Ford turns 'dirty' business into a profit driver. GM and Stellantis are taking notice

DETROIT — A once “dirty” word and company in the auto industry has become a multibillion-dollar battleground for American automakers, led by Ford engine.

The Dearborn, Michigan-based automaker has transformed its fleet business, which includes sales to commercial, government and rental customers, into a profit powerhouse. And Ford's cross-town rivals General Motors and Chrysler parent company Stellantis have taken note of this and have also restructured their activities.

“There is much more emphasis now on profitability and how fleet management can contribute to that,” said Mark Hazel, deputy director of commercial vehicle reporting at S&P Global Mobility.[Automakers] looking at how they approach this strategically. It's been a very focused approach in the way they deal with fleets.”

Many fleet sales, particularly daily rentals, have historically been seen as negative for car companies. They are traditionally less profitable than retail sales and are sometimes used by car manufacturers as a dumping ground to dump excess vehicle inventory and boost sales.

But Ford has proven that’s not always the case, publishing financial results from its “Ford Pro” fleet business. The operation has brought in about $18.7 billion in adjusted profits and $184.5 billion in revenue since 2021.

Such results have led to Wall Street praising the company, as analysts have called it a “hidden gem” and Ford's “Ferrari“, referring to the highly profitable Italian sports car manufacturer.

“No other company has Ford Pro. We plan to fully leverage that advantage,” Ford CEO Jim Farley said on July 24 during the company’s second-quarter earnings call, in which Ford Pro was the dominant performer.

According to J.D. Power, fleet sales typically account for 18% to 20% of annual light vehicle sales in the U.S., excluding some larger trucks and vans.

Part of the opportunity in fleet sales comes from the aging vehicles on U.S. roads. The average age of the 25 million fleet and commercial vehicles on U.S. roads last year was 17.5 years, according to S&P. That compares with 12.4 years old for light passenger cars in 2023.

While commercial sales, considered the best fleet sales, are expected to be slightly lower this year than in 2023, both GM and Stellantis have recently redesigned and doubled such operations. However, neither reports such results separately.

“If we break down the fleet channel, we see that commercial sales have been the weakest. And if we drill down further, there are only two [original equipment manufacturers] “These appear to be the ones struggling most: STLA and, to a lesser extent, GM,” Wolfe Research said in an investor note on Wednesday.

Meanwhile, Ford's commercial volumes are up a “strong” 7% this year compared to 2023, Wolfe said.

While fleet sales data isn’t as readily available as retail sales, Wolfe Research estimates that Ford is a distant leader in such revenues, with a forecast of $9.5 billion this year. That compares with North American operations at GM at $5.5 billion and Stellantis at around $3.5 billion, Wolfe estimates.

S&P Global Mobility reports that Ford has been the fleet leader for some time. As of 2021, Ford’s market share of new fleet vehicle registrations (categorized by companies with 10 or more vehicles weighing less than 26,000 pounds) is about 30%. GM had about 21%-22% during that time, and Stellantis had about 9%.

GM, based on third-party data, says it surpassed Ford last year in one segment of fleet sales: commercial vehicles sold exclusively to businesses (with five or more vehicles) and not to individual buyers.

Ford, meanwhile, said it is counting “all customers who register their Class 1-7 large truck or van under their company,” not just customers with five or more vehicles.

Ford said it led sales of commercial vehicles, categorized as Class 1-7 trucks and vans, with about 43% of U.S. registrations through May of this year, up 2.3 percentage points from a year earlier, the company said.

The Ford Pro division is led by sales of the automaker’s Super Duty trucks, which, along with the Ford F-150, are part of the F-Series. The lineup includes full-size pickups, commercial vehicles and chassis cabs.

It also includes sales of Transit vans in North America and Europe, all sales of the Ranger mid-size pickup in Europe, and service parts, accessories and services for business, government and rental customers.

Automakers including Ford also see fleet management as a key driver in other ways, such as for sales of electric vehicles and recurring revenue streams such as software and logistics services.

“These sales have gross margins of 50-plus percent, which results in significant operating leverage and improved capital efficiency,” Farley said during the quarterly earnings call. “The majority of this new software business is actually Ford Pro.”

