Behind GM, Ford’s new electric vehicle strategy is the old source of finance: Cash

Detroit’s automakers have devised a surprisingly conservative financial strategy to make electric cars the next vehicle of choice for American consumers.

They are paying cash.

Synthetic engine and Ford is investing $65 billion between them — $35 billion in GM and $30 billion in Ford — and so far, has not proposed borrowing any of it. Instead, the most radical change to automotive products in a century is being paid for from companies’ operating cash flows – severely reducing the risk to companies over time and now. now, are boosting their stock price.

“The short answer is they’re doing it because they can,” said Nishit Madlani, head of autos at bond ratings agency Standard and Poor’s. “The popularity of trucks [since the pandemic began] and strong valuations are giving them confidence. “

Detroit’s aggressive investment and conservative financing have been in the making for many years. It received $4 billion in loans from GM in May 2020, and Ford withdrew its $15 billion revolving line of credit during the same period, moves aimed at easing the dreaded sales slump from Covid- 19. As sales fell slightly more than worryingly in 2020 and then started to pick up again in 2021, cash flow remained strong, sending companies’ stock prices higher and leaving Ford to pay off interest payments. high.

At the same time, both companies kept cash by pausing dividends and stock buybacks. And the companies have cut billions of dollars in annual costs, by slashing their entire line of unprofitable sedans, pulling out of unprofitable markets overseas and focusing more closely on trucks. , is still their most profitable business.

Add all of this together, and America’s two largest automakers have cashed in on the cash to make the industry’s biggest technological transformation since its inception.

Detroit 2’s financial strategy is the exact opposite of how Tesla, then a startup, has funded the electric vehicle push over the past decade. The EV leader has repeatedly raised money from the stock and bond markets to pay for its plans, filing paperwork with federal regulators to sell nearly $10 billion worth of stock. here in 2020. Tesla’s first EV factory in California was financed with a federally-guaranteed loan in 2010, when the electric vehicle market was in its infancy, before the company went public or had any business. material collection.

GM and Ford are willing to spend more.

“If anything, it goes up from there,” a Ford spokesman said.

According to Nelson, the US auto market has rebounded with nearly 15 million units sold in 2021 providing the financial stepping stone Detroit needs to push further. The crash wasn’t nearly as massive as the 2008 financial crisis, when the US passenger car market shrank to more than 10 million cars and trucks. The short and shallow drop helped ensure that the two companies’ war stocks were large enough to meet the need for billions of dollars of new investment, Madlani said.

“We’re prepared for the known and the unknown,” a Ford spokesman said. “The unknown part is the pandemic. The known part is that we need to be the leader in electric vehicles.”

The rebound in sales, while still far below their pre-pandemic pace, translated into free cash flow of $7.8 billion in the nine months ended September at Ford. At GM, where the auto business barely broke even in terms of operating cash flow in the first nine months of 2020, liquidity was still strong enough for the company to spend more than $4 billion on capital expenditures. GM will report its fourth-quarter results on February 1, while Ford will release results on February 3.

Analysts expect Ford to report profit of 42 cents per share on $35.8 billion in revenue, up 75% since the September quarter, according to Thomson Reuters data. GM is forecast to earn $1.11 a share, down from $1.52 in the third quarter. GM raised its own forecast for the full year in December, saying it would make $14 billion in earnings before interest and taxes, up from $11.5 billion to $13.5 billion it said. previously predicted.

Profits for Ford and GM have increased, although unit sales in the US industry have fallen below the 17 million-vehicle annual rate before Covid, as the companies slashed costs to prepare for the pandemic. suffer for the transition, Nelson said. For example, Ford is almost entirely out of the sedan business, and GM laid off 4,000 salaried workers in 2019. That’s in addition to plant closures, including its Lordstown, Ohio plant. GM, which was later sold to the EV startup. Lordstown Motors.

On top of that, companies are holding a lot of cash in reserve if their cash flow falls short of forecasts. Since 2019, analysts who have been cautious about all the money Ford needs to invest in its business respectfully note that it also has $37 billion in cash and short-term securities. . Ford currently has $46.4 billion in assets and generated more than $12 billion in cash from operations in the first nine months of 2021.

Both companies had much to say about electric vehicle planning and financing strategy, at investor conferences last year. General theme: Building Ford’s electric vehicle strategy around existing model names like Mustang and especially the pickup truck F-150, for which the company has already obtained 200,000 pre-orders, is paying off in both customer acceptance and cost restraint.

“Over the next 24 months, based on demand for these products, [we] will be the number two EV car manufacturer, able to reach nearly 600,000 EVs per year globally [from Ford’s current product lineup] and we don’t plan to stop there,” Ford North America CEO Lisa Drake said during an investor conference sponsored by Goldman Sachs in December. The level of product complexity in the EV space is much less than in [internal combustion engines]. … And that will allow us to be more efficient with our capital and more efficient with labor and assembly plants. “

At GM, EV . strategy includes a wave of new vehicles using new and existing nameplates – most recently, the company unveiled a $42,000 electric version of the Chevrolet Silverado SUV – as well as its Cruise joint venture with Honda, Microsoft and other investors to build an EV-focused self-driving car business.

That means production complexes for electric vehicle production are underway — or in the pipeline — in two Michigan towns and in Spring Hill, Tennessee, with battery plants already planned. Plans near the sold-out Lordstown plant and in Spring Hill. GM’s chief financial officer Paul Jacobson said in March the company saved $1 billion to $1.5 billion per plant by converting existing car plants instead of developing factories. All-new, this will hit $20 billion to $30 billion by the time GM’s EV efforts are at full scale.

For now, the challenge is that electric vehicles are far less profitable than full-size pickups and SUVs that dominate the two companies’ businesses, Nelson said, but that’s not likely to last. Nelson says that as battery costs continue to fall and Ford and GM build up to scale in their electric vehicle businesses, they may be able to surpass the margins of internal combustion-engine vehicles — noting that Tesla is profitable per dollar higher revenue than the auto businesses of Ford or GM. Ford says its Mustang Mach E is still profitable despite selling less than 30,000 units in 2021.

“Ultimately we expect to match [internal combustion engine] profit with EVs as battery costs drop and we scale our operations,” a GM spokesperson wrote in an e-mail.

At Morgan Stanley, analyst Adam Jonas – a longtime EV developer – says Ford’s rise makes making its stock outperform Tesla last year, showing that their EV-focused businesses are now worth about $50 billion, with every 100,000 EV sales adding $2 to the company’s share price. However, he warned in a January 13 report that unavoidable collisions during the deployment of electric F-150s and other vehicles could result in a temporary drop in supplies later this year.

“From $25, we believe that expectations for Ford’s success in the EV space are achievable,” Jonas wrote.