The auto industry is shifting away from its "capital junkie" habits following unprecedented investments in EVs and self-driving technology.

• Automakers are starting to pull back on spending capital freely on all-electric and autonomous vehicles after years of investment.
• The release of a new automaker product or update to current models requires a substantial financial commitment, which has a domino effect on the global supply chain.
• While some automakers, such as General Motors and Ford Motor, are cutting billions in fixed costs and laying off thousands of workers, others, including Nissan Motor, Volkswagen Group, and Chrysler parent Stellantis, are taking even more drastic measures to reduce headcounts and trim spending.

The auto industry has been spending excessively on all-electric and autonomous vehicles for years, and now it's seeking treatment for its addiction.

Car manufacturers worldwide are striving to cut costs and minimize expenses due to economic uncertainty, despite significant investments in self-driving technology and EVs, which have not yet yielded a satisfactory return on investment.

Besides decreasing consumer demand, increasing commodity costs, and warnings from Wall Street analysts about global automotive sales and profits plateauing, China's automotive industry is also facing challenges.

Fixed costs are being cut by billions by companies such as Ford and General Motors, including layoffs of thousands of workers, while other automakers like Nissan, Volkswagen, and Chrysler parent are taking even more drastic measures to reduce headcounts and spending.

Morgan Stanley analyst Adam Jonas stated in a September investor note that Western automakers are increasingly prioritizing capital efficiency, which may result in lower spending, increased collaboration, and restructured EV portfolios to maximize profits.

The global automotive industry involves numerous companies manufacturing thousands of parts for new vehicles, necessitating substantial capital investment when introducing new products or updating existing models, resulting in a financial impact on the entire global supply chain.

In recent years, automakers have poured billions of dollars into self-driving and electric vehicles, with little to no immediate returns on their investments.

The total expenses for research and development and capital spending for the top 25 automotive companies have increased by 33% from approximately $200 billion in 2015 to $266 billion in 2023, as stated by auto consulting firm AlixPartners.

Despite a 38% drop in global sales from 2015 to 2023, GM's costs increased by about 62% to $20.6 billion (excluding sold European operations), compared to other automakers' increases during that timeframe. Volkswagen's costs increased by 42%, Stellantis' by 37%, and Ford's by 18%.

Since 2022, EV startups have burned through $16 billion and $8.8 billion in free cash flow, respectively. In an effort to increase vehicle production and reduce losses, both companies are striving to improve their financial performance.

The auto industry has a history of overspending and then cutting costs quickly, which is common in cyclical industries like autos. Could this spending have been avoided or reduced this time around?

Capital junkie

The current cost-cutting cycle is occurring ten years after Fiat Chrysler CEO Sergio Marchionne's famous Wall Street presentation, "Confessions of a Capital Junkie," in April 2015. The report revealed the automotive industry's significant capital expenditure on overlapping or specialized products, which Marchionne believed could be resolved through consolidation and shared capital spending.

Amid failed merger attempts with Fiat Chrysler and GM, Marchionne's report has resurfaced as automakers cut costs and announce partnerships between companies such as Volkswagen and Rivian Automotive, as well as GM and Hyundai Motor to share expenses.

Jonas stated in a November 2023 investor note that the concepts in the deck are highly insightful and still relevant today, just as Marchionne's junkie manifesto, which he continues to reference, emphasizes.

'The Sergio Quotient'

Jonas highlights that, according to "The Sergio Quotient," the average S&P 500 company takes approximately 50 years to spend its market cap on capital expenditures and research and development.

Among traditional automakers, only Volkswagen took less time than GM to spend its market cap, which was 1.8 years compared to GM's 1.9 years. Toyota, on the other hand, took the longest at 14.4 years.

In September, Ford and GM were ranked 402 and 403 out of 406 non-financials companies in terms of their capital spend compared to their market cap.

During a summer automotive conference, Joe Hinrichs, a former Ford executive, criticized the industry for its capital waste, referring to Marchionne's 2015 manifesto.

"Hinrichs, now CEO of a railroad company, stated that the auto industry is known for squandering capital and that it is a negative aspect. He emphasized that if companies invest billions of dollars in autonomous vehicles or electrification, they should be held responsible for their actions, as it is shareholder money."

While most automakers' capital spending isn't entirely wasted, the industry is less efficient than other sectors, resulting in minimal return on invested capital.

While the ROIC of traditional automakers is around seven or below, tech companies like Google parent Alphabet are at approximately 22, according to FactSet.

"Rebecca Evans, a principal at management consulting firm Roland Berger, stated that we have observed significant capital expenditure spending with extended return on investment due to the slowdown and low utilization in manufacturing plants. She added that the firm has been conducting an extensive analysis of costs."

