General Motors (NYSE: GM) | Intro & Update
“Marley was dead, to begin with. There is no doubt whatever about that.” — Charles Dickens, A Christmas Carol, 1843.
~30 min read.
Since starting Common Shares in 3Q23, we haven’t talked about GM much despite it being ~10% of the portfolio and despite the fact I’ve owned it since late 2018.
Let’s fix that. This isn’t everything about GM and the industry, but it’ll serve as an intro for us to start talking about them.
Let me know if you prefer what’s below, or if you prefer the ~1 hour write-up and full report I did on Ally (with the investment report attached and everything). There’s a poll for you to fill out at the bottom of this post.
An Abridged GM Thesis
What automakers do is straightforward, and the investment thesis is simple. However, the microeconomics, the industry dynamics, and the trajectory of industry change, are not.
The Charles Dickens quote above sums up the industry.
This is a crappy industry, to begin with. There is no doubt whatever about that.
There are so many bad things about making cars. The industry’s competitiveness, microeconomics, and cyclicality make it quite hard to earn even reasonable returns on capital over the economic cycle. In the US alone, many brands populate a huge graveyard no one remembers in 2024. Others live on as “zombies” who refuse to die despite being long-term destroyers of shareholder value, such as Mazda and Mitsubishi.
There will be more. Like the US in the early 1900s, there are now ~100 carmakers in China, most of whom will die or merge (in what will be bad deals1) because the market size and growth can’t feed all these mouths. Already, Chinese producers are in a bitter price war since the country’s recent recession began, and are exporting, using other countries as a safety valve for excess capacity. That’ll put pressure on regions like Europe and South America. (North America is a bit more… protected. For several reasons I hope this post partly reveals.)
The automaker industry basics:
(I might refer to them as auto OEMs, or original equipment manufacturers)
What they do:
Automakers like GM and Toyota design, assemble, market, and finance cars. They don’t produce most of a car’s 30,000 parts. Instead, just about everything except engines, transmissions, and press-metal body parts are sourced from a huge global network of suppliers like Lear, Magna, Continental, etc, who sell them the seats, suspensions, wheels and tires, axles, infotainment systems, etc. They’re also wholesalers in that they don’t sell or service cars. Franchised dealerships do that. Automakers just advertise. Finally, to drive sales volume, most automakers have a “captive finance” business selling financing and leases through the dealers.
Investing capital:
I’m simplifying, but initially, automakers invest up front three ways. First, there’s a few years’ R&D to design the product. Second, there’s capital expenditure to build or re-tool manufacturing plants. Third, there’s a marketing push before production starts. The product cycle from R&D to a car’s first sale is ~2-6 years, then several years of sales with only minor tweaks to features (“facelifts”). Automakers come out with “all new” models, and the process starts over. The industry’s capital intensive with a lot of R&D, manufacturing capacity, and marketing investment.
Profitability, growth, cyclicality:
Operating margins are “meh” (~10%), and overall the industry earns about the cost of capital or a little less. In the US, the market is mature with nearly ~1.0 licenced drivers per adult. Although the country’s adult population is growing, cars are becoming more reliable and last longer per owner, so there has been no industry volume growth for many years. At peak, ~17 million new cars are sold annually, and in a deep recession, 10 million.
Competition:
There are many competitors2. Most market segments, like sedans, are relatively competitive and commoditized/undifferentiated (meaning the brands’ products are similar to each other). Consider that they’re all mostly buying the same car parts like seats from Adient, so how can they be so differentiated? Automakers often compete on price or by adding features at little or no incremental margin3. The product is also “big ticket” (expensive), so consumers shop around, haggle, and are price conscious. Finally, cars are “durable” goods, so you can choose not to buy a new one during hard times, which makes the industry horribly cyclical, too, while driving some price competition.
(In this footnote4 is a more intermediate-level feature of this industry’s “bad” economics.)
On top of all that and more, it’s one of those sexy and important industries, so even though there are high barriers to success, every now and then a country and a bunch of entrepreneurs decides it’s cool to be in this bad business, making it worse. The industry’s also “important” in many companies’ home countries. In Japan, it employed ~7% of the nation’s workforce even as recently as the 2010s, so governments work hard to keep companies alive and employing people even when it’s not what’s best for the industry’s health overall. This is for example why the US and Canada bailed GM out in the financial crisis. To save jobs.
