Behind GM, Ford’s new EV strategy is old-school financing: Cash
The cab of an all-electric Ford F-150 Lightning prototype truck is seen on an Automated Guided Vehicle (AGV) at the Rouge Electric Vehicle Center in Dearborn, Michigan, September 16, 2021.
Rebecca Cook | Reuters
Detroit automakers have adopted a surprisingly conservative financial strategy to make electric vehicles the next vehicle of choice for American consumers.
They pay cash.
General Motors and Ford are investing $65 billion between them — $35 billion at GM and $30 billion at Ford — and so far aren’t offering to borrow anything. Instead, the most radical change in automotive products in a century is being funded by business operating cash flow, which significantly reduces risk to businesses over time and, for now, drive up their stock price.
“The short answer is they do it because they can,” said Nishit Madlani, head of the automotive sector at bond rating agency Standard and Poor’s. “The popularity of trucks [since the pandemic began] and high prices give them confidence.”
Detroit’s aggressive investment and conservative financing took years to prepare. It was helped by $4 billion borrowed by GM in May 2020, and by Ford drawing a $15 billion revolving line of credit around the same time, moves intended to cushion a feared sales implosion from Covid-19. 19. While sales fell more modestly than expected in 2020 and then began to rebound in 2021, cash flow remained strong, pushing up company stock prices and allowing Ford to pay down interest-rate debt. raised.
At the same time, both companies conserved cash by suspending dividends and share buybacks. And the companies have slashed billions from their annual costs, scrapping entire lines of unprofitable sedans, pulling out of unprofitable overseas markets and narrowly focusing on trucks, which remain the most profitable part of their activity.
Put it all together, and the two largest American-born automakers have the cash to undertake the industry’s biggest technological transformation since its founding.
Record car profits, record car prices
“Automakers expect record profits once we overcome supply chain issues and chip shortages, which are expected to last most of this year,” said CFRA Research analyst Garrett Nelson. . “Existing business is good, and the engine is car prices at an all-time high.”
Detroit 2’s funding strategy stands in stark contrast to how Tesla, then a start-up, funded its push into electric vehicles over the past decade. The electric vehicle leader has repeatedly raised funds in the stock and bond markets to pay for its plans, filing with federal regulators for $10 billion in stock sales as recently as 2020. The first plant Tesla’s electric vehicle company in California was funded by a federally guaranteed loan in 2010, when the electric vehicle market was nascent, before the company went public or generated significant revenue.
GM and Ford are willing to spend even more.
“If anything, it will go up from there,” a Ford spokesperson said.
The U.S. auto market’s rebound to nearly 15 million units sold in 2021 provided the financial cushion Detroit needed to move forward aggressively, according to Nelson. The collapse was not as large as that which accompanied the 2008 financial crisis, when the US passenger vehicle market fell to just over 10 million cars and trucks. The brief, shallow drop helped ensure that the two companies’ war chests were large enough to meet the need for billions of dollars in new investment, Madlani said.
“We have prepared for the known and the unknown,” the Ford spokesperson said. “The unknown part was the pandemic. The known part was that we had to be a leader in electric vehicles.”
The rebound in sales, while still well below the pre-pandemic pace, translated into $7.8 billion in free cash flow in the nine months to September at Ford. At GM, where the automotive business barely broke even operating cash flow in the first nine months of 2020, cash was still strong enough to allow the company to spend more than $4 billion. dollars in capital expenditure. GM is due to report fourth-quarter results on Feb. 1, while Ford is expected to report results on Feb. 3.
Analysts expect Ford to report earnings of 42 cents a share on $35.8 billion in revenue, up 75% from the September quarter, according to Thomson Reuters data. GM is expected to earn $1.11 a share, down from $1.52 in the third quarter. GM raised its own forecast for the full year in December, saying it would earn $14 billion in profit before interest and taxes, up from the $11.5 billion to $13.5 billion it had previously predicted.
Ford and GM’s profits have held up, even as U.S. industry unit sales are below the pre-Covid annual pace of 17 million vehicles, as companies aggressively cut costs to prepare for the transition , Nelson said. Ford has almost entirely pulled out of making sedans, for example, and GM laid off 4,000 workers in 2019. That’s on top of plant closings that included GM’s historic Lordstown, Ohio plant. , later sold to EV start-up Lordstown Motors.
On top of that, businesses hold a lot of extra cash in reserve if their cash flow doesn’t match forecasts. As early as 2019, analysts who spoke warily of all the cash Ford needed to invest in its business respectfully noted that it also had $37 billion in cash and short-term securities. Ford now has $46.4 billion and generated more than $12 billion in cash from operations in the first nine months of 2021.
Ford, GM EV predictions
Both companies had a lot to say about EV funding strategy and planning at last year’s investor conferences. The common theme: Building Ford’s EV strategy around existing model names like the Mustang and in particular the F-150 pickup truck, for which the company recorded 200,000 pre-orders, is paying off both in terms of customer acceptance and cost containment.
“Over the next 24 months, based on demand for these products, [we] would be the second car manufacturer of electric vehicles, probably nearly 600,000 electric vehicles per year in the world [from Ford’s current product lineup] and we don’t plan to stop there,” Lisa Drake, Ford’s North American chief operating officer, told a Goldman Sachs-sponsored investor conference in December. “The complexity of the product in the EV space is much less than at [internal combustion engines]. … And it’s going to allow us to be more efficient with our capital and more efficient with labor and assembly plants.”
At GM, the EV strategy includes a wave of new vehicles using new and existing nameplates — most recently the company unveiled a $42,000 electric version of its Chevrolet Silverado SUV — as well as its Cruise joint venture with Honda, Microsoft and other investors to build a self-driving car company focused on electric vehicles.
That has meant manufacturing complexes devoted to the production of electric vehicles that are underway — or in production — in two Michigan cities and Spring Hill, Tennessee, with battery plants planned near the sold plant in Lordstown and at Spring Hill. GM chief financial officer Paul Jacobson said in March that the company was saving between $1 billion and $1.5 billion per plant by converting existing auto plants rather than developing brand new ones, which will reach $20 billion to $30 billion. billion by the time GM’s electric vehicle effort reaches full scale. .
For now, the challenge is that electric vehicles are much less profitable than the large pickup trucks and SUVs that dominate both companies’ businesses, Nelson says, but that isn’t likely to last. Nelson says as battery costs continue to fall and Ford and GM increase the scale of their electric vehicle business, they may outpace the profitability of internal combustion vehicles – noting that Tesla is more profitable, per dollar of sales, than the automotive activities of Ford or GM. Ford says its Mustang Mach E is profitable even though it sold less than 30,000 units in 2021.
“We ultimately expect to match [internal combustion engine] profitability with electric vehicles as battery cell costs decline and we adapt our operations,” a GM spokesperson wrote in an email.
At Morgan Stanley, analyst Adam Jonas – a longtime EV bull – says Ford’s surge that led its stock to outperform Tesla last year suggests its EV-focused business is worth now around $50 billion, with 100,000 electric vehicle sales likely to add $2 to its stock price. But he warned in a Jan. 13 report that hard-to-avoid bumps in the rollout of the electric F-150 and other vehicles will likely cause the stock to drop temporarily later this year.
“From a level of $25, we believe that expectations for Ford’s success in electric vehicles, while achievable, are difficult to exceed,” Jonas wrote.