In particular, automakers have not seen ROIC on autonomous vehicles and EVs.

Despite spending over $10 billion on Cruise since acquiring the company in 2016, GM continues to invest in its autonomous vehicle unit.

In addition to billions of dollars spent on warranty and recall costs and strategic shifts, Ford has also incurred significant expenses on the development of a three-row electric SUV, which resulted in a write-down of $400 million in manufacturing assets.

Rehab

Nissan, Volkswagen, and Stellantis are undergoing significant business restructurings, including layoffs and production cuts, to reduce costs. In contrast, Ford, GM, and EV startups Lucid and Rivian are also attempting to lower costs, but their efforts are not as severe as the others.

"Lucid CEO Peter Rawlinson stated in October that the company must reduce costs for every car produced, as stated by the cost-cutting task force, and they are working diligently on this task."

In Germany, Volkswagen is currently undergoing a significant cost-cutting initiative that includes layoffs and the possibility of shutting down some of its plants.

In an interview published earlier this month, Oliver Blume, the Chairman and CEO of VW, stated that such actions are necessary to address the longstanding issues at the German carmaker, which is projected to spend 900 million euros ($975.06 million) to implement the turnaround.

According to Reuters, Blume stated in an interview with German paper Bild am Sonntag that the weak market demand in Europe and significantly lower earnings from China reveal decades of structural problems at VW.

The profits of traditional automakers such as VW and GM have been decreasing due to the increasing dominance of Chinese automakers in the world's largest car market, which has shifted from being a consumer to an exporter.

Besides Nissan, Honda, and BMW, other companies such as GM have attributed declines in China to missed earnings expectations or restructuring requirements. In response, GM is restructuring its operations in China, including attempting to renegotiate with its major Chinese partner, SAIC.

Despite losing ground in China, GM has been one of the most aggressive in investing in EVs and self-driving vehicles. However, the company's profitability remains high, with roughly $27 billion of free cash flow at the end of the third quarter. GM stands out as a model for balancing investment and cost-cutting efforts while remaining profitable.

On Wednesday, GM CFO Paul Jacobson confirmed plans to limit capital expenditures to approximately $11 billion in the future.

"Jacobson stated during a Barclays conference that over the past few years, we have maintained a disciplined track record of capital expenditures. It is important to be in an organization with more ideas than it can fund. Our role is to allocate and prioritize these ideas."

Partnerships

Newer automakers, including Rivian and Lucid, are reducing expenses and securing funding to remain financially stable as they continue to incur significant losses on every electric vehicle they sell.

Saudi Arabia's Public Investment Fund, the largest shareholder of Lucid, has invested billions of dollars into the company, while Rivian has partnered with Volkswagen for an up to $5.8 billion software deal, which is set to close by the end of this year.

This summer, GM and Hyundai agreed to explore potential collaboration in strategic areas to cut costs and improve efficiency. However, no actions have been announced since then.

Marchionne maintained that partnerships were effective, but they would not be sufficient in the future. He stated that companies could save billions of dollars annually by sharing costs related to commoditized parts such as transmissions, standardized safety equipment, and advanced driver-assistance systems.

"In a 2015 conference call with global industry analysts, Marchionne stated that it is fundamentally immoral to allow waste to continue unchecked and that something must change."

While some automotive industry mergers and joint ventures have resulted in long-term successes, many fall apart before producing significant results.

Both Rivian and VW have recently experienced failures with Ford in developing electric vehicles and autonomous vehicles, respectively.

Stellantis

In 2024, despite being formed through the merger of Fiat Chrysler and French automaker PSA Groupe in January 2021, Stellantis has struggled to maintain profitability.

Despite CEO Carlos Tavares' claim of achieving $9 billion in cost reductions after the merger, Stellantis has failed to invest in new or updated products, maintain historically high prices, and implement extreme cost-cutting measures, which has negatively impacted its U.S. market performance.

Despite not meeting "capital junkie" standards, Tavares stated that Stellantis has achieved the scale necessary for increased efficiency, but is still working on improving its product line and correcting errors in North America.

Stellantis is more profitable than Fiat Chrysler and PSA were on their own, according to Tavares. He attributed this to the regulatory chaos in the US and Europe regarding EV standards and emissions.

""Stellantis is the necessary scale to effectively utilize shareholder resources in a significant manner. As Tavares stated during the July first half results discussion, FCA was too small, while PSA was also insufficient. However, Stellantis possesses the appropriate scale, as acknowledged by Sergio."