After their auto industries matured, countries like Japan (beginning ~’60s) and South Korea (~’80s) then exported to developed countries because they had lower labor and supply chain costs, adding competitors to established markets. This was a big contributor to GM’s bankruptcy in 2008. (Although the final nail in GM’s coffin was sky-high legacy pension and healthcare costs of >$3,000 per car, in an industry earning 10% margins selling cars for $30,000… so: $30,000 * 10% margins - $3,000 legacy cost = bankruptcy.5)
Today, China is the new Japan/Korea. Tens of automakers rapidly oversupplied the domestic market, and are going global to keep plants running. As a group, Chinese automakers have capacity to produce 50 million vehicles/yr. Chinese consumers buy 25-30 million. All of you can see that, given these numbers, although these firms all certainly thought they would succeed when they started out, it cannot possibly work for them all. So they’re increasingly exporting and taking share in many regions. North America may be next.
The EV transition also looked like an attractive opportunity to several entrepreneurs. Now there are entrants in developed markets where there isn’t even any growth. It’s not just Tesla. There was Rivian, Fisker, Lucid Motors, etc. Tesla will survive but isn’t likely to garner the market share its stock price implies. Others will not thrive. Fisker is already in bankruptcy.
Everything above (and more) conspires to make this a bad industry for shareholders.
(One way you can ask yourself if you’ve got a good business is: if I were to design this business or industry from scratch, would it have these features? If you could create a carmaker, you’d probably not be choosing these features.)
The Thesis
If the neighborhood sucks, why does my money live here?
The way you make good money (or any money, lol) in this bad industry is:
By having the best plant economics, consistently running at 95-120%6 utilization, because you’re operationally efficient, and/or you’ve got more scale than others, and/or you’ve got a good brand and make cars that are more desirable than average, and/or you only play in less competitive market segments, making it easier to forecast your volumes and invest in line with that.
By having expense advantages, such as by being really efficient on R&D spend or having a lot of purchasing clout with the suppliers. For example, an automaker can have a small number of vehicle models and produce many of each model, or have a lot of parts commonality between your models, so that the fixed cost of R&D is leveraged over many more units and the per-car R&D is low, pushing unit margins up. Having a lot of parts commonality also means you’ve got more negotiating leverage with the suppliers who sell you those parts. Finally…
By being smart about where or how to play, playing mainly in the “moaty” places. The car market is not homogenous. Think of Porsche and Ferrari in the super-premium and hard luxury segments, respectively. Porsche’s brand is associated with a reputation of unmatched quality and performance. Ferrari, a century of motorsports history.7 If Ferrari wants to raise prices, they can, and they won’t lose market share to anybody or even hurt their own product demand.8 Being in such a position also helps you manage your production plant economics in point #1, and even helps with #2.
It comes down to a mix of these, and you can see how they interact.
In some cases, automakers have been able to build brand- and scale-based moats even in less desirable markets.
Example: Toyota
For a very long time, Toyota built cars in a superior way. This was ingrained in its culture, and so others like the American carmakers tried to copy it but couldn’t manage the change needed master it. This both saved Toyota money and made the product more valuable to the consumer, namely in terms of the used vehicle’s resale value when customers would go to trade-in. As a result — and I have the data on this — they’d haggle less with the dealers. Toyota’s sales incentives (discounts the dealer is allowed to offer to get the car to sell, which the automaker reimburses) were far less than the industry average. In the 8% margin business of selling sedans, having incentives even just 1 or 2 percentage points lower than the rest of the industry is huge. It’s basically a price increase, and it drops right to the bottom line since there’s no incremental cost associated with a price increase. So you now make 10% margins when other guys make 8, and the way you’re making it can’t be copied with any ease at all. Second, Toyota had and still has huge scale advantages. For ages, the Corolla was the best-selling car in the world, selling 2 million units annually. That gave Toyota huge R&D and supply cost benefits I mentioned above, at least until other automakers started to consolidate their products (more on vehicle platforms below).
I did a project on the automakers’ returns in 2014, looking at these businesses’ financial performance over the prior ~20 years. Of all the mass-market OEMs, Toyota averaged the highest returns on capital through the economic cycle.
