Ford's Galhotra: ‘A lot of runway left' for ICEs

It's been nearly 16 months since Ford Motor Co. split into separate business units for electric and gasoline-powered vehicles.

The company recently restructured its earnings reports to give more insight into the profits and losses for each unit and, in doing so, confirmed what many had long believed: Its internal combustion business is making most of its profits while EVs are deep in the red.

Despite the strong bottom line in the traditional business, called Ford Blue, challenges remain. The company is looking to remove billions in costs that are preventing it from making even more money. Kumar Galhotra, president of Ford Blue, said the company is making progress on those cost-cutting plans but has more work to do.

Galhotra, 57, spoke with Staff Reporter Michael Martinez this month. Here are edited excerpts.

Q: You've said Ford Blue is a growth business. How much longer will that be true?

A: We are a growth business because of the strength of our portfolio. Our products are sold out. Bronco and Maverick are in very high demand. F-150 is doing fantastic; it's actually up over 20 percent year over year so far. We're actually going to add capacity for a lot of these products. That's what makes it a growth business in the short term.

We also have a portfolio that is less exposed to this transition to EVs than some of our competitors because of the type of products we have in our portfolio. Bronco is an awesome off-road vehicle, and our Bronco customers are actually using it to truly go off road, go into the desert, and go into territories where you don't see a lot of EV chargers. So that segment is going to move a little slower into the EV transition. Similarly, our pickups. A lot of the pickup owners travel long distances and tow a lot. So until the EV range with towing improves substantially and there is a much broader network of chargers, customers are going to continue to buy our ICE pickups and hybrid pickups that we make.

Now, over time, will ICE volumes decline? Clearly. We know that's the reality. We embrace that reality and believe it will be sometime after 2025. But even when it happens, it'll be very unique by segment and by geography. And there are other parts of our business like the Ford Customer Service Division that will still grow and have a lot of opportunity for growth for years to come, because there's going to be tens of millions of ICE and hybrid vehicles that will continue to wear the Ford badge around the world that we can capitalize on. So there's still a lot of runway left for Ford Blue.

Does the Ford Blue team feel pressure to maintain and grow its margins to help pay for other parts of the business, such as Ford Model e?

Let's just look back to our portfolio. Think of our products and how iconic they are. You get to work on very few products that are truly part of the cultural fabric, products like the Mustang, the Bronco or the F-150. So our team is thoroughly enjoying working on those great products and creating new versions of those products, both in terms of modern versions of those icons as well as derivatives off of those icons — and making healthy profits in the process. Are those profits necessary to fund the future of the enterprise? Absolutely. Do I see it as pressure? It's challenging, but it's challenging for multiple reasons. One big challenge is we're trying to transform the entire company. But I would argue that it is more fun at the moment than challenging to get this done.

Executives have said Ford has a roughly $7 billion cost disadvantage compared with its rivals. What steps are you taking to cut costs?

Our costs are uncompetitive. We have to reduce both our material costs as well as our structural costs. I mentioned how great our portfolio is, and you can see our per-vehicle revenues within the segment for our key products are fantastic, but our costs need to be lower. We're taking a multipronged approach. Let's talk about contribution cost, which is bill-of-material cost. We're benchmarking a lot of our competition and working with our suppliers to lower that part of our costs.

One of the ideas I just reviewed was changing the material spec on our front rails, mounts and exhaust manifolds — things like that. They're smaller ideas but they add up. Just those three ideas saved roughly $30 million. The team found a cable that was necessary to pull vehicles through the assembly line that was different between one of our truck plants and another one. Just removing that cable and doing some adjustments of the manufacturing system saved $11 million annually. We've come up with ideas that will reduce the bill of material cost by over half a billion dollars this year, which is substantial but not enough. We're going to continue working on that side of the business.

Then there are structural costs, anything that's not related to a specific vehicle that's rolling off the assembly line. We're attacking every one of those areas. For example, last year just storing, shuttling around and moving incomplete vehicles cost us nearly a full point of margin, which is very substantial. So we're removing that waste.

In the coming months, we're going to reduce the orderable combinations on the F-150 by a magnitude that we've never seen before. Less complexity means fewer parts. From one model year to another, we're taking about 2,400 parts out of the F-150. That means many fewer parts to engineer, test and manage quality on. I'll give you another example. In Explorer, we have 500 different harnesses. We're going down to less than 20 in the next few months.

Did you achieve what you needed last year in terms of buyouts and layoffs or could we see more layoffs this year, specifically in North America?

We as an industry and as a company are going through a transition that we haven't seen in decades, and certainly not in my career. And the skill sets that we need for the future are changing rapidly for multiple reasons. Software has become so much more important to vehicles than it used to be. Obviously, folks working on battery technology and motors and inverters. We need more of them than we did previously because there are more BEVs in the cycle. So if you take all the forces that are changing our industry, that skill mix has to shift. And that skill mix shift doesn't happen in one quarter or one specific year. So this is going to be an ongoing phenomenon for us and for the rest of the industry. As a company changes, there will be a constant mix shift we will have to do. Unfortunately there will be some skills that the company doesn't need. And then that's when we have to say goodbye to some of our colleagues.

How do you manage that from a human standpoint to make sure morale doesn't suffer?

From a human element standpoint, it's an extremely challenging situation. Retraining is one path where we can. But some of these skills are so unique that retraining isn't always possible. It's one potential lever to work through this transition. Another is just helping them to find other positions, other jobs. So in the past and even now, we've been very thoughtful on how to create that transition to a different position or a different company or even a different industry. But in the end it is a very difficult thing to do. And there will be a transition and some folks will not be part of the future. We have an extremely talented work force today. But that work force skill mix will continue to shift, and we will do our best to make it as smooth a transition as possible for the employees that leave us and for the employees that stay with us.

UAW contract talks are this year. The new UAW president has called companies such as Ford the "one true enemy." What's your response?

We've had a really good relationship with the UAW and with other unions around the world. We value our employees. They're part of the Ford family. We will do what's right for the employees. We will work closely with the union. What we won't do is things that will make us uncompetitive because in the long term, an uncompetitive company is at risk and everybody loses. We are a company that employs more UAW workers than anyone else in the U.S. We export more vehicles from the U.S. to other countries than anybody else. We make nearly 80 percent, maybe even higher than 80 percent, of vehicles that we sell in the U.S. in the U.S. And that position comes with a cost. Our competitors have not chosen that path, but we have because we believe the U.S. work force and the U.S. industrial base is important to us.