Ford and Deere’s Digital Future

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On the pickup truck, we had no idea we would be first in terms of scaling. Like, we thought we'd be like third or fourth, frankly.

Welcome to the Barron Streetwise Podcast. I'm Jackson Cantrell. The voice you just heard is Jim Farley. He's the CEO of Ford. And in a moment, he'll talk about how Ford beat out Tesla and GM in the race to mass-produce an electric pickup truck. EVs cut emissions to near zero, of course, but to Jim, the more exciting part is selling a digital product which can bring in future revenue through software downloads. And speaking of heavy equipment makers gone digital, we'll also hear from John Deere CEO John May on fully autonomous tractors and sprayers that can tell weeds from crops. Grab a chili dog and rev your electric engines. It's a Heartland Goes Silicon Valley special. Listening in is my sidekick.

Hang on a sec.

Jack Howe. Hi, Jack.

Hello.

Don't worry everyone, I'm not taking Jack's job. Jack is busy working on the top CEOs issue for Barron's magazine, so he came to me on hands and knees asking for help.

I mean, it was a Zoom call.

And I said, don't worry kid, I've got you. We can play some of those CEO calls you recorded and I'll handle the narration. Make sense?

Yes, and thank you. See you next week.

That's my land later. Now off you go. You know what? He's okay, that guy. I miss him already. Now, first up is Jim Farley from Ford. Why did Barron's pick Farley as a top CEO? Well, a year ago, it looked like General Motors was winning the EV race among traditional carmakers. But now Ford is one where it counts, putting winning models in customer driveways. And much of the credit goes to Farley, who convinced the last CEO, Jim Hackett, to turn Ford's EV program away from economy models and instead to focus on the company's most iconic brands, like the F-150 pickup. Last November, Farley said he'd make Ford number 2 in EVs behind Tesla within 2 years. Well, he's already there. Here's the conversation.

It seemed like GM was out in front talking about electric and autonomous. And all of a sudden, you seem to have a lead on them by a year when it comes to electric pickups. And I'm just wondering, how did Ford engineer that?

3 and a half years ago, when we started Team Edison, we were deadly serious about this first generation of products. And we basically started with a Prius-type vehicle or a Volt or a Bolt or a Leaf or whatever. And we just— I wasn't happy with it. So Jim Hackett was very supportive. And we got after kind of a Mustang Detroit attitude performance SUV. And then at the same time, we got after electric pickup. And on the pickup truck, we had no idea we would be first in terms of scaling. We thought we'd be like third or fourth, frankly. I think our first range estimate for the Lightning was 125 miles. We got to 325. We didn't come up with Pro Power Onboard. Until about a year before launch. You know, so it was a— we basically, a little over 3 years ago, we decided to dedicate the capital and focus on our 3 best-selling vehicles. Mustang, best-selling sports car, best-selling van in the world, Transit, best-selling pickup, F-150. And with a small team, very irreverent team, and at times they were not popular at Ford, they were not liked at Ford, and we just got after it.

This is this rare combination you see is something arriving when it was supposed to. And I've been looking at the reviews on the trucks and, you know, they're really getting a lot of praise. So now what we're wondering, and you're in the best position to see this, is what is this transition going to look like from, you know, internal combustion engines to electric vehicles? What's your latest thinking on that? Is it going to happen faster than people think, slower than people think? And how do you manage you know, you gotta put capital to work years ahead of time and make some projections about how quickly this thing's gonna go. How do you manage that?

So, so far the leading markets are telling us what's happening. In Europe and in China, it's going much faster than we thought, almost double what anyone had forecasted. China, as we speak today, 50% of all electric cars sold in the world, and it's 18% of the market. Europe, It's approaching 20%. What's interesting is that hybrid is also selling well. It's not an all or nothing. Governments have to get behind the technology transfer. In Europe and China, they have, and that's really accelerated the shift. So the whole adoption of electric cars so far isn't what we thought, or isn't what some prognostics thought, which is it's limited by the infrastructure and the uncertainty in the technology, that's not happening. The second thing I would say is that the winners of this new generation of products looks nothing like the winners in the ICE world. Even though Mercedes and Volkswagen are incredibly successful with their EVs in Europe, they aren't the winners in China. The winners in China are very affordable vehicles like BYD, Chery, local brands, Chinese companies. And the biggest battery company in the world right now is CATL. Now they just passed 30% of all automotive batteries in the world, Chinese company. So that's the second one. But how I think about this transition, it's not about zero emissions. That's what people are saying. But for me, that's not the most important thing. The most important thing is that we finally made a digital product. The next generation product we're working on, I think the whole industry's working on that Tesla already has out, is fully updatable vehicles where we can ship ADAS, Level 2, Level 3 autonomy. I think that's the first shippable software that we're going to charge for, and it's, it's clearly we can charge for it. We're just past 50,000 Blue Cruise customers and they're paying $1,200 and they're buying the hardware before the software, and we're shipping them the software over the air. That's what's going to change this industry.

