Will your franchise win in the NEV wars? Part 7: General Motors

This entry is part 7 of 9 in the series New Energy Vehicles

This post is the seventh of a series reviewing the financial resilience of major auto makers and their ability to make profits during the transition from conventional to electric vehicles. The auto-makers reviewed are Daimler, BMW, Volkswagen, PSA, Ford, General Motors and Toyota. The first post asked where they might get the money to fund the transition to new energy vehicles (NEV’s). The second gave the financial results for each firm under three scenarios based on the speed of adoption of NEV’s: SLOW, MODERATE an FAST. The rest of the posts look at the outlook for each firm individually taking into account its publicly stated strategy for the transition. This post assesses General Motors.

Click on images or tables to enlarge.

GM Impact – electric concept car, 1990

General Motors ranked #5 in the Financial forecasts. While it lost money in the SLOW scenario, it made profits overall – after initial losses – in each of the other two scenarios – MODERATE and FAST. The key factor influencing GM’s forecast results is its high degree of Operating Leverage so, it loses money quickly in bad times and makes it as fast in the good ones. The forecast suggests that GM shareholders will be more profitable if they take, at least, a moderately fast track towards NEV adoption in their product offer. Of course, considering GM’s development of the Impact electric concept car in 1990 and the EV1 in 1996, GM could be described as following the SLOW adoption route to NEV technology by default. But, even if its pace has been slow, it can also claim respectability for the Chevrolet Bolt, launched in 2015 and in production since 2016 and the Volt, its PHEV companion.

GM Retained Profit forecasts under 3 scenarios

But, having been both a leader and a quasher of EV products – GM abruptly ceased selling the Bolt in Europe in 2017 – does GM have the financial resources to make the next step in the transition to NEV’s now? GM ranked #6 in financial resilience, beaten by VW by just two points – but, to be fair – the new GM is less than 10 years old and some would argue that it’s still in transition, having shed its European operations to PSA in 2017, after racking up a reputed $20BN in losses. It ranks #4 in Liquidity & Debt, beating Ford, PSA and VW, owing to its tight control of external debt and working capital. In Operational Efficiency, it rated #4 , leading Ford and BMW; it’s strong point is stock turn – it moves quickly to match supply and demand allowing GM to achieve almost double the stock turn of its premium rivals. Only Ford and Toyota better it on that metric. Sadly, GM’s working capital control is slowly deteriorating as the speed of payments from debtors has slowed in recent years.  Revenue & Growth is an area of


mixed fortunes. GM has lost significant global market share since 2016 (-17%), but Gross Profit margin is sharply up, while its rivals have seen some gross profit margins decline. GM ranked #3 on Profitability, just behind Toyota, hurt mostly by poor profit efficiency (operating profit/gross profit%), another indication of GM’s high break-even point and sensitivity to a loss in volumes. A more controversial indicator is that, while sustaining large Cap Ex since 2015, it is experiencing a sustained period of negative Free Cash Flow. Worryingly, much of that Cap Ex has been used for share buy-backs  ($14BN by 2018), rather than technology and new models, and some of the free cash flow generated has been used to boost dividend payments.

So, are shareholders happy? Apart from the hedge funds, often accused of ‘pump and dump’ in GM shares, it’s doubtful if long term investors are satisfied.

The ‘new’ GM emerged from bankruptcy in 2010 with an IPO (Initial Public Offering ) of $23.1BN of shares at $33 per share. Over the next 8 years, GM has made stock re-purchases of $14BN. Assuming that earnings were the same after the buyback as before it, the earnings per share must rise. As shares are valued by earnings per share (EPS), the share price should rise in proportion. Did that happen for GM shareholders? Sadly, No. GM’s EPS fell until 2014, and has been volatile since. The share price too showed no enduring appreciation between 2010 and 2018. However, Mary Barra, GM’s CEO since 2014, stood to gain $10MN by exercising her share options at the time, according to HBR. That might be excused by shareholders if the sale of the 7% stake in PSA, acquired in 2012 to cement the ‘GM-PSA Alliance’ had not been completed so cheaply. It was acquired in March 2012 for $400MN and sold in December 2013 for $253MN to institutional investors. That same year, the French government and Dongfeng Automotive each purchased 14% of PSA, paying €800MN ($885.5MN) each for their stake. By 2018 the same stake was valued at €2.2BN ($2.43BN).

Since 2016, GM has encountered a ‘perfect storm’ in their main export markets. While selling their access to the European market, reducing operating losses, GM also faced significant costs for exiting Europe – $5.5BN in exit charges plus $3BN in debt to cover pension liabilities. Then, as their EU sales faded away, so did China. GM sales have tumbled from 4.04MN units in 2017 down to 3.09MN units in 2020, a drop of 24%. In total, GM’s global sales shrunk by 17% between 2016 and 2018. Falls to that level signal that GM is below break-even in the crucial China market. Its entire strategy of retrenchment was based on winning big in the US and China. That looks unlikely in Q1 2020.

