The ugly math: General Motors, Ford and other old automakers are throwing hundreds of billions into EVs, the only auto part that’s growing. Tesla made them do it

It is a zero-sum game that consumes a lot of money. But the electric utility loves it.

by Wolf Richter NS Wolf Street.

In today’s investor conference press release, General Motors said it plans to double its annual revenue by the end of the decade as it transitions to electric vehicles. Mathematically speaking, a price increase of 8% per year for nine years would do that without having to jump through hoops of selling more vehicles. GM The average transaction price in the third quarter in the US jumped 20% on an annual basis. So… I don’t see this statement as a sign of an increase in volume, but an increase in prices.

GM confirmed this reasoning by noting that it expects to increase its margins as it transitions to electric vehicles. It said half of its manufacturing capacity in North America and China will be able to produce electric vehicles by 2030.

Sales growth in this industry is obtained by selling higher priced cars. But volume growth, in terms of the number of cars sold, is difficult to achieve in the auto industry. There are some developing economies where sales are still growing. But there has been no growth in advanced economies for two decades.

In the United States, sales peaked in 2000 at 17.4 million vehicles, then declined, then declined to 10.4 million vehicles in 2009, then recovered to 17.5 million vehicles in 2016, and that was the case. Sales have since declined. Last year, the industry sold 14.6 million vehicles. This year, it may be about 15 million cars.

But the one part that’s growing super fast is electric vehicles. And that’s what GM’s investor conference was all about — creating investor excitement about this “transition to electric vehicles,” from a “about $30,000” Chevrolet crossover to a high-performance 1,000-horsepower Hummer EV pickup truck.

What the conference didn’t get around is that the transition to electric vehicles is undoing sales of other cars because the auto industry in advanced economies, including the United States, has seen absolutely no growth in car sales. The transition to electric vehicles is a zero-sum game.

It is a very expensive transformation.

Vintage automakers — GM, Ford, FCA owned by Stellantis, Volkswagen, BMW, Mercedes, Japanese automakers, and Korean automakers — have announced investments worth billions of dollars each, or tens of billions of dollars each. dollars each. Create their own EV models, build electric vehicle manufacturing plants, enhance their software operations, and create or expand research, manufacturing plants, and battery supply chains.

The money that goes into these efforts by older automakers is mind-boggling. General Motors has announced that it will invest $35 billion through 2025 in electric vehicles, driver assistance technologies and autonomous driving. Volkswagen – along with Toyota, the world’s largest automaker – It plans to invest $86 billion over the next five years in its electric vehicle programs. Ford is investing more than $30 billion in its electric car programs through 2025. Tesla has spent more than $20 billion in cash it raised from investors to get it where it is today (it raised even more cash last year through massive stock sales, But she hasn’t burned that money yet.)

The auto industry has never seen this kind of massive investment spree — and investor enthusiasm will be required to fund it.

Legacy automakers don’t do it because they want to; They do it because They have to In order not to be run over by Tesla and a group of Chinese automakers.

Tesla hit BMW and Mercedes-Benz with its low-profile luxury sports sedan (Model S) and then with the semi-luxury Model III, then came out with cheaper models, including compact SUVs, and this is the mass market, this is the perfect place in the States United, where there is volume. And he was threatening to break out with a pickup truck, which would crash into Ford, which had already abandoned sedans in the US and relied on its F-Class trucks, the best-selling car of all time.

Tesla rocked the old, dormant automakers, and now it’s life and death for them. Electric cars are the only part that is growing, and the growth rates are huge, and they’re doing it at the expense of vehicles with internal combustion engines (ICE). There is no net gain in total sales volume. This is a zero-sum game at best.

The math is daunting for old automakers – it takes huge investments to produce uncertain profits and big risks. But they finally got to grips with it.

In addition, the industry now has to contend with several start-ups around the world, including dozens of companies in the US and something like 300 in China, all of which claim to become “the next Tesla”.

Startups don’t have to make money. They can burn cash for years, get more money from investors, and they can undercut old automakers and sell them for less than they expect. They will put pricing pressure on the old automakers.

Pickup with 600 horsepower or even 1000 horsepower? Electric vehicles make that possible. Ford’s F-150 Lightning EV is already on the market with over 600 horsepower. Ford says it has 150,000 orders for it. General Motors offers a line of trucks that are marketed as their premium model, the 1,000-horsepower Hummer EV.

