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John Engle
John Engle
Articles (529) 

Will General Motors Be the First Profitable Electric Car Company?

An aggressive transition to EVs will be supported by GM's existing profitable lineup

June 26, 2020 | About:

General Motors Corp. (GM) is betting big on electric vehicles. The Detroit-based automaker plans to spend $20 billion over five years to electrify much of its product lineup. However, whether that investment will result in a new generation of profitable EVs is not yet clear.

Making EVs for a profit

GMs roadmap to full electrification calls for a relatively slow and steady start. This makes sense in light of the fact that the company currently produces just one EV model for the U.S. market, the Chevrolet Bolt. Next year will see just two more additions to GMs EV lineup, the all-electric Hummer pickup truck and the Cadillac Lyriq crossover SUV.

While GM will eventually offer a wide range of EVs to serve every consumer price point, it is starting with more expensive, niche products. The new Hummer and Lyriq are each expected to sell for around $50,000. This approach makes some sense, since the higher-end EV segment has been proven out by other automakers, especially Tesla Inc. (TSLA). However, a steep price tag risks constraining sales volumes, especially early on, which may dampen public interest. Ultimately, consumer demand will have to be great enough to support mass-market volume production, as Patrick George, editorial director of The Drive, observed on June 12:

No EVs sell in profitable volumes yetnot even for Tesla, which still makes much of its bones on selling regulatory credits. To prep for the future, automakers must sacrifice proven profit machines for new technologies that have yet to see widespread adoption.

The task of developing a genuinely profitable mass-market EV lineup is not for the faint of heart, given the fact that no other automaker has managed to do so yet. Even Tesla, which is widely considered the market leader in the EV space, has thus far failed to deliver on its promise of a profitable mass-market EV. Indeed, the upstart EV company posted a painful $862 million net loss in 2019, despite delivering a record 367,500 vehicles.

GM is clearly taking a big risk by betting big on EVs. As I discussed in an article for GuruFocus earlier this week, it is a calculated one. Even so, exogenous variables may make GMs already daunting task even harder. The Covid-19 pandemic, which sparked nationwide lockdowns and threw the economy into recession, may tamp down demand for GMs burgeoning EV lineup.

Starving the old to feed the new

GMs plan for rapid electrification comes at a high price. The $20 billion it has committed to EV development might otherwise have been deployed toward improving and refreshing its existing fossil fuel-powered vehicle platforms. That is an inherently risky strategy, as Automotive News reported on June 11:

Fewer updates for popular gasoline-powered models may hurt market share, underscoring the quandary the industry faces as companies try to fund an electric-focused future. The billions spent on plug-in vehicles that typically lose money and that no one besides Tesla Inc. has sold in large numbers takes investment dollars away from their bread-and-butter vehicles at a time when the global pandemic has hurt sales.

While Ford Motor Co. (F) is set to update and refresh 83% of its vehicle lineup, GM plans to refresh just 65%. Even if GMs pivot to EVs pays off in the long-run, market share lost during the transition period may prove difficult to recover rapidly.

Even so, GMs commitment to electrification makes sense as a long-term response to the broader economic and consumer macro-trend toward sustainability. Indeed, the whole industry is struggling with the same challenge. Automakers worldwide are laboring to find the best way to transition their vehicles from internal combustion to more sustainable alternatives, especially electric. They must walk a fine line in order to maintain their financial sustainability as the transition toward environmental sustainability. On June 12, George reflected on this delicate tightrope act:

Refreshing less of their sales volume puts automakers at risk of falling behind competitors. But at the same token, these companies largely have to shift to EVs and AVs for competitive reasons, as well as regulatory reasons. Getting to the future of cars is a real balancing act.

My verdict

After years of splashing around in the EV market, General Motors is diving headlong into the deep end. Whether the automaker can successfully transition its lineup in the coming years without losing market share remains to be seen.

GM claims that it will be able to maintain its market share, and may even expand it thanks to its forthcoming EV fleet. The company is especially enthusiastic about the opportunity to grow its presence on the U.S. coasts, where EV adoption has been most robust.

Whether GM can transition to EVs profitably is an open question. Thankfully, GM has an existing lineup of popular gasoline-powered vehicles, including a number of very successful crossovers and SUVs. The company should be able to bankroll its EV rollout with those existing products, an advantage not shared by all of its peers, such as the all-electric Tesla.

If GMs bet pays off, it could do wonders for its stock price. In a June 24 investor note, Morgan Stanley (MS) automotive analyst Adam Jonas argued that a high-quality EV lineup could prove transformative for GMs valuation. According to Jonas, GM may soon become a genuine challenger for Teslas EV crown, which could add as much as $100 billion to its valuation. That would be a huge boost for a company, whose market capitalization is currently $36 billion.

In my assessment, GM is playing to win in the EV space. I think it has the financial resources, expertise and vision to execute on its strategic roadmap. The company still has a lot to prove, and it is putting its hard-won market share at risk, but GMs transition will likely become a dominant narrative in the media and market for some time. That alone could serve to boost GMs stock significantly over the next few years.

Disclosure: Author is short Tesla.

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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.

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