FORD'S KUMAR GALHOTRA: Dealers key to managing chip crisis

DETROIT — Despite an ongoing semiconductor shortage that has shuttered plants and drained dealership lots, Ford Motor Co.'s North American business is riding a wave of new products to impressive financial success.

The region booked a $2.9 billion profit in the first quarter of 2021 with a 12.8 percent margin. The company has long targeted 10 percent margins in the region and expects to get there consistently by 2023.

Kumar Galhotra, Ford's president of the Americas and International Markets Group, said Ford is benefiting from strong pricing on new models such the Bronco Sport and Mustang Mach-E, as well as recently redesigned models such as the F-150 and Explorer.

Galhotra, 55, spoke with Staff Reporter Michael Martinez in May, and he detailed upcoming digital retail changes and the company's expectations in managing the chip shortage. Here are edited excepts.

Q: Take us inside the room for the final sign-offs on the F-150 Lightning. Was there a greater sense of importance around this program because the F-150 is Ford's crown jewel?

A: I'd say there was a great sense of excitement given how important the vehicle is to our customers, how important it is to the company. Just like the Mustang, it's an icon. When we were doing the Mach-E, it had to live up to being a Mustang. The same is true here. F-150 is all about toughness. We had to make sure this BEV had all of those "Built Ford Tough" attributes. It had to have the right amount of towing, the right amount of torque. The customers told us it had to look very much like a truck, like an F-150, but it also had to look like a battery-electric vehicle.

You've said the Lightning will have a positive margin contribution. Is profitability a prerequisite to launch an EV?

In the longer term, for us to have a healthy, vibrant business, of course profitability is very, very important. But this is such a new area. If you take the propulsion systems for an ICE vehicle, a lot of times we get into just the battery cost, but I think we should compare it at a total systemic level — anything that is required to push the vehicle. If you compare that with a battery-electric vehicle — the controls, motors, transaxles, batteries — the delta between the two for a similar-sized product is still very substantial. But battery-electrics do command a little more pricing premium, so that helps.

Over time, we fully expect that delta will continue to shrink. But in that ramp-up, there is a lag. During that ramp-up the profitability of BEVs isn't as great, but that's OK. We have a plan for that entire journey that gets us there, but in the very short term the margins are not the same.

Could you make a profitable EV smaller than a Mach-E or, because of the pricing situation, does it need to be a relatively large vehicle?

Mach-E is contribution margin positive. So are the E-Transit and the F-150 Lightning that are coming. But that's the journey we're on. The prize is to bring that point lower and lower so that higher-volume, smaller-sized vehicles can be profitable as well. I can't say that right now, today. If we go much lower with a price point, say $20,000, it obviously won't be possible. But we're working towards it.

With the chip shortage, have you been able to make any changes on the fly, or will the changes you want to make take longer to implement?

This has been a really big learning experience for us. The issue right now is at a Tier 3, Tier 4 level. One of the key issues has been the transparency between all those layers and levels, both for us and our Tier 1 suppliers. We're both learning about how much more transparency is necessary. In the short term, we continue to work with our Tier 1 suppliers to make sure we're optimizing the availability of the chips. Moving forward, should that entire inventory management system be different? I don't know. That's something we're working with our suppliers on, but nothing really specific to share.

What's a comfortable days' supply level you'd like to get to compared with what you were running at before the crisis?

It will definitely be lower. I think it's too soon to say it will be "X" days' supply lower, but we're studying that very carefully. Both us and our dealers have learned how to turn over the inventory faster. I'm sure every one of our competitors has a key measurement of velocity, how many days between a vehicle landing at a dealership and a vehicle being in a customer's hands. You can maintain your production and wholesales at a level you want with a leaner inventory if you can have a faster velocity, if you can turn it faster as it reaches the dealership. Dealers have been really creative managing this crisis. That velocity is the fastest I've seen in my 32-year career. I've never seen anything like this.

It appears Ford has been hurt by the crisis more than some competitors. Is there something Ford didn't do that others did?