These are crazy numbers. Nobody needs that much power in a pickup truck, but hey, this is a new thing, and electric vehicles make it effortlessly possible.

Pickups and SUVs define the US market. Big is good. Strength is good. Electric motors are small. They have a nearly flat torque curve, which is ideal for high-performance driving, towing, and choppy traffic. They use the braking energy of their electric motors to charge the battery. Engines with a combined output of 600 hp can generate much more power from braking, and they can brake more aggressively than a 200 hp engine. Long steep slopes with a big trailer? stop and go traffic? Every time the driver applies the brakes, the electric vehicles charge the battery.

The problem is the battery, with tens of billions of dollars pouring in and much of the research effort. GM has already learned first-hand how expensive it can become when a battery made by someone else is defective and ends up burning cars.

The main technology of electric vehicles is battery technology. This is where the costs and challenges come in. It’s much cheaper to build other electric vehicles than it is to build ICEs.

Given the compact size of the powerful electric motors between the axles, front and rear, and the ability to place battery packs where the floorboard used to be — the so-called skateboard platform — automakers have design freedom they don’t. Ice vehicles. Here’s GM’s EV platform:

But so far, automakers have not taken advantage of this design freedom. They’ve remained true to the classic lines designed for ICEs, worrying that a drastic design change could alienate consumers.

But the profits, after billions of investments, can be negligible.

Together, automakers will pump hundreds of billions of dollars into the EV sector for years to come. As competition in the electric vehicle sector escalates, profits can be negligible.

Overall sales of electric and ICE vehicles combined will be stagnant in the long run at best, a zero-sum game. An EV sale likely means a vehicle that was not sold on an ICE. For automakers, this could mean breaking up the highly profitable sales of ICEs with less profitable electric vehicles.

This is what they get from investing hundreds of billions of dollars in this sector.

For people who have watched the industry for decades, this is the most exciting moment. The industry has become calcified. Now change is in full swing – a change imposed on them by the market. There will be vibrations, too. I’m not sure how the investors will go. But they have to do their own calculations.

The facilities are loving Evs. They are practically giddy.

In the United States, the problem of electrical utilities is twofold:

1. Huge idle ability at night When the demand for electricity is small compared to the peak demand during the day. Capacity is designed for peak demand (eg hot summer afternoons). For the rest of the time, some of that capacity stays there and costs money, but it doesn’t generate revenue. Idle capacity is expensive for utilities – and price payers pay for it.

2. Electricity sales have been stagnant for years. For the United States in general, sales of electricity through electrical utilities to end users, such as homes and industrial plants, have gone nowhere for more than a decade, due to the high efficiencies of electrical equipment (LED lights, air conditioners, etc.), and the impact from solar energy On surfaces, and other factors:

It varies by country. Below is a chart of electricity sales in California and Texas. In California, electric vehicle penetration is by far the highest in the United States. In Texas, electric vehicle penetration is among the lowest in the United States.

In California, electric sales have been trending down for more than a decade, and electric vehicle charging growth hasn’t stopped the decline in electric sales. The decline began with a push for energy efficiency (lamps, appliances, industrial equipment, air conditioning, building insulation, etc.).

Even in Texas, electricity sales have increased by only 9% in 10 years – less than 1% per year! This is an industry that is not growing for utilities even in Texas, and further growth will make its investors very happy.

Electric vehicles will solve both of these problems for electric utilities: they will increase demand, and they will increase demand mostly At night When people charge their cars in their garage, so they reduce this huge and expensive capacity idle at night.

In areas where time-of-use billing has been implemented, wage-payers are getting cheaper electricity at night as a lure to use idle capacity – and will charge their electric cars with cheaper juice.

Electric utilities are ecstatic about electric vehicles. Selling electricity is their business. It is easy to fund capacity additions to meet growing demand when utilities can demonstrate that these investments will generate revenue growth.

This is how utilities work: they make a large capital investment, like a power plant, with cheap borrowed money, which results in revenue growth and income growth for decades. The stagnant demand environment over the past decade has challenged this business model. And the demand for electric cars, when they finally make their appearance, will be a huge boost for utilities.

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