GM isn’t nearly as good a business as Ferrari or Porsche, but it does have a moat. What’s in the sauce?
It comes down to where they play.
The vast majority of profits (65%+) come from selling pick-up trucks, large SUVs, and small commercial vehicles (such as to trades workers) in North America.
GM and Ford roughly share the top spot here, and have the most scale. Annual unit sales peak at almost one million trucks each.9 RAM comes in third, and the “Detroit 3” dominate the market with >90% share. They leverage this scale by designing products on common “platforms” to save R&D costs and ensure negotiating power with suppliers. Maybe you’ve noticed the Suburban, Yukon, Sierra, and Silverado all look eerily alike… as if they sit on the same chassis? I smell a footnote…10
In particular, the pick-up truck business is most of that 65%, and is a protected niche. Here, customer loyalty is sky-high. Customers switch brands very little. Many Ford truck owners berate Silverado and RAM owners (and vice versa) on job sites and such. Ford’s own market research shows pick-up owners have a tattoo of their truck/brand far more often than the average car buyer (I’ve never seen a Toyota tattoo). Truck owners are also more likely to give up their phone or sex before their vehicle. Toyota and Nissan have been trying 25 years to break in and have barely made a dent (never passing ~7% combined pick-up truck share in North America, to my knowledge) because of the red-blooded American’s loyalty.
Can all of you even name Nissan’s pick-up truck?
This gives the Detroit 311 huge scale efficiencies on their plant economics and R&D spend, and brand-based pricing power in trucks. GM’s Silverado and Sierra (nearly the same thing with a different sticker on the front) sell 1 million units combined, almost entirely in North America. Those scale efficiencies don’t get competed away because the high customer loyalty prevents the Detroit 3 truckmakers from cutting prices in an effort to conquer customers from each other.
As a result, those products earn ~14-16% margins and >20% returns on capital, about the same as selling a Porsche. That’s compared to ~10% margins and returns on many SUVs and crossovers, and sub-10% returns on capital selling sedans. Pick-ups also sell at high unit prices. All that means the unit economics are way better, and trucks make ~$10,000 per unit pre-tax, several times that of many cars/crossovers. Pushing one truck along the plant floor is the same as making several sedans.
Similar — but weaker — forces are at play in parts of the SUV market, and the state of much of these market segments is pretty locked in.
Although GM does sadly invest a bit in making selling small crossovers, its product and profit mix skews mainly to the good stuff, so the overall business earns a 12-20% return on invested capital.
People know this about trucks. What the market is really missing, though, is this business’ pricing power long term:
In 2018, GM wholesaled 3.55 million units to its North American dealerships, earning $113.8 billion in revenue. In 2023, it sold 3.15 million units for $141.4 billion. That’s $32,056/unit —> $44,888/unit in 5 years, up nearly 7% annually, well in excess of 4% inflation. GM made more selling fewer cars. Note these numbers are partly driven by product mix, not only price, as GM and many peers dialed back on sedans and pushed crossovers and SUVs due to changes in market demand, and those have higher unit prices and profitability. The auto market was also “tight” during these 5 years because of the semiconductor shortage after COVID, and that led to price inflation and low industry incentives (discounting at the dealership lot) to push volume. I’ve got a bit more/clearer data than this, though, and it still points to decent pricing power (around inflation), very much driven by the pick-up truck business. The same is true at Ford and Stellantis/RAM. In fact, even while Toyota and Nissan were trying to break in into the truck business in the late 90s and early 00s, the Detroit 3 were still raising pick-up truck prices. This is a good niche. The pricing power is not as strong elsewhere.
On top of this, under Mary Barra, GM has managed to take a little from the Toyota example above. The product quality and perception thereof has improved, as the company focused on products’ trade-in value (which doesn’t directly benefit GM at all, but does benefit the consumer). The company’s sales incentives (discounts) used to be similar to or higher than the industry overall 10 years ago, but are now below average today in the US. Like we said, strengthening your brand so that you discount less is also effectively a form of price increase and of pricing power.
The thesis is/was that as GM continued raising prices and its product mix shifted away from sedans and into more profitable SUVs (for… reasons), the profit stream would grow long-term and GM would sustain decent returns on capital.
The stock was (and is) not priced as such.
