Marin Gjaja: Yes, I don’t think we’re prepared right now to commit to a specific timing on when we’re going to be positive EBIT. We are going to expect to see improving gross margin quarter-over-quarter over the course of the year. John mentioned some of the levers we’re starting to pull, and we will continue to adjust to the market realities. We’ve changed our production. We have increased C&I as need be to address our inventory issues. And we’re going to keep working on our cost. We’ve taken 4,000 to 5,000 out of the BOM on Mustang Mach-E since it was launched and 2,000 to 3,000 out of Lightning and the team continues to work. But the market is turned and it’s going to be a challenge. And I don’t know that we can commit because we don’t know exactly what’s going to happen in the market.
In terms of warranty costs, our Generation 1 vehicles, as we mentioned earlier, have been incredibly valuable for us to learn about a set of the issues around batteries and thermal obligation. And we will continue to work on that to lower our warranty costs dramatically for Generation 2, but we’ve got to deliver that in partnership with Kumar and the industrial platform.
John Lawler: So Rod, I think the last part of your question was around, are we going to start to see costs turn? I would say that from a warranty standpoint, costs are probably going to be about flat this year. We’re starting to see green shoots in the quality improvements. But as you know, the way that works, there’s a lag. And Kumar can touch upon this a little bit more, but this year, we expect to see $2 billion of efficiencies flow through. And those efficiencies are in the material cost in the industrial system, pretty much offsetting the impact of the UAW. But also remember, 60% of our global portfolio this year will be refreshed. And coming with that will be incremental costs that we have for new features, compliance, et cetera. And so what we should see this year is the efficiencies of $2 billion offsetting the UAW labor contract plus the refresh costs of our 60% of our products being refreshed this year.
Rod Lache: Got it. Okay, thank you very much.
Operator: The next question is from Dan Levy with Barclays. Please go ahead.
Dan Levy: Hi, good evening. Thank you for taking the questions. I want to go back to Pro and your — the guide that you have for this year is already in line with the mid-teen margin guide you provided at your CMD last spring. So really the question is, how sustainable is this earnings stream? And specifically, I think you’ve had something like $7 billion of price tailwind. Last year, I think $11 billion if you aggregate over a two-year stretch. I know this is partially driven by new product, but what is the sustainability of these very robust price tailwinds you experienced?
Jim Farley: Well, first of all, I tried to explain the fundamental factors for our vehicle profitability in Pro that’s driving that demand will be here for a while. It’s basic infrastructure, government state, 5G, onshoring, manufacturing, manufacturing sector. We believe that, that’s very durable. And by the way in Europe, we’ve been the top-selling brand there for nine years and we have very old products. So we haven’t even seen the effect of Transit Custom and Ranger that’s all coming our way. We feel that this is a pretty robust profitability because we’ve never had the 20% attach rates. We’ve never had 0.5 million units of software with 50% margins. We’ve never really focused on Pro aftersales like we are now. We’re just getting started with this 20% of the profitability coming from attached services.
And I think that totally changes the risk portfolio of our commercial business. And we — this is a real opportunity for our company that we never had. I also believe that attach rates are the kind of things that we’ll start to see on the retail side of our business. Blue’s software is now 70% margin and it’s high volume now. And we’re just getting started with that optionality. So what it will be five years from now? I’m not sure the time frame of your question, hard to predict. But for the next couple of years, we’re in a really good spot because the shovels are in the ground or about to get in the ground. The one other thing about Pro that we have to watch really carefully, which would be even more upside is a return to a robust construction housing market, which has been really slow in the last couple of years.
If that starts to fire up, we’re going to even have more capacity issues on Pro.
Dan Levy: Great. And then as a follow-up, John, I want to go back to your comments that you just mentioned a second ago on the industrial costs. And specifically, I think at the CMD, talked about a $7 billion cost disadvantage versus your competitors in Blue. So how do we contextualize the cost improvements that you’re adding now versus the $7 billion? I mean, is it safe to say that now this journey on sort of narrowing that gap is starting? Or is it still just still a lot more work to do? Just help us understand the path to narrowing that cost gap versus your competitors’ inflow?
John Lawler: Yes. What I would say is that it is now we’re starting to gain the traction and that gap should start to narrow. And your — that’s part of the $2 billion. And so it’s going to be across the industrial system, both in material and in labor. And I think Kumar can share some more details on how he’s leading that and driving that.
Kumar Galhotra: Yes. Thanks, John. Well, this year, we’re starting very differently than ’24 than ’23, for example. A couple of fundamental different things. Last year, we had a lot of inflationary pressures and claims from our suppliers. Those have eased very substantially and are going to help us deliver the $2 billion that John talked about. The second thing is the supply chain is much more stable. That allows us to run our entire system much more smoothly and helps us remove a lot of waste. It also reduces a lot of our freight cost because we’ve been doing a lot of premium freight last couple of years so that will help as well. And in terms of material, we’re attacking it in like 3 different ways. One is where our designs are not efficient, so I want to give you a bit of color on what those are, a couple of examples.
In one of our vehicle lines, we were using certain aero shields for fuel economy and the fresh eyes Kaizen review internally and some benchmarking, the team came up with a different way of delivering the same aero and save $40 per vehicle. So that’s equivalent to about $10 million per year. Another category is where we are providing certain features to our customers where they’re not finding a lot of value. And connected vehicle data here is very important because it helps us see what we’re providing, whether the customers are using it or not. So one example is an auto part feature that lets the customer parallel park automatically. Very, very few people are using it. So we can remove that feature. It’s about $60 per vehicle, another $10 million per year.
We’re doing very extensive benchmarking for our manufacturing, both internally because we have lots of good ideas within our system and externally at a station-by-station level. So just recently, one of the teams completed analysis of about 50 stations and saved about $8 million. And I already mentioned the freight. So these are the kinds of very robust ideas we have in the hopper, along with less inflationary claims, along with a stable supply chain that’s going to help us close that gap that John mentioned and save $2 billion this year.
Dan Levy: Great. Thank you.
Operator: The next question is from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Emmanuel Rosner: Thanks so much. I was actually hoping to pick it up just where you left off on all that good color on the cost side. Are there any green shoots that you can sort of point us to, to give us increased conviction around some of these costs? Obviously, in 2023, cost was still a fairly major drag and that includes even in the fourth quarter. So like any in your reporting, any of these markets that we should be watching in terms of what will actually provide the tailwind, the $2 billion-plus in 2024?
Kumar Galhotra: It’s just fundamentally the things I talked about. We have a very robust hopper of ideas that we’re very busy executing. Stability in supply chain, removing a lot of waste, and freight cost. So we spent a lot of money, all of us did, in premium freight. We’re starting to see in fourth — third quarter and fourth quarter a much more stable supply chain that allows us not to spend that premium and bring those costs down in 2024.
John Lawler: Emmanuel, the other thing I would add to that is that when you look at ’22 and ’23, we were very much behind the curve of supply base, catching up to where they were and understanding what was driving their inefficiencies in claims. And we spent a lot of time in 2023 getting out in front of that. And I would say that we ended ’23 with a great work that Liz has done to be at a very different place with our supply base. And now we’re working together with them very proactively across industrial system to identify efficiencies, things that we can change to help them and, as Kumar said, design actions, et cetera, things like that, that will make them more efficient as well. So that’s another bit of color to add to that.
