivers, the emergency workers, the construction workers, all the people in our country who make our country run. But our competitors all sent work overseas, so there was not as much need in our education system for trade schools, apprenticeships, and all these things that our grandparents and parents used to do, and all those jobs got shipped overseas. Well, now we have to build data centers. Now we need emergency workers. We need plumbers and electricians, especially welders, for all these AI data centers. Ford sees this through our customers because we have a 45% share of the commercial market in the US. These are our customers. They buy our vehicles, and they all say the same thing to us: Ford, can you help me find the next generation of my team?

My average electrician is 57 years old. They’re going to be retiring soon. So we decided to get serious about this. We had a conference in Detroit last fall, and we started to find like-minded companies with similar issues. We’re now talking to them. We’re allocating serious resources to this. We’re talking to the Ad Council about starting to build awareness of how great these jobs are. My son can graduate from high school, become a technician in a Ford dealership, and make 150 grand in three years. He’s not going to get that opportunity if he goes for a four-year degree. So we need to build awareness that these are good jobs and that you can have a great life. We also need to build more infrastructure in our country—trade schools, apprentice programs. We need help from the government. We also can’t rely on the government. We have to do it ourselves.

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SAFIAN: Your choices about what you’re passionate about, your leadership—it has an echo effect beyond Ford’s business itself. How much do you think about that responsibility beyond your own shareholders?

FARLEY: I say I have no right to play any role outside of being the CEO of Ford and making the company successful without progress at Ford. And that’s the most important thing. We need to continue to make breakthroughs in quality, cost, and electrification. We need to be profitable. We need to build a sustainable company. But I work for the Ford family. This is not a family that is interested in the car business because it’s an interesting business, so they’ve been in it for six generations. They are all completely committed to the industrial future of our country. And yes, I want our country to succeed long term against China and others. And I think Ford is the kind of company that actually requires a leader like that.

SAFIAN: What’s at stake for Ford right now?

FARLEY: I think what’s at stake at Ford, and our story of success, is pretty simple. I think it really reflects the future of our country, not because we are the country, but because Ford is part of the heart and soul of our industrial base. We won’t be able to defend ourselves. We won’t have jobs for future generations. We won’t be able to reduce CO2 at large scale without Ford being able to do that and impact our communities positively, not just with economic benefits but with social progress. That’s the kind of scale Ford has, the kind of impact we have on our country. The importance of our sustainment is really tied to the success of the country and even the defense of the country. And that’s what’s at stake.

SAFIAN: It sounds like a lot of pressure, the way you describe it there. Do you sleep at night? Or do you worry about it?

FARLEY: I do. I’m a problem solver. I literally love problem-solving. So yes, of course, anyone in my position loses sleep, especially when we do things we don’t want to do, like layoffs and restructuring. It’s the worst part of my job. But sometimes you have to shrink to grow, like we have at Ford. After almost six years of leadership in the position, I feel like we’re in a good spot, we’re making progress, and we really can change our country and make our country stronger and do everything we need to do for shareholders. I really believe that in my heart, or else I’m not the right leader for Ford.

SAFIAN: Well, Jim, this was great. Thanks so much for doing it.

FARLEY: Thanks so much. All the best to you, Bob, and I appreciate the time. Thanks for having me on.

SAFIAN: Jim has always been passionate, and as Ford’s CEO, that urgency is definitely front and center. I’m struck by his sense of responsibility that Ford’s mission goes beyond mobility to positively impacting community and country. Now, one could look at that cynically, that he’s wrapping Ford in the American flag to help differentiate it, but there’s a bigger-picture sensibility at play too, a holistic view of long-term impacts that many business leaders would prefer to brush aside. There’s courage in that, even if it also helps the brand. I’m Bob Safian. Thanks for listening.