In a surprising move, Ford Motor Co. has secured the largest loan that an office within the US Department of Energy has ever doled out. The automaker announced almost $29 billion of cash on its balance sheet and more than $46 billion worth of total liquidity at its disposal in March 2021. However, the Energy Department added to that amount, announcing a loan of up to $9.2 billion to BlueOval SK, a joint venture with Ford, to construct three plants that will produce batteries for Ford’s future electric vehicles.
Two factors contributed to this decision. The first is the vast amount of money Ford plans to invest in the coming years towards electric vehicles (EVs). Early last year, the company informed investors of its intention to put $50 billion towards EV-making efforts by 2026. This is an enormous sum even for a company of Ford's size. Morgan Stanley analyst Adam Jonas highlighted the apprehension of investors, who believe that taking on Tesla and Chinese carmakers that have dominated the early electric age amounts to a "pretty easy way to destroy billions and billions of capital".
The second factor is Wall Street's skepticism about Ford's EV plans. During a capital markets day held by Ford last month, Jonas asked if the management team and family have considered funding the EV investments in any other way. The Chief Executive Officer of Ford, Jim Farley, replied, "Not as of yet". He also mentioned that "they're really confident about their approach", but investors' line of questioning highlighted the risks involved in trying to revolutionize a 120-year-old company.
Ford is anticipating that its EV business may lose up to $3 billion this year. This is largely due to its investment in a planned 15-fold production increase in a very short time. By the end of 2026, the company aims to make 2 million EVs annually.
The Energy Department’s loan will cover much of the near-term expenses. It may cover close to the entire battery plant portion of the $11.4 billion that Ford and SK On have said they’ll spend on three cell factories and one pickup assembly in Kentucky and Tennessee. The truck facility included within that total won’t receive any funding from the loan.
Although neither Ford nor the Energy Department has disclosed the terms of the loan, Jigar Shah, the director of the Energy Department’s Loan Programs Office, hinted that "the terms may have been quite a bit less favorable" if they had relied purely on Wall Street. In October 2020, when reporting quarterly earnings, Ford mentioned that "low-cost" Energy Department loans were among the potential benefits of the Inflation Reduction Act that had just passed. Ford's previous experience with the Energy Department loan program included a $5.9 billion loan in 2009, which they repaid 13 years later.
Despite securing the loan, Ford still needs to win over Wall Street. There is skepticism from some analysts about whether Ford can deliver on its EV goals. To achieve its EV targets, the company will need a massive improvement in volume, and there is uncertainty about whether they will achieve this. Ford has disappointed investors for many years, so it will need to prove that its EV strategy can be successful.