What can you tell us about your management style? Congratulations, by the way, on being added to the Barron's Top CEO list. What parts of the job do you enjoy most? What parts of the job do you're best at? What do you spend your days doing primarily?

I spend more and more time interviewing others that have gone through the transition in the media business, the technology companies, the people that have gone through and redesigned their supply chain. I probably spend 25% of my day on the phone with people not in the car business, learning about embedded systems, learning about supply chain management, learning about how do you spark innovation teams I would say that's probably my most important work. The next group is obviously talent. Building a car is not simple. Ask Rivian. So we need the best talent at Ford, but we also have to import a lot of talent. And then the rest is paying a lot of attention to execution. All those F-150 sales are what's funding all this $50 billion. So I can't skip a beat in terms of our free cash flow. In our operations.

Last question for you. By the way, I rode in one of those Rivians recently. It's nice, but I have to go in the thing horizontally like Dukes of Hazzard style. I'm 6'4". I just can't— it doesn't have the same—

I don't know, you'll like the Lightning.

I think it'll be a better fit. But I want to ask you about the year ahead, and this is something that we're asking all of our CEOs. Do you expect that business conditions are going to grow more favorable or more difficult in the year ahead? And what do you think will be your biggest challenge at Ford?

For me, you know, I think it's best to plan for the worst, but be prepared if the customer is as robust as it is right now. Like, I do not want to miss out. We have the newest lineup. Like you said, our EVs are hot. Our ICE lineup from Maverick to Transit and everything in between is really hot right now. So we have to solve these supply chain problems. And I need to be ready in case the customer is as strong as it is today. But I want to make sure our costs are ready to support higher inflation in our commodity costs, in our bill of materials, in, of course, all of our people costs. You know, this team is going to be very serious about cost control because we can't expect a customer to pay for it anymore. But we can't touch any of the spending on growth. This is the time to go for it because some will slow down, and that's a really big mistake. We are not going to slow down one iota. In fact, we're going to speed up on the investment in growth and the new talent coming to the company and, and try to push ourselves to launch a second cycle of connected vehicles sooner than even people think. But I will tell you, Jack, our second cycle of products that we have been working on for a couple years now since I've been the CEO are nothing like these. When I read the other company strategies, I think we're kind of going in a different direction. We're going after high-volume segments with a pretty simple body engineering, with really all-in battery electric optimized vehicles, dramatically simpler to manufacture, dramatically better aerodynamics than these first-generation products. I mean, really dramatically different Fords than anyone would recognize. So this first generation really is not indicative of the real bet we're making with the $50 billion we're allocating to the next cycle.

Hey, Jim, thanks so much for taking the time to speak with me. We wish you the best of luck in the year ahead.

Thank you, Jack. Thanks so much.

Take care.

Next up is John Deere CEO John May. You might know that Deere's high-tech tractors can alert owners to failures before they happen, and that the company sells subscription services that help farmers maximize profits per acre. But you might be surprised to learn that Deere has sprayers that can identify weeds and spritz them individually with herbicide rather than dousing entire fields. And that can cut herbicide use down by 90%. Autonomous tractors are coming too. So are battery electric ones. By the end of the decade, corn and soybean farming could be the work of robo-planters, sprayers, and harvesters, adding plenty more subscription revenue for Deere. We'll hear that conversation after this short break.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Hey John, Jack Howe from Barron's. How are you?

Good, Jack, how you doing?

Doing well, thanks. Thanks for making a few minutes to speak with me. I love hearing about, you know, big farm machines and software, and I saw about this goal that you folks have for recurring revenue. Kind of reminds me of Apple a little bit and their, you know, rising recurring revenue business. So I wonder if you could just tell me about that for folks who maybe don't know. Talk to us a little bit about the changes you've been making and, and the rising importance of software and technology and recurring revenue.

About 2.5 years ago at CES, we rolled out our new strategy where we said we want to transition from being a traditional industrial company to more of a smart industrial company. And to do that, we knew we needed to do 3 things. One, we needed to get a lot closer to our customers Now we have our engineering teams, our marketing teams focusing on understanding the jobs that our customers do. If we understand where the greatest opportunities are to impact our customers' profitability, their productivity, and, and how they impact the environment, we can focus technology, software in some cases, new sensor technology, automation, autonomy, etc., to unlock new value. In those jobs. Second was centralize our tech stack. In the past, we had a lot of divisions trying to solve problems for their own customers. We had lots of duplication within our company. By bringing it all together under a new CTO, new chief technology officer, we felt we could accelerate the technology development because, to your point, lots of software, lots of new advanced sensors, And then finally, one more point on the strategy. We created a new customer support organization. Technology not only extends to improving their business, we can serve them in new ways we've never served them before because of the new sensors, new software suite that we have on the equipment. For example, today, by using predictive analytics, we can identify a failure before it happens on a machine and send an alert to the customer and to the dealer, not only letting them know it's going to fail, but here's exactly what you need to do to fix it.