Going back to the nature of the issue, because of where the wafter begins in a fab somewhere, it can go into multiple chips which can go into multiple modules which can go into multiple vehicle lines. It's very difficult to predict which shortage will affect which vehicle line for which OEM. All we can do, and have been doing, very diligently, is serve our customers and optimize our profitability based on that chain.

It's very difficult to say how that's affecting one of our competitors because they're probably going through the same thing. I would say we're doing our best to continue serving our customers, continue to optimize our profitability and I think there's three or four more quarters to go in managing this crisis. We expect it to start getting better in the third or fourth quarter, but it could very easily spill over into next year as well.

What can you say about Ford Express Buy, the new digital retail tool?

It's a really exciting way for us to sell vehicles in partnership with our dealers. We've designed the system to be fully transactional, so like other websites that are very prominent in online selling, you have a cart. You can start building your vehicle, pricing it, put it in the cart and you can go all the way to make a transaction. Ford Credit can approve the customer's credit in seconds, and you can make the payment and the dealer can deliver the car to your home. The system's designed to do all that, but the system's also very flexible, where the customers can hand it off and come out of that digital landscape into a more physical approach with a dealer of their choice. We've designed it with full collaboration with our dealership network.

Right now, it's operational for Mustang Mach-E, so if you made a reservation you can take that order and go all the way through to transaction. And if you want to do a trade-in, it can give you a fair value for that and calculate that into the purchase process. We're seeing several do that right now. The intention is, Mach-E is the first pilot and over the next few months we'll scale the system to be available to all of our customers.

Will you mandate that all dealers use Ford Express Buy?

What I've learned over the years: Us and our distribution network are part of the broader enterprise. It's very difficult, and I'd say not appropriate, to force these things. That's why we work very closely with our dealer councils. There's the overall council and other committees. It's designed with a lot of input from them. We want this to be a pull from them. This is where the customers and marketplace is going.

You're giving dealers the option to build standalone Bronco stores. Could we see a Mustang or F-Series store?

It's difficult to predict that, but the Bronco store idea came from the dealers. They were so impressed with the vehicle and what a unique segment it plays in, they approached us. Why Bronco? It's such a passion product. We haven't had one in a long time and it's going into a segment where there really aren't a lot of players — there's one big player, Jeep, and you could argue Land Rover, but they're at a different price point — so this is giving customers in that segment a brand-new option. Could a similar pull come for other products? Sure. If it does, we'd love to work with them. Let's see where it goes.

Aside from the money spent to become EV-certified, will Ford dealers be required to make any additional investments or facility upgrades to sell EVs?

We have over 2,300 dealers now who are EV-certified, and over 650 commercial vehicle centers who are EV-certified. That was the first big step. Moving forward, as we add to the portfolio, there might be some smaller investments that are unique to an F-150 or E-Transit in terms of tools, but that's not unusual. Every time we launch a product there's always a small amount of tools that dealers need to invest in for a specific product. No, we don't expect any more substantive investment.

Considering Lincoln in China is now outselling Lincoln in the U.S., would Ford consider making it a China-only brand?

No. Let me clear that up. This is an iconic American brand, and a big part of the appeal in China is because it's an iconic American brand. China is bringing great scale, but we have a very vibrant business in the U.S. and Canada and Mexico. Those markets are very important and will continue to be very important for us.

What's Jim Farley like as a CEO and how does he differ from Jim Hackett?

Jim Hackett brought us into the era of things like design-thinking, things like consumer experience, and really leaning into the future. Jim Farley has taken all of those and really turbocharged all of it. We have a very, very clear plan in terms of having must-have products. We're really leaning much more into electrification. Our cycle plan looks very different, leaning much harder into EVs. A lot of focus on modernizing the company, which is something else Jim Hackett had started. There's a lot going on.

Jim [Farley] is a very thoughtful guy, but a very intense, driven guy. But also a very caring person. Whenever you're going through a very big transformation like this one, people are really key in creating that. And we have to do all that with great empathy in an environment where we don't have anxiety, we have excitement and we have people truly leaning into all that to set us up for a much brighter future.