The automotive industry is extremely capital intensive, a drawback that has long been discussed by investors and analysts alike. Mainstream automotive businesses -- unlike unique automakers such as Ferrari, which boast luxury-like margins -- are notoriously low margin and competitive. The good news, especially for Ford Motor Company(NYSE: F) investors, is that this low-margin business could be on the cusp of shifting gears thanks to a growing digital services market that could be worth hundreds of billions of dollars.
A sneak peek
Ford potentially offers a sneak peek into what the future could look like, at least financially, with growth in digital services. Let's first break down some basic numbers from the first six months of 2024 to show the difference between its traditional business, Ford Blue, and its commercial business, Ford Pro, and why it matters.
During the first half of 2024 Ford Blue generated $2 billion in earnings before interest and taxes (EBIT), while its Ford Pro division more than doubled that, generating EBIT of $5.6 billion. Further, and here's a big point of emphasis, Ford Blue's margin during the first six months checked in at 4.3%, compared to Ford Pro's 15.9% EBIT margin.
Part of that more lucrative growth is due to software technology that Ford has developed for its commercial customers, which the company points out are more quick to adopt new technology, digital services, and software upgrades than traditional consumers.
In fact, subscriptions to Ford Pro software were up 35% in the second quarter and mobile repair orders completed by the company's fleet more than doubled.
For automakers with digital services such as Ford, "the economies of scale are huge," Andreas Nienhaus, partner for Oliver Wyman Forum's automotive and mobility business, told Automotive News. "The more people who use this will provide [automakers] with more data ... and also just give [them] margin. You don't have a lot of hardware connected to it because it is built in the vehicle already."
The future
More broadly, the global market for advanced driver-assistance systems is likely to grow to $307 billion by 2035, light-years ahead of just $1.7 billion in 2023, according to the report from Oliver Whyman Forum. Revenue from digital automotive services is projected to grow 25% annually through 2035, reaching $610 billion that year compared to a meager $42 billion in 2023. The report included 14 mobility services within car-as-a-service, micromobility, digital services, and air mobility.
What this all means is that long-term investors could see a major shift in margins within the automotive industry as these digital services and more software-based products filter down to mainstream consumers. If these high-margin digital services businesses have the same impact for Ford Blue as it did its commercial Ford Pro business, it could mean better margins than investors have seen in the automotive industry, perhaps ever.
It's just a little good news for Ford investors who have watched its stock price spin its tires for a decade, losing 18% compared to the broader S&P 500's 197% gain. The future could be much more lucrative for automakers.
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Daniel Miller has positions in Ford Motor Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
