November 18th, 2019 by  

No, that’s not a typo. As I watched the reveal last tonight, I was curious about how the Mustang Mach-E is going to be positioned within the Ford lineup, and after some time looking into it more, I find this new pony to be an incredible business risk to Ford.

If you regularly read my articles, this may seem odd, because it appears to be the opposite of my analysis that the market has been embracing electric cars, but it really isn’t. I don’t think that the Mustang Mach-E is a potential “Ford Killer” because it isn’t good enough, but because I wonder exactly how ready Ford is to make this shift.

Before going on, it struck me last night that Ford is going to make this change one way or another. On my end, the process started with Ford advertising its nearly non-existent electric car line up to me the past few months, and was followed by Ford rolling out what I think is the most impressive non-Tesla electric car that the market has seen so far. The Mustang Mach-E looks like an outstanding electric car.

And that’s the difficulty. There seems to be this belief among many stock analysts that electric vehicles are a specific “segment” of the market. Like, you go in looking to get a gasoline SUV or an electric car, and those two things don’t really cross over. This, perhaps more than anything else, is what makes me feel like traditional stock analysts really have no understanding of the current market trends.

I went electric once I figured out the price, maintenance, and time savings of a used Nissan Leaf. I fell in love with the instant torque and the silence of the drivetrain. My family bought a Tesla Model 3 as our second car because, even though it was more expensive*, it allowed us to enjoy all of the benefits of electric propulsion with a long-range travel network. (*As a complete aside, I have claimed on here that based on the way I calculate things, getting a Tesla Model 3 is saving me money. I still believe that, and will at some point write an article about why.)

These two cars replaced gas cars. Additionally, since purchasing my Leaf, talking about it with others has resulted in no less than five people who I know purchasing used Leafs in the past two years. Every one of them reports that they absolutely love the car, and every one of them states that they will never buy another gas car due to all the other benefits.

Why am I talking about this with regards to the Mustang Mach-E? Because this is the first time that a legacy automaker has introduced and pushed a major electric vehicle like this.

If, as you’re reading this, you’re thinking, “Wait — you just mentioned the Leaf, and you’re overlooking the Bolt.” I disagree. I love our Leaf. I have test driven a Bolt, and other than the dealership flat out telling me it would be a bad decision to get one because, ‘you can’t go anywhere with an electric car’ (yes, seriously), it seemed like a nice car too. But, the Leaf and Bolt remind me of extremely similar gas cars made by those same manufacturers — the $15,650 Versa Note hatchback and $13,220 Spark, respectively — except those are both less than half the cost of the electric version.

The Mustang Mach-E is not that at all. It’s similar in size to the Ford Escape, which starts at $24,885, nearly double the price of the gas cars I noted above. The entry-level Mustang Mach-E, including the $7,500 tax credit, starts at $36,395. While an $11,510 difference is still major, let’s compare that to the other two cars I’ve mentioned. The Leaf, with full tax credit, is $6,840 more expensive than its gas counterpart — and quite frankly should be more competitive with it. The Bolt is a whopping $21,525 more than the Spark.

The Leaf and Bolt, especially in America, haven’t been huge sellers for their brands. The Leaf I think is hurt by abysmal used car costs, subpar range, and unimpressive battery technology; the Bolt because it’s simply way too expensive.

The Mustang Mach-E appears like it could be a huge seller for Ford, is comparable to one of Ford’s best selling models, and doesn’t carry an insane price difference. And, unlike Nissan and Chevy, which barely advertise their electric offerings, it appears like Ford is serious about this one, which started with this commercial being shown to me regularly on Facebook a couple weeks ago:

Editor’s note: I’m going to add a note that I think closes Frugal’s argument — wrapping it in some points that I think are just being underemphasized a bit. The LEAF and Bolt are much better than those comparable gas models he mentions, and they do come with top features for a Nissan or Chevy. However, you would never guess that from the outside and there’s almost no way for a normal consumer to learn these things. Dealers are not going to bring it up while someone is looking at gas models, ads are sparse, and the vehicles do not call out for attention.

The Ford Mustang Mach-E, however, is impressively and immediately thrown into a different category — even before you see it. Ford granted it the company’s prestigious, iconic Mustang branding, and also through in a “Mach-E” label that sounds exciting and special. This is a Mustang, but no ordinary Mustang! Furthermore, Ford took some serious risk making a Mustang that’s a crossover, but it’s obvious why — people want crossovers. This is a positive thing. Ford is saying, we’re the same old awesome Ford, but we’re ready for the 2020s with an electric crossover that is sporty, high tech, and the future of the company. This inspires, excites, and Frugal and I clearly think it is going to pull in customers far more than the Bolt or LEAF did so for Chevy and Nissan. Ford is basically putting everything it has into this electric offering, and it shows. That compels and warrants a higher price tag. I think it is somewhat obvious to a normal consumer that the Mustang Mach-E has a higher price than the Ford Escape because it’s a much better vehicle. Anyway, back to Frugal …

We’ve gone over 750 words now (minus the editor’s note), and it seems like I’m extremely positive about the Mustang Mach-E. And to be clear, I am — unless Tesla surprises me and is planning to start CYBRTRCK production next year, I expect that the Mustang Mach-E will be the most important new electric vehicle in 2020, even surpassing the Tesla Model Y.

