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John Engle
John Engle
Articles (212) 

Is GM Really Embracing Green Technology?

The restructuring could be the harbinger of a new business model

November 28, 2018 | About:

On Nov. 26, General Motors (GM) announced a major restructuring, outlining plans to lay off approximately 15% of its workforce and shutter five manufacturing plants. Management has forecast that this will increase annual adjusted cash flow by approximately $6 billion, due to cost reductions of $4.5 billion and a decrease in capital expenditure of $1.5 billion.

As part of this transformative strategy, GM has stated a commitment to developing new products, including electric vehicles and autonomous driving systems. Yesterday’s investor statement goes as far as saying that "resources allocated to electric and autonomous vehicle programs will double in the next two years," a point we discussed in an earlier article.

However, while it is true that GM’s long-term future is likely to lie in the EV space, what is being lost in much of the commentary on the automaker’s restructuring is that this is not a wholescale embrace of green technology. Indeed, a closer look at the strategy document shows that GM is cutting a range of sedans, as well as the Chevy Volt hybrid, in favor of trucks and light trucks (minivans, SUVs, crossovers). To understand why, we need to look at automobile demand in the U.S. over the last decade.

The bigger, the better

Demand for light trucks in the U.S. has significantly outpaced demand for passenger cars in the last few years. Light trucks outsell their smaller brethren by a ratio of more than two-to-one. According to the Kelley Blue Book, the top three best-selling automobiles in the U.S. in 2018 are the Ford F-150, the Ram Pickup and the Chevrolet Silverado -- all pickup trucks. In the Blue Book’s top 20 best-selling cars, 10 are crossover SUVs alone. By contrast, passenger car sales recently fell to below 30% of the overall American market for the first time in history. Five years ago they constituted almost 50% of the market.

How is GM responding to this combination of record truck demand and declining passenger car sales? As mentioned above, the restructuring strategy involves the closure of five plants. These are: Oshawa Assembly (Ontario), Detroit-Hamtramck Assembly (Detroit), Lordstown Assembly (Warren, Ohio), Baltimore Operations (White Marsh, Maryland), and Warren Transmission Operations (Warren, Michigan).

As pointed out by the FT’s Alphaville blog, what all of these plants have in common is that they all make sedans and hybrids (with the exception of Oshawa, which also manufactures trucks). The plant closures will affect the Chevrolet Cruze, Volt, Impala, the Buick LaCrosse and the Cadillac XTS and CT6 sedans, which are all being discontinued. So not only is GM cutting a range of passenger cars from its product line, it is also shuttering the locations in which those vehicles are manufactured: Baltimore Operations makes hybrid transmissions and electric motors, as does Warren Transmission Operations. If GM is indeed pivoting to green technology, then this is surely a case of throwing the baby out with the bathwater.

Verdict

This restructuring could be the harbinger for a new model for the company -- one in which GM prioritizes light trucks, but simultaneously pours more investment into the Chevy Bolt, its budget electric car. Perhaps we will see the light truck and electric vehicle segments continue to independently evolve alongside one another as conventional passenger car models are cut from production lines.

But what we can say for sure is that GM is retreating from the passenger car market in order to focus on the faster-growing and much more lucrative light truck market. The electrification of this segment is very much a work in progress, and most analysts do not expect to see a viable electric pickup truck any time soon. The future may be green, but it is still very far off.

(This article was co-authored by Stepan Lavrouk, director of research at Atreides Capital LLC and a former research analyst for Almington Capital Merchant Bankers.)

Disclosure: No positions.

Read more here: 

US Market Indexes Continue Gains After Successful Cyber Monday 

General Motors: Time to Buy as Costs Are Slashed? 

GM Looks to the Future With New Transformation Plan 

About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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