In 2018/2019, you were paying $50 billion for a cash flow stream that would be $10 billion annually at peak, ~$0 in a deep recession, and average ~$7 billion through economic cycles. These days, GM’s auto business now prints >$12 billion annually at peak and ~$0 in a deep enough recession. Given the ability to raise price — and therefore the fact that cash flow stream will grow — GM should be worth ~$100-150 billion company if you model it all out. Yet it’s still a $50 billion company in the market today. (Yeah, my stock hasn’t done well.)
GM’s gushing cash. Over 2020-2022, COVID, worker strikes, and serious supply chain issues caused CEO Mary Barra to hoard cash to ensure GM could continue investing in product if things got worse. That’s passed. The company’s now returning all its excess cash and ongoing cashflow to shareholders. This is a $50 billion company that is about halfway through a 12-18 month plan to buy back $22 billion in stock, and is printing $10 billion annually in a slightly-depressed auto sales market.
Looking at it another way, the stock has nearly a 20% free cash flow yield on average cash profits. Those cash flows are generally well managed and CEO Mary Barra usually doesn’t do stupid things with the money. At the same time, the cash flows predominantly come from a protected niche in the market that nobody is able to invade, for the reasons we discussed.
At this point, you guys should be used to asking “Ok so why isn’t the stock priced this way? Why are you so special to have put together the mosaic like this, and nobody else is willing to act on it, buy, and push the price up to fair value?”
Good.
Now the fun part.
Tokyo Drift Thesis Drift
Businesses and industries change. And with it, our thesis and the risks around GM and the automotive industry have shifted too. Three things will make or break it going forward. They’re interconnected and the market’s concerned with them all.
Pricing power: will GM still have pricing power in key products like pick-ups?
EV transition: what effect will the transition from combustion engines to electric vehicles have on the industry’s economics and returns on capital?
Chinese expansion: as Chinese carmakers export and expand around the globe in order to get their plants’ capacity utilization up, will they penetrate the North American market in a big way? Doesn’t that mean GM is at risk of putting capital in the ground (R&D & plant investment, e.g., in crossovers) only to not sell enough volume to earn a good return on the investments made, because they’ve lost all that volume share to the Chinese?
Let’s start with Chinese automakers
It’s probably a coin flip, frankly. If it does happen, it will happen at a moderate pace over the next 20 years. This happened with the Japanese automakers, the Koreans, and the Germans when they came to North America, and each had varying degrees of success. Currently, the trade war between the US and China involves the auto industry. Laws and tariffs are making it hard for Chinese producers to sell here. The US is adopting protectionist policies. Auto workers make up a big part of the voter population and are often “swing” voters who might vote Democrat or Republican depending on the platform. So all elected officials have an incentive to cater to them.
However, I don’t think this should be relied upon forever. I think eventually “comparative advantage” is likely to win out. Inevitably, cars will be made wherever it is most sensible to make them. If American workers’ wages are far higher than Chinese workers, it will outweigh the cost of putting the cars on a ship plus the risk of currency exchange rates messing the foreign plants’ profit margins. Usually, though, cars are made pretty close to where they’re sold.
Because Japanese and Korean wages and production costs were lower (and their currencies weaker), it allowed the Japanese to enter the US c. 1970s, and the Koreans c. 1990s. If you look at these cases, it took many years for them to take a big piece of the market. There’s mind-share to build. A dealer network to roll out. Customer knowledge to gain, especially in developed markets where you need to tailor products and make them appealing to locals who generally have high expectations because they’ve been living with decked-out cars for a long time.
If you look at the result of many attacks on the Detroit 3’s economic castles, the moats around big SUVs and pick-ups let them withstand the Japanese, Korea, and German assault in these market segments. The Ford Taurus and other sedans might have lost a lot of territory to foreign invasion by Civics, Corollas, Camrys, and more, but the bastion that is the truck market still stands. Cadillac Escalates, Chevy Suburbans, Silverado Denalis, and more, still reign.
The Chinese will come in at the lower end of the market. This is how Hyundai, Kia, Honda, Nissan, and Toyota also played the game. If they come in a big way, it won’t matter to GM’s cash cow business. Because of their positioning with smaller and more affordable vehicles, Chinese producers are having a bigger impact in developing countries (and Europe). Far more North Americans are in love with big cars, not seen nearly as much elsewhere in the world. Foreign automakers consistently fail to penetrate this niche because it’s not in their DNA.