And therein lies the problem. When consumers start to see commercials like this, it starts to make them question their current purchases, and whether those purchases will be obsolete sooner than later. The effect is often called the Osborne effect thanks to the history of the Osborne Computer Corporation, which started publicity for a new computer that it was producing in 1983 months in advance of its release. Dealers were rumored to have canceled their orders for the existing product in droves, leaving the company with tons of unsold inventory and leading to it declaring bankruptcy in 1983.

This is where it’s about to get interesting for Ford. Not just is the Mustang Mach-E an impressive car, but it has a ton of features that were clearly inspired by Tesla, including a phone app with lots of controls, passive phone entry, and over-the-air software updates to improve the user experience. These are selling points of the Mustang Mach-E, and everyone who I know who has seen them on a Tesla raves about them.

The problem? Nothing else that Ford has includes these features. Maybe you aren’t ready to spend the additional money to get a Mustang Mach-E, but it’s pretty clear that “Ford electric vehicles are coming,” so maybe it’s worth waiting a few months or an extra year to see what else they come out with. The strong rumor is the electric F-150, which Ford has also more or less started to advertise, will debut as a 2021 model … which is more interesting when you look at the Mustang Mach-E on the Ford site and realize that it is listed as a 2021 model.

Debuting both of these cars at the same time with a hard pivot to electric is a fascinating strategy and, quite frankly, the only way I expect legacy auto to be able to make the transition, but it is fraught with risk, and I see one more major risk for Ford.

On paper, it appears that the Mustang Mach-E and the Tesla Model Y are going to be extremely similar. Standard range on the Mustang Mach-E is expected to be 230 miles, the same as Tesla expects for the Model Y Standard Range. The all-wheel-drive extended-range Mustang Mach-E is expected to get 270 miles of range, very comparable to the Model Y Long Range’s 280 miles.

The difference is in how they do it, though. The standard-range Mustang Mach-E sports a 75.7 kWh battery, which is a whopping 25.7 kWh larger than a Tesla Model Y Standard Range. The extended-range Mach-E takes an extra 23.8 kWh of battery to go as far as it’s going to go.

Even if we go off the recent reports from Volkswagen that it is buying batteries under $100 per kWh, we’re looking at an additional cost in the thousands of dollars for the batteries. At first, I found it difficult to understand how Ford would make up the difference in money, until I realized that the Mustang Mach-E Premium is still a standard-range vehicle for $50,600. Extending your range will be another $5,000, meaning a long-range Mustang Mach-E will cost $55,600 compared to Tesla’s $48,000 for the Model Y Long Range. After the tax incentive, the pricing will be nearly the same.

This is where I assume that Tesla still has a pretty massive advantage. Tesla is able to use ~25% less battery capacity to make its vehicles go the same distance. Add to that Tesla selling its vehicles directly to customers, avoiding the dealership model that Ford is forced to use, and that shaves off an estimated $2,367 more. (If you’re wondering where I pulled that number, I found this fascinating Quora post a while ago and bookmarked it — look for the second answer by David.)

Combined, I expect Ford to be paying minimally $5,000 more than Tesla for each Mustang Mach-E it sells. Based on Chevy’s continued statements about how it isn’t making any money on the Bolt, it makes me wonder if there is any room for profit in Ford’s model.

If there isn’t, or even if there is but it isn’t a decent profit, if the Mustang Mach-E and the advertising around it lead to a drop in sales of other Ford vehicles, Ford could be in serious trouble. In September, Ford’s credit rating was downgraded by Moody’s to junk status. It’s worth noting here that Tesla’s credit rating by Moody’s is actually worse than Ford’s, but I view Ford’s debt as a bigger problem.

Ford carries around $100 billion of debt globally. A significant amount of that debt is tied up in internal combustion vehicle assets. If the Mustang Mach-E kickstarts the electric revolution, Ford could face the very real prospect that those assets would be essentially stranded, in turn making it far more difficult to service the company’s debt.

This is the difficulty with any legacy automakers facing this transition. Their value is largely based on perceived value of assets that may not have any value, which is why I’ve felt like the Leaf and Bolt were purposely made to be not overly appealing. The problem is Tesla continues to create vehicles that are compelling compared against all other cars in their price range, regardless of propulsion method, and then is doubling down by creating and updating the most advanced tech package in the industry.

In doing so, the Model 3 captured over 1% of the US auto market share by itself. If the Model Y sells double what the Model 3 does, it’s plausible that Tesla could hold 3% of the market with just two models, and that’s without having advertised.

It appears that Ford is the first major legacy automaker to understand what this could mean for the company, and the Mustang Mach-E looks like an outstanding vehicle ready to truly compete against Tesla’s offerings. If Ford continues pushing electric cars in commercials like the one above, and if Ford moves forward with an electric Ford F-150 for model year 2021, we could very rapidly see an increasing awareness of the arrival of electric vehicles industrywide.

What does that mean for the rest of the auto industry? And what does that mean for Ford? Can Ford survive this shift with its current debt level and product lineup? The auto industry is about to get incredibly interesting. 
 
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Tags: Ford, Ford financials, Ford Mustang, Ford Mustang Mach E