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John Engle
John Engle
Articles (528) 

General Motors Bets on an Electric Future

GM is spending $20 billion to jump-start its electric vehicle lineup

June 25, 2020 | About:

Even before the financial crisis struck in 2008, General Motors Co. (GM) was in dire straits. Faced with a punishing recession, the debt-laden, money-losing automotive juggernaut had no alternative but to seek bankruptcy protection and a government bailout.

More than a decade later, with recession once again biting into the American economy, GM is looking much better. Rather than fighting for survival, the venerable Detroit automaker is gearing up for an ambitious strategic pivot. Specifically, the company is going all-in on electric vehicles, a bet that carries considerable risk but also massive opportunity.

Betting on the future

Long a relative laggard in the realm of EVs, GM kicked off 2020 with a bang. On Jan. 27, the company announced a $2.2 billion investment to build out its first all-electric vehicle plant. The plant is slated to produce an electric Hummer pickup in 2021, as well as a series of electric SUVs and a commercial electric van.

That was just the tip of the iceberg. On March 4, GM unveiled a new strategic roadmap with EVs squarely in the center. CEO Mary Barra declared that she wants to “put everyone in an EV” as GM joins the global effort to transition to sustainable transportation:

“We believe climate change is real. We have the ability and the responsibility to create a cleaner planet.”

GM laid out its plan to invest $20 billion in EVs over five years, which would see 20 all-electric models available by 2023. The company is moving fast for a reason. As Bank of America senior automotive analyst John Murphy observed on June 9, GM has a fairly narrow window of opportunity to transition to EV successfully in such a tight timeframe.

“You have the gap period of time where you can ride the wave of your profitable products for a few years, so (shifting to electric powertrains) won’t impact GM for the next two years. But that means GM has to kick it off in the time where they are in a period of strength.”

GM has certainly jump-started its electric ambitions in style. If its bet pays off, GM will be well positioned as a major leader, if not the dominant player, in the EV space – domestically and internationally.

Endangering the present

GM enjoyed 17% U.S. market share at the end of 2019. However, 2020 was set to be a challenging year for the company, even before the disruptions of the Covid-19 pandemic and concurrent economic downturn gripped the nation. In February, CFO Dhivya Suryadevara presented a sober outlook:

“We’re expecting [to be] about half a million units down in the U.S. We’re expecting [sales in] China to continue to be down, as well as markets in South America.”

While GM’s “very active shift” to EVs is a sign of real confidence in its strategy, the transition “may result in lost market share,” according to Murphy. On June 12, Sam Abuelsamid of Guidehouse Insights expressed a similar sentiment, warning that a myopic focus on next-generation EVs could end up starving existing products of resources:

“There’s certainly a risk of losing some market share and not necessarily growing quite as fast as the rest of the industry, as we hopefully head into a recovery over the next two to three years. GM has put a lot of resources into electric powertrains and vehicles that use those. That means they’ve taken away some of the resources from traditional products."

Going all-in on EVs may make sense as a long-term strategy, but GM could suffer if it neglects its existing profitable automotive business. While GM’s leaders insisted that market share would not come under serious threat as it transitions to EVs, their assurances are unlikely to dispel the fears of the skeptics.

A calculated risk

Overall, I am cautiously optimistic about General Motors' EV strategy. The venerable automaker has charted an aggressive course, but it is one that should position it for success as EV adoption becomes more widespread.

Fortunately, GM is starting from a solid financial foundation, despite seeing its profits fall 86.7% in the first quarter to $294 million. While undoubtedly painful, it was a triumph by comparison to other major domestic automakers, such as Ford Motor Co. (F), which endured punishing losses as a result of the Covid-19 economic shutdown. GM ended the first quarter with $33.4 billion in automotive liquidity. While a fair chunk of that is spoken for already, such as the $2.2 billion earmarked for the new EV plant, the company has a strong cash cushion at its disposal.

Overall, GM is looking pretty good, both compared to its peers today and compared to its own financial position in the last major economic downturn, which forced it into bankruptcy. If GM can execute its EV strategy effectively, it will be well placed to prosper during the next economic expansion.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

Rating: 4.3/5 (3 votes)

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Comments

ds002000
Ds002000 - 1 week ago    Report SPAM

With so many auto manufacturers investing heavily in EVs, the supply of EVs is predicted to vastly outstrip demand. This pivot to EVs coupled with the investments in autonomous vehicles that won't meet the promised "vision of the future" anytime soon will drain GM as they have neglected their profitable vehicle lines and this time may kill them for good. (but who knows, Chysler seems to have 9 lives)

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