(This is the Lindy Effect in action, by the way. It’s part of how you know pick-ups should remain a Detroit 3 thing. They’ve already been attacked like this before, in different ways, and have survived each time already.)
Tesla is a more unique reference case and has clearly gained share in the US, but will not dominate the pick-up market for the same reasons.
Lastly, if GM loses the small car business but the transition to EVs continues, it will be a headwind to profit growth and a tailwind to returns on capital. GM’s small vehicles have the worst returns on capital, as I said. In an EV world, GM can avoid making as many of these products.
Part of the reason you even make these crappy cars is to meet countries’ GHG emissions standards, because the governments measure pollution at the company level and blame the companies, not the consumers (can’t blame your voters). If you sell more pick-up trucks and fewer compact crossovers, your average emissions per car goes up. You might not meet regulatory standards, at which point you get to pay a big fine. Ferrari has so much pricing power that if regulators try to make it conform, it just pays the fines and passes this on through the car prices. GM can’t. BUT… in a world of electric SUVs, this incentive to sell small crossovers is gone. Each electric SUV or truck pulls down the average emissions per car since EVs don’t emit. GM can then just focus purely on what’s best for GM. It can move investment dollars away from small cars (whose market segments may be killed by Chinese competitors anyway) and toward pick-ups (which will stand up to competition).
Next, pricing:
Pricing’s been flattish for 4-5 quarters now, following ~23% price inflation during the pandemic (roughly in line with overall inflation). This is the case across the industry in the US. Over time, I expect price increases in GM’s key vehicle segments are going to be relatively consistent. In other segments, like small crossovers and such, pricing’s going to be a lot more competitive and harder to increase. That’s kind of played out in this industry historically. This is also true across a lot of consumer industries and generally agrees with frameworks underlying competitive analysis: the less competitive your industry is and the more leverage you have (or you can look at it like: the less negotiating leverage your customers and suppliers have), the easier it will be for you to raise prices without losing market share.
You can see the drivers of pricing power in the data. GM was ranked #1 in terms of customer loyalty (measured by how often customers switch away from it when buying another vehicle) by industry data providers. Again, this comes out directly in the business’ economics. GM’s dealer incentives (discounts) have been about 10-20% below the industry average for some time. Generally, the automakers with less loyal customers (a weaker brand) have to price more aggressively to drive volume and maintain market share.
GM’s more recent focus on customer experience is resulting in customers haggling with dealers less intensely than average. That focus will also help it protect volumes from Chinese invasion a little longer. Other OEMs with weaker brands will lose more share to the Chinese, instead.
Last, the EV transition:
I’d actually like to have more data than I do about this, but that data has a short half-life anyway and I believe no data is going to take away the fact its unknowable exactly how the industry transition might go. Nonetheless, I have qualitative conclusions, and they’re why I still own the stock.
(Note: because of this inherent uncertainty, I think GM has the highest chance of being “wrong” and ranking low in terms of investment performance among our portfolio holdings next 5 years.)
The issues:
First, consumers generally aren’t willing to pay a premium for an EV vs. an ICE (internal combustion engine) vehicle. Second, it currently costs automakers much more to produce a hybrid or EV than an ICE vehicle. If your next gen product costs more but your market research says your customers won’t pay up for it, your business has a problem.
Why’s an EV cost more?
Mostly the battery.
People tend not want an EV unless they feel like they can get the same range as an ICE. That means: big battery. That reads: expensive battery. While it’s true the OEM’s removing a several-thousand-dollar transmission and combustion engine from an EV, the electric motor(s) and this huge battery cost more. For a hybrid car, it depends, but you’re still throwing in a small electric motor and battery in with a (smaller) combustion engine and transmission. It’s also more complex to design more product variations like this (remember the industry’s big R&D spend).
At the pack level — battery cells plus housing and such — a battery costs ~$125/kWh. Ignore the measurement units. A mid-sized SUV like a Chevy Blazer or Equinox needs gets an 85kWh battery to meet the kind of range a consumer wants. That’s $10,000 of battery, plus an electric motor. These replace a combustion engine and transmission that cost about half that. There are other differences but these two parts are responsible for most of the cost difference per car, and that’s what we care about.
