Ford's Third-Quarter Profits in Part Due to Savvy Outsourcing

Many things added up to create Ford’s surprise $997 million third-quarter profit: President and CEO Alan Mulally’s prudent and carefully followed business plan, cars and trucks (including hybrids) that have won kudos from both critics and the public, strong overseas sales—and knowing when to “upfit.”

Ford spokeswoman Jennifer Moore uses the term “upfitting” for the company’s relationship with both Magna International and Azure Dynamics—both originally Canadian companies that have relocated to the Detroit area. And both companies that are helping Ford build electric vehicles.

Magna’s partnership on the Focus-based battery electric car Ford will roll out in 2011 is not new, but Azure Dynamics’ similar arrangement to build electric drivetrains for the Transit Connect vans that will debut next year was announced October 30.

Scott Harrison, CEO of Oak Park-based Azure Dynamics, is fighting the swine flu but found time to talk to BNET Autos. Magna, he said, has “a few more zeroes” in its annual revenue, but he acknowledged the similarity of the missions with Ford. “What they’re doing for the Focus we’re doing for commercial vehicles,” he said.

“Outsourcing is a brilliant strategy, frankly,” Harrison said. “We will do the entire drivetrain for, maybe, 1,000 electric Transit Connects in the first year—those kind of numbers make sense for a company like ours. These are niche vehicles for sure, and outsourcing them allows Ford to keep its resources focused on higher-volume electrification programs, such as the Hybrid Escape and Fusion.” Harrison estimates total first-year Transit Connect volume (in all configurations) as 40,000.

The electric Transit Connect Transit will have a range of approximately 80 miles, and batteries supplied through a partnership with Johnson Controls-Saft. “From the vantage point of a CEO, I can say that the beauty of a project like this is the simplicity of it: It’s just motor, gearbox, battery, inverter and controller,” Harrison said. “We make the latter two ourselves, and will use a proprietary motor someone else will make for us.”

Azure Dynamics applied for federal Department of Energy loan funds, but was not funded in the first round. The company’s business—which put it on Ford’s radar screen—has been primarily creating hybrid commercial vehicles on Ford’s E450 platform. Clients have included FedEx, AT&T, Purolator Courier (Canada) and the Mexican Bimbo Bakeries (the name probably works better in Mexico) which has recently expanded into the U.S. The company has also made hybrid shuttle buses for the states of Minnesota, Michigan and Kentucky.

Harrison points out that commercial vehicles cover only 12 percent of U.S. transportation miles, but account for 25 percent of emissions—so there could be a big market in cleaning up those tailpipes. The current commercial market is 300,000 vehicles annually in non-recession years.

“Our market is class three to class five,” said Harrison, “FedEx delivery trucks, 15-passenger shuttle vans, work trucks. The market could go way north of 300,000, and the share for hybrids and electrics is likely to mature quickly as energy storage costs come down. As it is, we offer an economic payback on our hybrids in four or five years.” The hybrids offer up to 40 percent fuel savings, and 30 percent greenhouse gas reductions.

Azure has 400 vehicles either on the road or in the process of being ordered. Its trucks have covered more than two million miles with customers. Harrison says that when the market matures, Ford will probably take back its hybrid and electric truck business. “The OEMs really know how to make light-duty vehicles,” he said. “When the volumes are there, nobody does it better. But for us, commercial vehicles are a pretty safe market, and we’re going to stay focused on them.”

Ford’s Moore says that the company uses “upfitters” where appropriate, as it is with outsourced natural gas vehicles. “This is expensive technology, and it makes sense for us to collaborate at this stage, when volumes are still relatively low and markets are still emerging.

Moore said that Ford is “on track” to be solidly profitable in 2011, and outsourcing remains part of the picture.