Why Ford believes the $1.9 billion switch to electric vehicles will profit the automaker

DETROIT- Ford MotorFor a long time, 's profit engine within the U.S. has been large trucks and SUVs, so it might surprise investors that the automaker believes its latest path to electric vehicle profitability will start with smaller, cheaper vehicles.

The latest plan is a sort of “insurance policy” for the automaker to expand its increasingly popular hybrid models and create more cost-effective electric vehicles. He is convinced that this can give the corporate and its investors a more capital-efficient and profitable electric vehicle business, says Marin Gjaja, Ford's chief operating officer for the Model e electric vehicle division.

“We're pretty confident that the highest adoption rates for electric vehicles will be in the affordable segment at the lower end of the price range,” he told CNBC on Thursday. “We need to be there to compete with the new entrants.”

The expected latest entrants are mostly Chinese automakers, resembling Warren Buffett-backed BYD, that are rapidly expanding from their home market into Europe and other countries.

Gjaja's comments got here a day after the automaker announced updates to its EV strategy that may cost as much as $1.9 billion, including about $400 million in write-downs of producing equipment and as much as $1.5 billion in additional spending and money expenditures.

Ford's latest plans for North America include discontinuing a big three-row electric SUV that was well under development, delaying production of the next-generation “T3” electric full-size pickup truck by about 18 months to late 2027, and refocusing battery production and procurement on the United States.

Instead of a three-row SUV or a big pickup truck, the corporate's first latest electric vehicle is predicted to be a industrial vehicle in 2026, followed by a mid-size pickup truck the next 12 months and at last the massive T3 pickup truck.

Gjaja said the choice was not made calmly, particularly the cancellation of the upcoming three-row vehicle, which Ford CEO Jim Farley and other executives had touted as a game-changing innovation for years.

The van comes at a time when Ford's “Pro” industrial vehicle and fleet business, which incorporates vans and enormous super-duty trucks, has been a standout product for the corporate, offsetting billions in losses in the electrical vehicle sector.

And the mid-sized pickup is about to be the primary vehicle from a specialized “Skunkworks” team in California. The company commissioned the team two years ago to develop a brand new platform for small electric vehicles.

“We believe that smaller, more affordable vehicles are the way to go for mass-produced electric vehicles. Why? Because the math is completely different than [internal combustion engine (ICE) vehicles]Farley told investors last month. “In the inner combustion engine business, a business we've been in for 120 years, the larger the vehicle, the upper the margin. But with electric vehicles, it's the other.”

Farley said the weight and cost of battery packs required for large vehicles such as a three-row SUV that many families buy for road trips, towing and hauling are a limitation for electric vehicles given current range and charging networks.

Ford's current electric cars – the Mustang Mach-E crossover, the F-150 Lightning and a commercial vehicle in the U.S. – are not profitable overall. The Model e business lost nearly $2.5 billion in the first half of this year and will lose $4.7 billion in 2023.

The losses, as well as changing market conditions and business plans, prompted Ford earlier this year to withdraw its ambitious 8% profit margin for its electric vehicle division by 2026.

Investors and Wall Street analysts have largely supported the EV changes, sending the company's shares up about 2.3% since the announcement earlier this week despite the expected costs.

“Overall, these changes will enable Ford to capitalize on growing demand for electric vehicles while specializing in areas where the corporate has a fabric competitive advantage,” BofA's John Murphy wrote in an investor note Wednesday. “Given the scale of the fee, that is clearly a difficult decision within the short term, but we expect it is sensible within the medium to long run given the likely subpar economics within the three-row CUV/SUV segment.”

These updates are the latest actions in Ford's electrification plans, which now place a strong focus on hybrid and plug-in hybrid electric vehicles (PHEVs) to support compliance with stricter fuel economy regulations alongside pure electric vehicles.

Ford Chief Financial Officer John Lawler said Wednesday that the company's future investment plans will shift from about 40% to 30% for all-electric vehicles. He did not give a timeline for the change, but it's a huge shift from the company's 2021 announcement that it would spend more than $30 billion on electric vehicles by 2025.

The hybrid plans call for offering such options across the North American lineup by 2030, including SUVs with three rows of seats, to help meet stricter emissions and fuel economy requirements. Lawler said that to improve profitability, Ford is also accelerating the mix of battery production in the U.S. that is eligible for tax incentives and credits.

The change in Ford's plans is in line with the wider auto industry, which is facing a growing but slower-than-expected adoption of electric vehicles and an inability of automakers to achieve the expected profitability from the vehicles.

“What we saw in 2021 and 2022 was a short lived market spike where demand for electric vehicles really shot up,” Gjaja said in an interview with CNBC earlier this year. “It's still growing, but not nearly as fast as we expected in 2021 and 2022.”

There are also industry-wide fears that Chinese automakers could flood the market with cheaper and more profitable electric cars. Chinese automakers such as BYD are rapidly increasing their vehicle exports to Europe and other countries.

Lawler on Wednesday dismissed the notion that the Chinese have outpaced American automakers, saying Ford built the Skunkworks team in part to prove that Ford could compete with Chinese automakers.

“As we've observed over the past 18 to 24 months, I feel crucial thing for us has been the emergence of incredible products and formidable competitors in China,” Gjaja said. “And as we take a look at the competitive landscape now, we’ve got to compete against probably the most competitive corporations in China.”

Ford's latest plans are the precise opposite of those of its biggest competitor. General Motors.

The largest U.S. automaker has cut spending and delayed the launch of many electric vehicles, but several large all-electric vehicles are due to hit the market soon.

GM was one of the first companies to fully embrace electric vehicles, including by developing a vertically integrated, dedicated electric vehicle platform and supporting technologies such as batteries and motors.

Next to TeslaGM was the first automaker to begin large-scale battery cell manufacturing in the U.S. through a joint venture, which the company continued to tout as a cost advantage

GM's current lineup includes three all-electric full-size pickup trucks, a Hummer SUV, two recently introduced Chevrolet crossovers, a luxury Cadillac crossover and the $300,000 Celestiq. Several other crossover models and an all-electric Escalade SUV are also expected to join the lineup this year.

Just last month, GM confirmed its expectation that its electric vehicles would be profitable on a production or contribution margin basis once the company reached production of 200,000 units in the fourth quarter.

A GM spokesman said Thursday that the automaker continues to work toward “a positive variable profit within the fourth quarter.”

Gjaja declined to comment on GM's goals or business activities, but said Ford is doing what is best for the company.

“We focus on the technologies that we believe are the right ones to serve our customers, that are affordable for them and profitable for us,” he said.