But what’s going on in the Wall Street Hype Machine regarding the EV space is hilarious, when you think about it for a moment.
By Wolf Richter for WOLF STREET.
Citi came out this morning and raised its price target for GM shares, which are already up 50% from a year ago, to $85, from $70, with a path to $100. What’s hilarious is the reasoning behind the increase in the price target: GM is getting serious about EVs.
In reality, the EV space is a brutal game within the zero-sum auto industry where the sale of each EV comes at the expense of a sale of an internal-combustion-engine (ICE) vehicle. In US auto sales, there has been a lot of turmoil but no growth for over two decades, and then in 2020, auto sales plunged to 1970s level. The only US automaker that grew was Tesla.
GM is finally getting serious about EVs in an all-out effort to avoid oblivion. GM has been dogged for years by declining revenues and declining global deliveries. In 2020, GM’s global revenues dropped by 11% from 2019, and by 17% from 2018, and by 21% from 2014. GM’s global deliveries in 2020 dropped by 12% from 2019, and after four years of declines, are now down by 32% from 2016.
Why the EV battle is brutal for GM and other automakers.
Automakers have to fight that battle in order to stay relevant. They cannot dodge it, they’ve been forced into it at first by Tesla, and now by a slew of other startups, and government incentives and regulations globally have been pushing in that direction, and they know if they fail in that battle, they will become irrelevant.
Legacy automakers’ control of the market fell apart, barriers to entry vanished. EV powertrains are far simpler to design and build than modern ICE powertrains. The EV components are being commoditized across supply chains. The hard part is the battery-cell technology, but automakers can buy the cells from battery suppliers (which is what Tesla does). This lowers the technical barriers to entry.
And the flood of money handed to EV startups and to Tesla is completely tearing down what remains of any barriers to entry: The companies with deep pockets that can lose nearly unlimited amounts of money on getting EV models on the road and scaling up are now the startups!
Legacy automakers compete with startups that are designed to lose tons of money for years. But legacy automakers do need to make a profit. Legacy automakers are going to get underpriced by companies that will purposefully generate losses in order to gain market share – in order to gain scale, the mantra of investor-funded startups these days. Along the same principle as Uber’s strategy to undercut taxi fares and generating huge losses that continue to this day, and thereby becoming the biggest taxi enterprise in the world, and also the one with the biggest losses. Legacy taxi companies that couldn’t afford to lose money for years didn’t fare well.
This may seem unfair, but that’s how it is these days. Automakers will have to compete on that basis, and that means only one thing…
EV prices are already getting cut. Under pressure from the dozens of EV models coming on the market, Tesla already cut prices in 2020. And yesterday, on its website, it cut prices further, this time for its near-mass-market models at the lower end where it is coming under pressure from other automakers:
- It cut $2,000 off the Model Y Standard Range, to $39,990
- It cut $1,000 off the price of the Model 3 Standard Range Plus, to $36,990.
Tesla isn’t cutting prices because it wants to make less money. It’s cutting prices to defend its market position and its sales against the new competition coming on the market that is specifically targeting its models.
In the US, Tesla is the dominant EV maker, and other automakers have to dance to its pricing tune. If Tesla cuts, they have to cut. Legacy automakers have been targeting Tesla’s older price points with their competing models, and they now have to rejigger their pricing downward.
Price cuts mean lower than expected profit margins and earnings prospects from EVs for all manufacturers. EVs already have a notoriously low profit margins due to the expense of the battery – though the powertrain itself and everything around the powertrain is far cheaper than an ICE powertrain and all the systems that go with it.
These price cuts mean that EVs are no longer considered a premium product, but are now a competitive product where prices matter – prices compared to ICE vehicles and to EVs.
The shift to EVs will remain a giant money-suck for legacy automakers for years to come. Both GM and Ford have announced investments exceeding $20 billion each over the next few years in order to get their EV programs off the ground. This includes developing the hardware and software, and converting manufacturing plants to EV production. Volkswagen said it would invest $86 billion into its EV and related programs over five years.
Tesla burned through more than $20 billion in investor money to get where it is today. Tesla raised most of this money from share sales. The legacy automakers will have to rely on their cashflow and on borrowing money via bond sales.
In essence, the shift to EVs has been and will continue to be a giant money-suck. It will take years to settle down. And legacy automakers cannot dodge it. The market has turned, and legacy automakers now have to compete in it, or become irrelevant.
Ultra-fat profit margins in the Oligopoly of ICE pickup trucks are being targeted by EVs. Everyone is entering the EV pickup space. The way to reach scale is to undercut competition on price. ICE pickups have been where Ford, GM, the former Fiat-Chrysler, and Toyota have made much of their money in the US. These are hugely profitable model lines with high prices and relatively low production costs, and legacy automakers didn’t challenge each other on price. There was enough for everyone, the thinking went, leading to obscene profit margins that everyone loved, and that all automakers bragged about in their earnings calls. And Americans were willing to pay those profit margins.
But the new entrants in the EV space don’t care about that. They want to reach scale. They want to ramp up. And they’re going to do it on price. Pickups are the low-hanging and juiciest fruit because of their high prices. With their frame rails and their higher weight, pickups are ideally suited for EVs. And electric motors have flat torque curves, which is ideal for towing. Ford, GM, and Fiat-Chrysler are all coming out with full-size e-pickups to defend their turf.
Full-size pickups are the bestselling vehicles in the US, and with their obscene profit margins, they’re where the earnings of legacy automakers are most vulnerable. That was a gravy train, run by an oligopoly of four companies, and EVs are going to muck it up.
It will take years to ramp up and play out, and until the new-normal settles in, tons of money will be invested and lost in the EV space, while profits of legacy automakers from their high-profit ICE trucks are going to get gutted.
It’s laudable that GM and Ford and other automakers are finally taking EVs seriously, after brushing them off for a decade. But this is a survival effort. Tesla and now many new companies – hundreds of them in China alone – are forcing legacy automakers into this battle to defend their turf. Government regulations around the world are favoring EVs. And automakers know if they fail, they will be tossed into the big scrapheap of automakers that didn’t make it.
Financially, it’s going to be a long hard slog for GM and other legacy automakers, in an industry where there has been zero growth in developed economies in over two decades, and where each EV sale is therefore coming at the expense of a more profitable ICE vehicle sale.
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