Are electric cars worth it when you’re losing billions on them?

Ford lost $2.1 billion on its electric vehicle unit last year and expects to lose $3 billion more this year, calling into question whether the legacy automaker will succeed in the highly competitive EV market.

But those massive losses are just growing pains for a company that is carefully reorganizing its business lines for the future, according to Wharton management professor John Paul MacDuffie. Ford last year divided into five business units, which helped offset the EV loss with $10 billion in operating profit from its internal combustion and fleet lines.

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“Ford CFO John Lawler has been making the rounds, saying EV is a startup within Ford, and we expect startups to lose money at first while they’re investing in capabilities and building scale,” MacDuffie told Wharton Business Daily on SiriusXM. “They’re trying to normalize our expectations around this … all in the context of being profitable overall because the core business is doing very well. They are projecting 8% margins for that EV business by 2026.”

MacDuffie, who is the director of the Program on Vehicle and Mobility Innovation at Wharton’s Mack Institute for Innovation Management, studies the EV market and said there are different challenges facing incumbent automakers, including Ford. Newer players Tesla and Rivian began with an EV blueprint, so they worked out the engineering first before moving on to manufacturing, supply chains, and other parts of the business. However, incumbents are going in reverse, figuring out the technology and then adapting their existing manufacturing processes.

But MacDuffie said that reverse order is no reason to think the legacy firms will fail.

“I’ve been on record for a while in saying I think these automotive incumbents do have the ability to make this transition. It doesn’t mean all of them will be equally successful,” he said. “Their strength overall is as a system integrator that can pull all of these technologies together in this very complicated, multi-technology vehicle with global supply chains. It’s a transition, and we’re in the early stages of it.”

“I’ve been on record for a while in saying I think these automotive incumbents do have the ability to make this transition. It doesn’t mean all of them will be equally successful.”— John Paul MacDuffie

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Ford’s massive new EV plant near Memphis, Tennessee, is evidence of its commitment to electric. Production is expected to begin there in 2025 with the goal of turning out 500,000 vehicles annually. MacDuffie said that figure is about double the capacity of a typical new plant, indicating the company’s ambition. So far, the only vehicle in the production queue is an electric truck that Ford has nicknamed T3, for “Trust The Truck.” Its current EV lineup includes a fleet van, the Mustang Mach-E, and the F-150 Lightning.

The F-150 is a top seller for Ford and one of the best-selling trucks in America. In fact, Ford’s F series line has earned the title of best-selling truck for the last 46 years, with one sold every 49 seconds in 2022 alone.

“Trucks have been this huge seller and generator of margins for the U.S. industry for a long time,” MacDuffie said. “Even though Toyota and Nissan and other manufacturers have come in with competing products, they’ve gained some market share but they haven’t put a substantial dent in the lead that the Ford, Chevy, GMC, and Ram trucks have in the U.S. market. So, to be successful in the EV truck market is hugely important to the incumbent companies.”

Ford’s new T3 will be different from the F-150 Lightning in that it will be made from scratch instead of converted from the gasoline model to electric. Conversion usually creates compromises, including a higher weight and larger battery, so the new truck is expected to be more efficient. South Korean supplier SK On is investing billions in a battery facility at the Tennessee plant to make next-generation cells that will power the T3 and other EVs.

The professor said Ford is acutely aware of its prized truck branding as it moves toward EVs, and the company appears to be working hard to satisfy the towing, storage, and power demands of both private and commercial truck consumers.

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“One thing that is absolutely true is to really maximize what you get out of an electric vehicle and out of a given battery capacity, you really want to rethink almost every aspect of making the vehicle,” MacDuffie said. “If you can bring the weight down, you can use a smaller battery, which also brings the weight down. There are going to be a lot of small changes that are made to optimize the electric vehicles of the future. That’s one of the things that the incumbents are working on, and Tesla as well.”