Ford's electric vehicle strategy is being financed through cash, similar to the old-time financing methods.
- General Motors and Ford are allocating a combined total of $65 billion towards the development of electric vehicles, with $35 billion going to GM and $30 billion going to Ford.
- The financial health of Detroit's major automakers is being boosted by predictions of increased industry profits and higher car prices.
- Despite the challenges posed by the pandemic on supply chains, both companies have reduced expenses, eliminated unprofitable models, and have the financial resources to undertake the industry's most significant technological revolution since its inception.
American consumers are increasingly choosing EVs as their next vehicle, thanks to Detroit's automakers adopting a financially conservative approach to their production.
They’re paying cash.
The two companies are investing $65 billion in their businesses, with $35 billion going to GM and $30 billion to Ford, without taking on any debt. Instead, they are funding the significant changes in their automotive products through their operating cash flow, which is reducing their risk and increasing their stock prices.
Nishit Madlani, automotive sector lead at Standard and Poor's, stated that the reason for the increase in truck production is due to their ability to do so, as well as the popularity of trucks during the pandemic and strong pricing providing them with confidence.
For years, Detroit has invested aggressively while financing conservatively. This approach was aided by $4 billion borrowed by GM in May 2020 and $15 billion drawn down by Ford around the same time, moves intended to mitigate the impact of Covid-19 on sales. Despite declining sales more modestly than expected in 2020, cash flow remained strong, boosting the companies' stock prices and allowing Ford to repay high-interest debt.
Both companies have suspended dividends and share repurchases while cutting billions in annual costs by slashing unprofitable sedan lines, withdrawing from unprofitable overseas markets, and focusing solely on trucks, which remain their most profitable business segment.
The two largest U.S. automakers have the financial resources to compete with the industry's technological revolution.
Record auto profits, record car prices
Garrett Nelson, a CFRA Research analyst, stated that auto manufacturers anticipate record profits after resolving supply chain problems and chip shortages, which are predicted to persist throughout the year. The current market is thriving, and the driving force behind this is the record-high prices of cars.
The Detroit 2's financing strategy differs significantly from how Tesla financed its push into EVs over the past decade. Unlike Tesla, which repeatedly raised money from the stock and bond markets to fund its plans, the Detroit 2 relied on traditional financing methods. Specifically, the company filed paperwork with federal regulators for $10 billion in stock sales as recently as 2020. In contrast, Tesla's first EV factory in California was financed with a federally guaranteed loan in 2010, when the EV market was still in its infancy, before the company went public or had significant revenue.
GM and Ford are ready to spend even more.
A Ford spokesman stated that "it will only get better from here."
The U.S. car market's recovery to nearly 15 million units sold in 2021 provided the financial cushion Detroit needed to push forward aggressively, according to Nelson. The collapse was not nearly as large as the one that accompanied the 2008 financial crisis, when the U.S. passenger vehicle market fell to slightly more than 10 million cars and trucks. The brief, shallow dip helped assure that the war chests of the two companies were big enough to meet the need for billions of dollars in new investment, Madlani said.
The spokesman for Ford stated, "We were ready for both the expected and the unexpected. The unknown factor was the pandemic, while the known was our responsibility to lead in the field of electric vehicles."
Despite still being below pre-pandemic pace, Ford's sales rebounded, resulting in $7.8 billion in free cash flow over the nine months ending in September. Meanwhile, GM's automotive operations barely broke even on operating cash flow in the first nine months of 2020, but the company still had strong liquidity and spent more than $4 billion on capital expenditures. Both companies are set to report their fourth-quarter results, with Ford announcing its on February 3 and GM on February 1.
According to Thomson Reuters data, analysts anticipate Ford to report earnings of 42 cents per share on $35.8 billion of revenue in the fourth quarter, representing a 75% increase from the September quarter. On the other hand, GM is projected to earn $1.11 per share, which is a decrease from $1.52 in the third quarter. In December, GM revised its forecast for the full year, predicting that it will earn $14 billion in earnings before interest and taxes, an increase from the previously predicted $11.5 billion to $13.5 billion.
Despite a decline in U.S. industry unit sales, Ford and GM profits have remained stable due to their cost-cutting measures in preparation for the transition. Ford has shifted away from sedan production, while GM has laid off 4,000 salaried workers and closed factories, including the Lordstown, Ohio plant, which was later sold to an EV start-up.
Since 2019, Ford has been holding a significant amount of extra cash as a reserve, with $37 billion in cash and short-term securities. Currently, Ford has $46.4 billion and generated over $12 billion in operating cash in the first nine months of 2021.
Ford, GM EV forecasts
Both companies have discussed their financing strategies and EV plans at investor conferences in the past year. The shared theme is that Ford's EV strategy, which centers on utilizing existing model names such as the Mustang and F-150 pickup truck, has been successful in terms of customer acceptance and cost containment.
In the next 24 months, based on the demand for these products, Ford expects to become the number two EV automaker, with a global annual production of approximately 600,000 EVs. This is due to the complexity of the product in the EV space being much less than in internal combustion engines. This will enable Ford to be more efficient with its capital, labor, and assembly plants.
GM's EV strategy involves introducing new vehicles using existing and new nameplates, such as the $42,000 electric version of the Chevrolet Silverado SUV, as well as its Cruise joint venture with Honda, Microsoft, and other investors to develop an autonomous-car business focused on EVs.
The company has established manufacturing complexes for EV production in two Michigan towns and Spring Hill, Tennessee, with planned battery plants near the sold-off Lordstown plant and in Spring Hill. According to GM chief financial officer Paul Jacobson, the company saves $1 billion to $1.5 billion per plant by converting existing car factories rather than developing all-new ones, which will reach $20 billion to $30 billion by the time GM's EV effort reaches its full scale.
Although electric vehicles are currently less profitable than pickups and SUVs for Ford and GM, this trend is expected to change as battery costs decrease and the companies increase their scale in their EV business. In fact, Tesla is already more profitable per dollar of sales than Ford and GM's auto businesses. Ford reports that its Mustang Mach E was profitable despite selling fewer than 30,000 units in 2021.
As battery cell costs decrease and we scale our operations, we anticipate achieving profitability with EVs that is on par with internal combustion engines, according to a GM spokesperson in an email.
At Morgan Stanley, analyst Adam Jonas, a longtime EV advocate, believes that Ford's recent surge in stock price, which surpassed Tesla's, indicates that its EV-focused businesses are now worth approximately $50 billion. For every 100,000 EV sales, he predicts that Ford's stock price will increase by $2. However, in a report dated January 13th, Jonas cautioned that the rollout of the electric F-150 and other vehicles may cause a temporary dip in the stock price later this year.
Jonas wrote that although it is possible for Ford to succeed in EVs from a $25 level, exceeding expectations for success may be challenging.
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