Since this is a competitive industry where the customer has plenty of alternatives, trying to charge your customer more for what they think is a similar product is… well… less than easy. That means the extra $5K in cost above is going to come out of the automaker’s bottom line instead. If you’re selling the ICE version of these SUVs at $45K and making a 10%-ish pre-tax margin, you are now losing about half of the profit per car on the EV version.
There’s more to it, with a few offsetting levers OEMs can pull, but this is the issue. In essence, it also means you’re going to be earning perhaps half the returns on capital as well, since the operating profit per unit is down by a half.
Ouch.
AND… EV penetration is rising. Demand’s growing. ~8% of US new vehicle sales are EVs/hybrids today.
So… there’s no choice: the automakers will feel they have to have to make R&D & manufacturing investments to sell EV options because they’ll otherwise cede market share long-term to someone else who is. They also need to get an early start and eventually be selling these vehicles at scale, otherwise they won’t get their fixed costs per unit down, and won’t get anywhere near the profit per car they ultimately want, which more scaled players like Tesla already do.
See the market’s fear?
Although I’m less certain about GM’s future than I am of Brookfield or Bank of America, I think GM will navigate this.
Why?
Outs in the Deck
I can see at least a few outs in the deck, and I’m sure that because I think Mary Barra is a very skilled CEO, she and her team see more options than I do.
On the higher end where customers are less price-sensitive, I believe GM and others can price away some cost problems into several products over time (e.g., like the Suburban, the Silverado, and all of the Cadillac brand). It’s not purely price, though. They do sneaky things like come up with more premium trim levels that have shiny bells and whistles you get emotionally “tricked” into buying at the dealership. If you want an EV, you might be forced to only buy a better trim and not a basic one. Otherwise, you might only be able to get an ICE if you want the basic trim. And so on. Higher trim levels earn more variable profit per unit12. This should hide some of the cost pressure. Hopefully that makes sense.
This is one of tens of ways to skirt the issue.
On the lower end, you can’t just raise price. So there’s more pressure. Yet there is, and will be, a cost race underway across the whole supply chain. Stellantis (which owns brands like Jeep and RAM) estimates there’s a 30% cost difference across auto suppliers globally in terms of the price they will quote you for a given part, on a like-for-like basis (e.g., you ask for a quote regarding an order of 10,000 of the same kind of windows or seats). Finished materials cost (car parts) is ~85% of a car’s manufacturing cost (the rest is like 5-10% labour, 5% freight, and such). That means there’s an opportunity automakers to shift their supply base around and pull some cost out of the car. 30% of 85% is a lot in a business where the pre-tax margin is 10%.
Next, the technology’s new-ish and riding down the cost curve. The industry average battery pack cost declined 14% from 2022 to 2023, according to Bloomberg. In these $125/kWh packs, the packaging (the part that holds the cells) alone is ~$30/kWh. Qualitatively, automakers have told us it’s overdesigned and being optimized. Many of the designs are only in the first generation. Like other technologies, unit costs should decline as the producers’ volumes scale up and as they optimize the design, take excess materials out, etc.
Auto manufacturing is silly-complicated with a lot of components. Cars have 30,000 components on average, and are produced in an afternoon. So, there’s no one thing you can point to and say “this will fix it”. However, this also means there are tens of different levers in the business that a smart management team is going to pull in order to pull cost out.
CEO Mary Barra originally started out as an engineer at GM. When she took over after the 2009 bankruptcy, she consolidated GM’s 30+ vehicle platforms down to close to 4 at one point. She and her team saved the business $4 billion in annual cost, almost doubling GM’s profitability. She’s done things like this repeatedly. We are not taking it on faith that she and her team will “hopefully” find things to do. They will, and they talk regularly about what they’re already doing. Barra’s team, for example, is working the supply chain backward all the way up to the lithium mines, trying to figure out how to source material more cheaply (rather than leaving it up to the suppliers) and entering into long-term contracts with materials companies.
(Maybe one day we’ll go over my old investment case on Facebook/Meta, where the company had a similar issue. Apple stopped sharing phone users’ IDFAs with the company — whose ability to target you with ads was basically anchored on knowing your phone’s IDFA. That upended Meta’s business model and it was impossible to see how exactly you could fix it, but you could know that they were likely to fix it.)