What does GM’s exit from Europe say about their long-term strategy? In profit terms, jettisoning OPEL/Vauxhall allowed GM to end production of 20 years of loss-making vehicles and raise their automotive business bottom-line, from 2% to 8% in the years 2017 – 2018. More importantly, it signalled their new focus on SUV’s and Trucks, rather than cars and a way out of the EU’s ever-tightening emissions and fuel economy regulations. But, within a year of the sale being agreed, the market risks that it deepened were apparent: increased dependence on the North America and China markets. When either one of these falters, GM is thrown into operating losses. In the medium term, escaping from EU emissions and fuel economy regulations, may have provided only temporary respite. China seems set on expanding the role of EV’s, diminishing GM’s sales potential in that market too.

Still, no-one should write-off GM. It sells cars in 90 countries and sells 8MN+ cars a year. Its published strategy – electric vehicles- is a potential world-beater: it plans 20 electric vehicles by 2023 based on its own battery research and collaboration with Panasonic. In 2016 the Chevrolet Bolt – the first affordable electric vehicle with 200mile/300km+ range was launched and achieved the highest sales of an electric car in its first year. So, if I was a dealer in China or the US, GM would remain on my list, just not at the top.

Can GM Win The NEV Wars?

General Motor’s subsidiary Cruise ‘Origin’ EV/AV test product

There are four ‘must-have’ elements for a conventional auto-maker who wants to adopt mass production of electric vehicles: first, the senior management must be committed and aligned with the strategy. Second, they need the money to fund the technology and the transition. Third, the OEM requires control of battery production and technology. Otherwise, much of the potential profit is in the hands of the battery supplier. Finally, a dedicated EV platform is required. It costs more but, without it, the vehicles produced are, at best, an acceptable compromise. For a manufacturer aiming at the mass-market, such as GM, two additional factors are critical: low vehicle build cost and volume market access.

GM’s slow progress in NEV’s, despite its undoubted engineering ability, reflects understandable dissent among many top management’s in the US about their nation’s direction of travel. While there are many local initiatives by individual states, there is no agreement at the national, federal government level concerning global warming, or even emissions. Rather there are efforts to lessen the burdens of emissions control on auto-makers. At the same time, a large section of the US public remain enamoured of large SUV’s and Pick-Up’s. So, the default strategy of GM makes short-term sense: ‘wait and see’ for the US market and prepare for ever deepening emissions regulation in Europe and China. For example, GM president, Mark Reuss unveiled an even larger, conventionally engined Chevy Tahoe SUV in late 2019. Earlier the same month GM announced a 30 GWh battery cell plant in northeastern Ohio in a joint-venture with LG Chem. Clearly, the output from this plant is not required for their best selling EV, the Chevrolet Bolt. 54% of that product, including the battery is already made by LG in South Korea, so GM at least intend to keep their options open.

Chevrolet Bolt BEV2 Platform

As for funding the transition, GM are in a similar financial position as their cross-town rivals, Ford. In 2018 GM could pay its interest almost 15 times over, but it has negative Free Cash Flow, high Financial Leverage and high Gearing compared to any of its European and Japanese counterparts. It’s doubtful if shareholders would provide more cash. After all, the long term shareholders didn’t benefit from the share buy-back programme. However, at the right price, the capital markets might be willing to finance them.

‘Wait and See’ aligns with their NEV product development and market stance. For years, GM has said that the Chevy Bolt would be the first of a series of vehicles. In 2017 CEO Mary Barra announced 18 new NEV’s within 5 years. As it turned out, the first unveiling in 2019 was of a new EV test project in the US – a Cruise Origin, planned for an autonomous ride-hailing service in San Francisco sometime in the future. It launched its latest EV in China: the Chevy Menlo EV promising an all-electric Cadillac ELR in the US, “soon”.

Does it have access to a mass market for EV’s? Its exit from Europe has been commented on above but it still has significant sales of ICE vehicles in China, some of which could be transitioned to NEV’s. More importantly, does it have an EV platform for its chosen direction of travel – SUV’s, Pick-Ups and Trucks. Probably not yet. Mark Reuss announced in 2019 that he expected the new BEV 3 platform to be ready by 2023. The BEV 2 platform is used in the Bolt.

There’s no doubt that GM could make the transition to NEV’s if they needed to but there’s no evidence that they will be a leader in the race. The strategic dilemma they face – and their US counterpart, Ford, is the absence of a clear timetable for a US market for NEV’s. The consequence is that they are deprived of a predictable domestic EV market in which they can achieve scale economies. Instead they must compete in the most dynamic and competitive EV market available, China. If US auto-makers switch too early to NEV’s, they risk losing volume and profitability at home. If they switch too late, they risk losing volume to newcomers, such as Tesla, or exporters, such as VW or Toyota, whose products may be more competitive by the time GM arrives.







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