Ford Motor Co. posted an $827 million loss in the third quarter, dragged down by costs associated with the shutdown of a self-driving vehicle technology company the Blue Oval backed as a major investor.
In confirming the decision to shut down Pennsylvania-based Argo AI, founded by two Michigan natives in 2017 with a $1 billion investment from the Dearborn automaker, Ford executives acknowledged the challenges of developing Level 4 fully self-driving advanced driver assistance systems with human observations — and said doing so is likely to take at least five more years and would have required billions of dollars more in investment in Argo.
The automaker initially said it expected to bring Level 4 ADAS technology to market by 2021. “But things have changed, and there's a huge opportunity right now for Ford to give time — the most valuable commodity in modern life — back to millions of customers while they’re in their vehicles,” CEO Jim Farley said in a statement. “It’s mission-critical for Ford to develop great and differentiated L2+ and L3 applications that at the same time make transportation even safer."
“We’re optimistic about a future for L4 ADAS," he added, "but profitable, fully autonomous vehicles at scale are a long way off, and we won’t necessarily have to create that technology ourselves.”
The effective dissolution of Argo amid stiffening economic conditions and the global auto industry's pivot to electrification signal how unpredictable the advance of next-generation technology is proving to be — and how sure things less than five years ago are proving less so as automakers focus more intently on delivering partial self-driving solutions to customers.
Doug Field, a former Apple Inc. and Tesla Inc. engineer who now heads up advanced technology and embedded systems at Ford, said the work Argo was doing was “what I consider to be the hardest technical problem of our time. It’s harder than putting a man on the moon to create an L4 robotaxi that can operate in a dense urban environment, safely, and navigate to its destination."
The decision to wind down Argo's operations resulted in Ford recording a $2.7 billion non-cash, pretax impairment on its investment, driving the net loss for the quarter. Meanwhile, Ford executives acknowledged they are seeing signs of a weakening macroeconomic environment.
Chief Financial Officer John Lawler said the automaker believes a "mild or moderate recession" in the U.S. next year is likely, as well as a "more substantial decline" in Europe, though he believes the automaker is in a better position to weather a recession than in previous eras.
Lawler pointed to the rate of cash transactions on vehicle purchases declining, customers seeking longer loan payment terms, used vehicle prices coming down and a shift in demand for mid-series vehicles versus higher-margin options as signs that consumers are reacting to the economic conditions — though he said Ford still sees strong demand.
In posting strong quarterly results Tuesday, crosstown rival General Motors Co. also signaled it continues to see strong consumer demand. The Detroit automaker made $3.3 billion in net income on record revenue of $42 billion.
Meanwhile, Ford posted the loss on revenue of $39 billion, up from $35.7 billion in the third quarter of 2021. The company booked adjusted earnings before interest and taxes, or adjusted operating profits, of $1.8 billion in the third quarter — up from the $1.5 billion to $1.7 billion guidance the company gave last month but down from $3 billion in the same period last year.
Ford expects to post full-year adjusted EBIT, or operating profits, of about $11.5 billion, at the low end of its previous guidance of $11.5 billion to $12.5 billion. Last year, Ford's adjusted operating profits came in at $10 billion.
Lawler pointed to issues in Ford's supply base, as well as the sinking value of the British pound, for guidance now coming in at the low end of the range.
“Over the last few weeks, we have conducted numerous deep dives on-site into our supply base. We’ve reviewed, on site, close to 300 suppliers and did a complete analysis," he said. "And there’s a number of non-chip suppliers that are struggling to ramp production as the chip restrictions have started to ease a bit, and then they’re not able to ramp for a confluence of reasons. Labor shortage is really hitting the supply base hard.”
Results in Q3 were affected by two factors Ford warned investors about last month: supply constraints that forced it to park roughly 40,000 vehicles while they await parts, and about $1 billion in higher-than-expected supplier payments. The company expects to deliver those vehicles in the fourth quarter.
The company ended the quarter with $32 billion in cash and $49 billion in liquidity. In a bright spot for the quarter, Ford raised its goal for full-year adjusted free cash flow to between $9.5 billion and $10 billion, up from $5.5 billion to $6.5 billion, after ending the third quarter with adjusted free cash flow of $3.6 billion.
In North America, the automaker posted $1.3 billion in operating profits and a 5% operating profit margin. Both are down from a year ago, which Ford attributed to higher commodity costs, inflationary pressure and unfavorable mix due to it having thousands of high-margin trucks and SUVs parked awaiting parts. It recorded profits in every international market it reports, except China, where it posted a $193 million loss.
Ford will pay out a 15-cent-per-share regular dividend in the fourth quarter. The company's board also authorized stock buybacks of up to 35 million shares. In after-hours trading, Ford shares were down less than 0.1%.
"I think investors are going to welcome the quarter and now the drum roll into Q4 and 2023," said Dan Ives, an analyst at investment firm Wedbush Securities Inc. "And I think for Farley, it’s a notch on the belt in terms of this quarter."
Self-driving troubles
The move to shut down Argo, experts said, is a sign of the difficulties of being successful in the self-driving space — and a setback for the autonomous vehicle industry.
However, analysts said Ford and Volkswagen AG (another major Argo backer) could benefit. The companies invested another $2.6 billion since Argo's launch, and they could build off its core technology for more use cases that fit their priorities.
"It’s a cautionary tale for the complexity and competition in the autonomous space," said Wedbush's Ives. "This was a great idea when it launched in 2017, but it had a lot of execution issues, faced significant hurdles, and it’s been overshadowed by Cruise, Waymo and others that have become the behemoths in this space."
Volkswagen likewise confirmed it no longer is investing in Argo, though other partnerships with Ford remain unchanged.
Argo isn’t alone in its challenges. Competitor Aurora Innovation Inc.’s shares are down 75% year-to-date, and last month, CEO Chris Urmson weighed a sale to the likes of Apple Inc. and Microsoft Corp., spinouts and layoffs in a leaked memo to the company’s board. GM in March bought out Softbank Vision Fund’s $2.1 billion stake in Cruise. Google parent Alphabet Inc.’s Waymo LLC has held external funding rounds.
There had been plans to have Argo make an initial public offering this year, said Sam Abuelsamid, principal e-mobility analyst at market research firm Guidehouse Inc.
“When the markets tanked this year, that became an impossibility,” he said. “They knew they were going to have to raise more capital. Ford and Volkswagen as the two primary shareholders looked at what was going to be needed going forward, the challenges facing them and investments they have to be making in electrification and current supply chain problems. They decided putting more money into Argo at this point was not a wise move, because there’d be no return on that investment for many, many years.”
“The whole rollout of this technology is clearly a lot slower, a lot longer, a lot tougher,” Abuelsamid said. “There will be a few companies that will stick it out.”
Argo, though, had appeared to be making progress. It has tested self-driving Ford Fusions and Escape Hybrids on public roads in several U.S. cities, including Detroit, and ID Buzz vehicles in Germany. It also had launched pilot programs with companies like ride-hailing app Lyft Inc. and Walmart Inc. Last month, it announced several software products around AV technology to support commercial delivery and robotaxi operations.
Ford executives said Wednesday they expect to hire an as-yet-undetermined number of Argo's approximately 2,000 employees who will work on the automaker's hands-free driving Level 2+ and Level 3 technologies.