Finally, there’s an EV tax credit in the US in place. When a consumer buys an EV, they get a $7,500 tax credit. The government is stupid and gave the tax credit to the consumer. However, through the magic of the invisible hand, that’s fine. The credit is transferrable to the dealership when a consumer buys a car, and the consumer doesn’t have to wait until they file their taxes. When the dealer gets the credit, some fun and exciting finance stuff goes on (rebates, wholesale price reimbursements, whatever) and the automakers end up with the credit. This tax credit then offsets most, if not all, of that incremental cost of producing an EV that we just discussed above. Already, GM’s management has said that with the tax credit in place, they expect no huge change in the company’s operating margins over the next few years, whereas they don’t talk as confidently when you ask them what happens without the tax credit (meaning internally, they expect margins to drift down a bit until they scale up production and get the battery’s cost down).
At this point, the thesis is mainly:
The core moat around pick-up trucks is unchanged. None of the changes above have anything to do with the highly brand-loyal, price-insensitive pick-up truck buyers that drive two-thirds of GM’s profit.
Management is smart and will do smart things that allow them to navigate the cost pressures reasonably.
If #1 and #2 hold true and we stay at these margins, the market will eventually come to see things my way. In that case, the stock is a >2x.
That’s all for now.
Did you enjoy this more narrative format, or more like the formal investment report I presented on Ally?
Chris
Well, good for the investment bankers.
There are around ~10 meaningful players in many countries. 100 in China… because reasons. Many will never die even though they have failed to earn their cost of capital for decades.
This is basically also price competition, since you are giving away extra product features and not earning any incremental profit dollars doing so.
Automakers generally have negative working capital and a negative “cash cycle”, which is normally a good thing. It is what made Dell a lower cost producer of PCs in the 1990s. It means you tend not to pay your suppliers for a while. In fact, you take so long to pay your (frustrated) suppliers that this is longer than the average amount of time it takes you to get paid by your customers, plus the average time a unit of inventory spends sitting on the “shelves”). That is: Days Payable > Days Receivable + Days Inventory. If you were just looking at a balance sheet, it’d also be approximately true if you saw that the payables balance was larger than the receivables and inventory balances. You’re essentially using your accounts payable to fund your inventory and your receivables, and then some. That reduces how much capital you have to have in the business. The problem with negative working capital, though, is when you are a cyclical business, it consumes cash as your revenues shrink and the negative balance unwinds. So you get a big cash outflow at exactly the time you would prefer not to have a big cash outflow: a recession. Most businesses have positive working capital, and so their working capital becomes a source of cash when their revenues shrink, and helps buffer them. There’s more to working capital than just these three balance sheet items, but you get my point.
These costs no longer exist at GM, and its pension has been “frozen” since 2009, with no new enrollees.
In the auto industry, plants can run at over 100% of their design utilization by adding a third worker shift and weekend shifts, meaning the plant runs around the clock and never stops. Generally you want to set things up such that when the economy is very good, you just add an extra shift like this, instead of building another plant. Otherwise, when the economy is not good, you have a plant that is not running at all, instead of one that is running at 85% capacity. Make sense? You also have to lay off fewer workers in this world, which makes the UAW, the auto workers’ union, happier (while also being a better way to treat people).
Ferrari in particular sells only to the wealthy who value this more than anything, and who care a lot less about the price paid.
Ferrari, in fact, will not sell you some of its cars until you own one of the introductory level models, for which there is frequently a wait list. You have to be permitted by the company to buy its stuff, and it severely limits the production of everything. Many Ferrari owners have more than one, or own several different supercars. Not buying Ferrari when I understood it well was one of my biggest investment errors.
You need to combine sales of the Sierra and Silverado to compare to the F-150, since the Sierra/Silverado are basically the same truck and share probably something like 90% the same parts, saving on R&D and manufacturing production costs as I described in this paragraph.
Usually, scaled automakers design one “platform” shared across multiple products, then design a different “top hat” (the part the customer sees/uses most) for each product so that they can better address different needs of different customer market segments. Even then, the top hats often have many of the same parts, like the headlights and infotainment systems and wiring harnesses.
Ford; RAM/Jeep owned by Stellantis, and Chevy/GMC owned by GM.
Variable profit is price minus “variable” costs like materials and freight, but before “fixed” costs like R&D.