While everyone is busy dissecting Ford's electric vehicle strategy and the future of Ford Pro, a quiet revolution is brewing within the company. Ford's hybrid business is not only experiencing explosive growth but is also reaching a crucial inflection point - profitability.

In the Q1 2024 earnings call, Jim Farley, Ford's CEO, dropped a bombshell that seems to have slipped past most analysts. He revealed that for the first time, some of Ford's hybrid models are achieving contribution margins "above or at similar" levels to their pure internal combustion engine counterparts. This is a game-changer, not just for Ford, but for the entire auto industry grappling with the complex economics of the electric transition.

Let's rewind for a moment. Ford's hybrid journey began over two decades ago, giving the company a significant head start. While Toyota and Honda have long dominated the hybrid space, Ford's focus has been decidedly different – trucks. In fact, the F-150 hybrid and the Maverick hybrid are the number one and two best-selling hybrid trucks in the US.

Now, the real magic is happening. The pricing premium for Ford's hybrid models is finally sufficient to cover the incremental material cost of the hybrid technology. This, combined with healthy demand, is pushing hybrid contribution margins into uncharted territory – on par with or even exceeding traditional ICE vehicles.

This quiet hybrid success story has implications that go far beyond just boosting Ford's bottom line. It offers a compelling alternative path for the entire industry as it navigates the choppy waters of the electric transition. Here's why:

Affordability is King: While early EV adopters were willing to pay a premium, the mass market is demanding affordability. Hybrids, with their lower battery costs and smaller price premiums, offer a more approachable entry point for consumers looking for fuel efficiency without breaking the bank. Customer Choice Matters: As Farley pointed out, EV adoption varies dramatically by geography and customer use case. In some regions, hybrids align perfectly with customer needs, offering tangible fuel savings and added utility like Pro Power Onboard without the range anxiety or charging infrastructure concerns associated with EVs. Bridging the Profit Gap: The brutal reality of the EV market is that many first-generation models are unprofitable, dragging down overall earnings. Hybrids, with their more favorable margin structure, offer a lifeline for automakers to offset these losses while they work on bringing down EV costs.

The Numbers Tell a Story:

Ford's hybrid sales grew 36% in Q1 2024, with the full-year growth expected to be around 40%. The company is targeting 400,000 hybrid units this year, almost double what it sold just a couple of years ago. Ford has intentionally increased capacity for hybrid models like the F-150, anticipating continued strong demand.

The Hypothesis:

Ford's hybrid success, particularly with trucks, could be the key to unlocking shareholder value in the short to medium term. Lower Capital Intensity: Hybrids require less capital investment than EVs, particularly when it comes to battery production. This frees up resources for Ford to invest in other areas, such as Ford Pro, software development, and improving quality. Faster Profitability: As hybrid margins converge with or surpass ICE margins, Ford's hybrid business will contribute significantly to overall profitability, offsetting the drag from EV losses. Stronger Cash Flow: The lower capital intensity and faster profitability of hybrids will translate into stronger free cash flow, allowing Ford to return more capital to shareholders and invest in growth opportunities.

Ford Pro Segment Performance

The following chart illustrates the substantial growth of Ford's Pro segment, showcasing its revenue and EBIT performance over recent quarters.

While Ford is still committed to its long-term EV vision, the company's burgeoning hybrid business presents a compelling alternative path to unlocking shareholder value. As the industry navigates the turbulent waters of the electric transition, Ford's hybrid success story may become a blueprint for others to follow.

"Fun Fact: The Ford F-150, often dubbed "America's workhorse," has been the best-selling vehicle in the United States for over four decades. Its popularity extends to its hybrid variant, which is currently the top-selling hybrid truck in the country."