Yeah, well, that— it just gets me, you know, one follow-up on it gets me thinking about competitive advantage. What is it at this point? Is it the hardware? Is it the software? I think about this phone of mine. I used to pay attention to the hardware specs, but now all I know is I've got years and years of my kids' pictures on here somewhere on the internet. It'd be too big of a pain in the neck to switch, and it's got all the features. So Is that how you think about this with, with Deere's competitive advantage? Is it becoming more of a software advantage?

Where our competitive advantage really changed in this space was everybody in the industry was focused on building the best product, like the best tractor, the best planter, the best combine with the highest quality. We made a big shift and said, no, we want to help our customers do the jobs they do better. So by applying technology, software, automation, we can take a lot of decisions out of their hands and do it for them and do it with technology in a, in a better way. As a result of that, to your point, we're collecting tremendous amounts of data that allows us to build better products, but also connects our customers to their trusted advisors in order to make better decisions on a real-time basis. We have a cloud-based solution called the Operation Center, You know, during a busy part of farming, we're ingesting a terabyte of data, you know, every minute. So it's a lot of data coming in.

What's your favorite part of this job? How do you spend your week? What do you like to do? What do you think you're best at? Tell me about what you spend your time on.

You know, I spend the majority of my time working with our production system leads and helping them try to solve a new equation for farming. And I believe really, really strongly in this. When I grew up in the company, how we created more productivity, more yield, we did more with more, meaning we made larger planters, larger pieces of equipment. Farmer might put down more nitrogen, more seed in order to create a better outcome, a better crop. I believe with technology we can do more with less, and that's where I spend the majority of my time. And I want to give you one example of a product that, that came up when I was the division president It's called See and Spray, and, and this product uses computer vision. It uses advanced algorithms, edge computing, and robotics. And as a result of that, it can see the difference between a healthy plant and a weed and only spray the weed. By doing so, it reduces herbicide application by 90%. And my passion is around making our customer more profitable more productive, and helping them do the jobs they do in a more environmentally sustainable way.

There is suddenly a lot of talk right now about food shortages connected with the war in Ukraine. How do you think about that? What do your folks say about that? And I guess, you know, to follow on that, what do you think farming looks like by the end of the decade? How well equipped is— are the world's farmers to meet the needs to feed the planet.

You know, you're bringing up a great example that actually leads into all the shortages right now in agriculture, in particular related to Ukraine and Russia. We're seeing massive increases in fertilizer, massive increases in seed costs, and fuel, which is important to our customers, has gone up significantly. Where we can play a significant role is solving all of those problems for them. By reducing the amount of inputs that they need to use to get the same amount of crop is gonna have a big benefit on their business. This year at CES, we launched the first autonomous tractor in the history of agriculture that takes labor completely out of the cab and allows farmers to hit very critical windows where they may only have a laborer that can work 8 hours. Now they can run this tractor, this tillage tool 24 hours straight until, uh, without any restraint around labor. Solving these very critical challenges in agriculture are a must in order for us to feed the growing world and improve diets.

I want to just ask you about any growth opportunities that get you particularly excited. Software obviously has to be one of them.

We believe we have $150 billion of incremental addressable market And we believe it's going to come through 4 suites of technology. Now, software is embedded in all of these, but it's going to come from automation, autonomy, digitalization, and electrification. Those 4 technologies are going to allow us to be even more precise in our ability to help our customers do the jobs they do better, and that'll have a big impact on our customers' business.

Our nation's farmers are going to come out of MIT In the future, it sounds like from all this software you're talking about. Hey, John, thanks an awful lot for taking the time to speak with me and best of luck to you and Deere in the year ahead.

First of all, I want to thank you. I really appreciate that you even considered us. We believe strongly in our story, all 70,000 of our employees, and we're going to keep pushing hard to make sure our customers are more profitable and more productive. So thank you.

Thank you, Jim and John, and thank all of you for listening. Jack Howe is the host of the show. I'm the producer Jackson Cantrell. I also host a daily market update show for Barron's called Numbers by Barron's, so you don't have to wait a whole week to hear my voice again. Rate us, write us a review, tell your friends. And if you have any questions for the show, you can record a voice memo on your phone and send them to jack.hough@barons.com. That's H-O-U-G-H. See you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.