The cockpit of a Ford F-150 Lightning all-electric truck prototype on an automated guided vehicle (AGV) at the Rouge Electric Vehicle Center in Dearborn, Michigan on September 16, 2021.
Rebecca Cook | Reuters
Detroit automakers have adopted a remarkably conservative financial strategy to make electric vehicles the next car of choice for American consumers.
They pay in cash.
General Motors and Ford are investing $65 billion between themselves – $35 billion in GM and $30 billion in Ford – and are not going to borrow yet. Instead, the most drastic changes in automotive products in a century are being paid for by companies’ operating cash flow, greatly reducing the risk for companies over time and boosting their stock prices now.
“The short answer is they do it because they can,” said Nishit Madlani, head of the automotive sector at Standard and Poor’s. “The popularity of trucks [since the pandemic began] and high prices give them confidence.”
Detroit’s aggressive investment and conservative funding has been building up over the years. It was helped by a $4 billion loan from GM in May 2020, and around the same time, Ford cut its revolving line of credit by $15 billion, moves meant to allay fears of a collapse in sales due to Covid-19. With sales declining more modestly than anticipated in 2020 and then starting to recover in 2021, cash flow has remained strong, pushing stock prices up and allowing Ford to pay off high-interest debt.
At the same time, both companies saved cash by suspending dividend payments and share repurchases. And companies have cut billions of dollars of annual spending by cutting entire lines of money-losing sedans, pulling out of money-losing overseas markets and focusing on trucks, which remain the most profitable part of their business.
Put it all together, and the two largest US automakers will get the money to drive the industry’s biggest technological transformation since its inception.
Record car profits, record car prices
“Automakers are expecting record profits once we resolve supply chain issues and chip shortages, which we expect to last for most of this year,” said CFRA Research analyst Garrett Nelson. “Existing business is doing well and the driver is car prices at an all-time high.”
Detroit 2’s funding strategy contrasts sharply with how Tesla, a startup at the time, has been funding the advancement of electric vehicles for the past decade. The EV leader has repeatedly raised money in the stock and bond markets to pay for its plans, having filed $10 billion worth of stock sales back in 2020 with federal regulators. Tesla’s first EV plant in California was funded by a government-guaranteed loan in 2010, when the EV market was in its infancy, before the company went public or generated significant revenue.
GM and Ford are willing to spend even more.
“If anything, it will grow from there,” a Ford spokesman said.
The recovery of the U.S. auto market to nearly 15 million units sold in 2021 has provided Detroit with the financial airbag it needs to move forward aggressively, Nelson said. The crash was nowhere near as massive as the one that accompanied the 2008 financial crisis, when the U.S. passenger car market dropped to just over 10 million cars and trucks. The brief, shallow drop helped ensure the two companies’ war chests were large enough to meet the need for billions of dollars in new investment, Madlani said.
“We prepared for the known and the unknown,” a Ford spokesman said. “The unknown part was the pandemic. What was known was that we needed to be the leader in electric vehicles.”
The rebound in sales, while still well below pre-pandemic levels, resulted in free cash flow of $7.8 billion in the nine months ended September for Ford. At GM, where auto production barely broke even with operating cash flow in the first nine months of 2020, liquidity was still strong enough to allow the company to spend more than $4 billion on capital expenditures. GM is due to report fourth quarter results on Feb. 1, and Ford is due to announce its results on Feb. 3.
Analysts expect Ford to report a profit of 42 cents per share on revenue of $35.8 billion, up 75% from the September quarter, according to Thomson Reuters. GM is forecast to earn $1.11 per share, up from $1.52 in the third quarter. In December, GM raised its own forecast for the full year, saying earnings before interest and taxes of $14 billion, up from $11.5 billion to $13.5 billion it previously forecast.
Ford and GM’s profits have held up, Nelson said, despite U.S. industrial unit sales hovering around 17 million vehicles a year before Covid, because the companies are aggressively cutting costs to prepare for the transition. For example, Ford almost completely exited the sedan business, and GM laid off 4,000 employees in 2019. This is in addition to plant closures, including the legendary GM plant in Lordstown, Ohio, which was later sold to EV startup Lordstown Motors.
In addition, companies keep a lot of extra cash in reserve in case their cash flows fall short of forecasts. Back in 2019, analysts who were wary of all the money Ford needed to invest in its business respectfully noted that it also has $37 billion in cash and short-term securities. Ford now has $46.4 billion and operating cash for the first nine months of 2021 was over $12 billion.
Forecasts Ford, GM EV
Both companies talked extensively about funding strategy and EV planning at investor conferences last year. Common theme: Building Ford’s EV strategy around existing model names such as Mustang and especially the F-150 pickup truck, for which the company has received 200,000 pre-orders, is paying off both in customer acceptance and cost containment.
“Over the next 24 months, based on the demand for these products, [we] will be the second EV automaker with probably around 600,000 EVs per year globally. [from Ford’s current product lineup] and we don’t plan to stop there,” Ford North America COO Lisa Drake said at a Goldman Sachs-sponsored investor conference in December. “Product complexity in the field of electric vehicles is much less than in [internal combustion engines]. … And this will allow us to use our capital more efficiently, as well as to use labor and assembly plants more efficiently.”
At GM, EV strategy includes a wave of new vehicles with new and existing nameplates — most recently, the company unveiled an electric version of its $42,000 Chevrolet Silverado SUV, as well as a Cruise joint venture with Honda, Microsoft and other investors. an autonomous vehicle business focused on electric vehicles.
This means that manufacturing complexes dedicated to the production of electric vehicles, which are in progress or in production, in two Michigan cities and in Spring Hill, Tennessee, with planned battery factories next to the sold plant in Lordstown and in Spring Hill . GM CFO Paul Jacobson said in March that the company is saving $1 to $1.5 billion per plant by converting existing auto plants rather than developing entirely new ones that will reach $20 to $30 billion by the time GM’s efforts for the production of electric vehicles will reach its full scale. .
For now, the problem is that electric vehicles are much less profitable than the big pickup trucks and SUVs that dominate the two companies’ business, Nelson says, but that’s unlikely to last. Nelson says that as battery costs continue to fall and Ford and GM scale up their electric vehicle businesses, they could outperform combustion engine vehicles, noting that Tesla is more profitable per dollar of sales than Ford’s or GM’s auto business. Ford says its Mustang Mach E is profitable, though it sold fewer than 30,000 units in 2021.
“Ultimately, we expect [internal combustion engine] profitability with electric vehicles as battery cell costs drop and we expand our operations,” a GM spokesperson wrote in an email.
Morgan Stanley analyst Adam Jonas – a longtime supporter of electric vehicles – says a surge in Ford stock that saw its stock outperform Tesla last year suggests its electric vehicle-focused business is now worth about $50 billion, and every 100,000 electric vehicle sales are likely to add $2. to the price of its shares. But he warned in a Jan. 13 report that inescapable problems with the release of the electric F-150 and other vehicles would likely send stocks temporarily down later this year.
“Starting at $25, we think Ford’s expectations for electric vehicle success, while possible, are hard to beat,” Jonas wrote.