Ford aims to achieve $1 billion in software and services revenue by 2025, primarily through its fleet and commercial divisions.

“Ford Pro is core to Ford and there is potential upside on volumes, but also on software and service,” BofA's John Murphy said in an investor note Thursday. “On the software side, Ford Pro accounts for ~80% of Ford's software subscriptions with an attach rate of just 12%, which is expected to grow to 35%+ in the coming years.”

While Ford is touting its fleet operations, its biggest competitors have been expanding theirs.

Chrysler parent Stellantis is relaunching its Ram Professional division this year with the goal of achieving record profitability by 2025 and eventually becoming the largest seller of light commercial vehicles, excluding some larger vehicles.

Christine Feuell, CEO of Stellantis' Ram brand, declined to provide a time frame for achieving that goal, but said the automaker is confident it can be achieved after a complete overhaul of its operations and a focus on better integrating its operations for customers and growing profits through sales and new services.

“It’s a very profitable business. Not just on the product side, but also on the service side,” she told CNBC at a media event last week. “Software and connected services are also a really significant growth opportunity for us.

“We are slightly behind Ford in launching these services, but we certainly expect to see similar growth and revenue from these connected services.”

Ram accounts for about 80% of Stellantis’ U.S. fleet and commercial business. It has a new or refreshed line of trucks and vans coming to market, plus a host of connected and telematics products to help fleet customers. It has also expanded the availability of financing and loans for commercial customers.

“This year marks the beginning of our commercial offensive,” said Ken Kayser, vice president of Stellantis North American Commercial Vehicle Operations, during the media event. “2024 is a foundational year for our brand as we look to build momentum for 2025.”

GM is not sitting still either. It has been renewing its fleet and commercial operations. Last year it launched “GM Envolve,” its renewed fleet and commercial operations focused on fleet sales, digital telematics and logistics for commercial customers.

Sandor Piszar, vice president of GM Envolve in North America, said the Detroit automaker sees the business as a competitive advantage, not just to sell vehicles but also to create recurring revenue and relationships with businesses.

GM Envolve, formerly known as GM Fleet, has reorganized the automaker's operations into a one-stop shop for fleet customers, from sales and financing to fleet management, logistics and maintenance.

“GM Envolve is a critically important part of General Motors' business. It's a profitable business,” he told CNBC earlier this year. “We think the approach we're taking in this consultative approach of having a single point of contact and coordinating the entire portfolio that General Motors has to offer is a competitive advantage.”

GM and Stellantis declined to disclose the profits and profitability of their fleet operations.

GM Envolve includes the company’s commercial EV business, BrightDrop, which was folded back into the automaker last year instead of operating as a subsidiary. It didn’t achieve the growth GM had expected, but EVs offer an opening for automakers’ fleet and commercial sales.

“BrightDrop is a tremendous opportunity for General Motors and for GM Envolve,” Piszar said, referring to fully electric vans specifically for last-mile deliveries and small local businesses. “There are a lot of use cases, and as we ramp up production and have customers try the vehicle, that’s a key part of our model.”

Unlike residential customers, many fleet and business customers have pre-defined routes or schedules that are a good fit for electric vehicles because they drive locally in a region and can charge overnight, when electricity costs are lower.

S&P Global reports EV startup Rivian Automotive was the largest US manufacturer of fully electric vans last year, roughly doubling the number of Ford, its closest competitor, in second place.

While the initial investment is high, automakers say the eventual payback may be worth it for some companies.

All three of Detroit's traditional automakers are touting such benefits to their customers while still offering traditional internal combustion engine vehicles.

Stellantis and Ford have also begun to showcase their portfolios with different powertrains, such as hybrids and plug-in hybrid electric vehicles, as the adoption of electric vehicles has not been as rapid as many expected.

Ford last month announced plans worth about $3 billion to expand production of the Super Duty, including by “electrifying” the Super Duty trucks.

“We’ve moved to a multi-energy platform for all of our commercial vehicles so we can offer customers a choice that we don’t think any other competitor will have,” Farley said during the earnings call. “We believe we’ll be a first mover, if not the first mover, in multi-energy Super Duty.”

— CNBC's Michael Bloei contributed to this report.