Time for pinching pennies at Ford, GM

DETROIT — This will be a year of belt- tightening for both General Motors and Ford Motor Co. as a potential recession looms, but the rival automakers are coming from very different places as they target billions of dollars in cost cuts.

GM achieved record earnings in 2022 of $14.5 billion before interest and taxes, and it posted nearly $10 billion in net income. Ford generated more revenue than GM but reported its second net loss in three years and fell more than $1 billion short of the earnings guidance it provided as recently as October.

Ford CEO Jim Farley blamed poor execution and "dysfunctionality" within the company he took over more than two years ago for leaving some $2 billion in profits on the table.

"We have deeply entrenched issues in our industrial system that have proven tough to root out," Farley said on the company's earnings call last week. "Candidly, the strength of our products and revenue has masked this dysfunctionality for a long time."

GM executives said they plan to cut $2 billion in costs over the next two years, with 30 to 50 percent of that coming this year. The reductions, which will not include layoffs, are meant to help preserve margins as the automaker continues to ramp up its EV transition — including building more battery cells and launching key new models.

Ford, meanwhile, plans to slash expenses by a "considerable amount more than" the $3 billion it previously promised to cut by mid-decade, according to CFO John Lawler, who noted "everything is on the table," including further layoffs.

Ford shares tumbled as much as 10 percent after the company reported its results, and Deutsche Bank downgraded the stock to "sell." Farley said the company needed to reduce complexity, which could take years to accomplish.

"Our approach is different now in how we're thinking about costs," he told CNBC. "In the past we would cut the people, which is like the output. What we have to do is improve the efficiency of the input, so we improve the efficiency of engineering and don't need as many engineers. I don't want to make the cuts without redesigning the work. This has to be sustainable."

GM also plans to reduce product complexity and trim corporate expenses, with plans to slightly lower head count through attrition and limit hiring only to key roles, CFO Paul Jacobson said. He declined to say how much the company would shrink its work force.

"I want to be clear," Jacobson said. "We're not planning layoffs."

GM projects 2023 net income of $8.7 billion to $10.1 billion and adjusted EBIT of $10.5 billion to $12.5 billion.

Jacobson told reporters that this year's earnings will be hampered by an expected decline in GM Financial's earnings as a result of falling used-car prices, rising interest rates and a smaller lease portfolio, as well as pension accounting.

"We think the underlying business is going to be pretty consistent in '23 with what we saw last year, and I think that's a slightly more bullish statement than where most of the market is," Jacobson added. "We're going to continue to watch it."

Ford, meanwhile, expects a "mild recession" in the U.S. this year and a "moderate recession" in Europe, Lawler told reporters. The automaker expects adjusted EBIT of $9 billion to $11 billion in 2023, assuming industry sales of about 15 million vehicles in the U.S. and 13 million in Europe.

It anticipates higher incentives as inventory rebounds and reduced profits from Ford Credit.

"There's considerable headwinds in 2023 we didn't have in 2022," Lawler said, "on top of the effects of the economic environment."

Both companies also have to negotiate new labor agreements with the UAW this year, as does Stellantis, which reports its 2022 results Feb. 22. Under the current contracts, GM's unionized workers will receive a profit-sharing bonus of up to $12,750 based on the company's North American performance last year, while UAW members at Ford get an average of $9,176.

Despite a focus on cutting costs, both companies expect to continue ramping up electric vehicle sales and production this year.

GM, which aims to produce a total of 400,000 EVs by mid-2024, started building the GMC Hummer EV SUV last week. It plans to have nine EVs on the market in North America by year end.

As part of the electric transition, GM last week said it is making the largest-ever investment by an automaker in battery raw materials production. GM said it will take a $650 million equity position in Lithium Americas Corp. and work with the company to jointly develop a mine in Nevada.

GM says it has signed supply agreements to secure all of the raw battery materials needed to build 1 million EVs in North America by 2025 and now is working on supply agreements for 2026 and beyond.

Ford, the nation's No. 2 EV seller behind Tesla, said it soon should have access to all the raw materials needed to produce 2 million EVs annually by the end of 2026.

But executives have admitted the EVs it sells now are unprofitable, saying that, on average, it won't be in the black on EVs until its second-generation models come out mid-decade. That generation includes a new "full-size pickup" that will be built at the Blue Oval City plant under construction in Tennessee, Farley said.

Ford added to its losses on the Mustang Mach-E by cutting prices last week in response to reductions by Tesla. Ford has said it plans to eventually make 8 percent margins on its EV business, known as Model e.

Farley said the Mustang Mach-E and F-150 Lightning were not properly optimized after Ford prioritized speed to market instead of developing a dedicated battery-electric architecture first. The Mach-E, he said, has too many parts, is too heavy and is not aerodynamic enough.

"The second-cycle of product ... is dramatically different," Farley told CNBC. "It takes a completely different, simplified, more fundamental effort to really get to that 8 percent margin we're looking for.

"It goes from contribution costs, to aerodynamics, to reducing the size of the battery, 50 percent less fasteners, a lot less labor content. I can't wait to show you and the whole world this next cycle of products."