The cab to a Ford all-electric F-150 Lightning truck prototype is seen on an automated guided vehicle (AGV) at the Rouge Electric Vehicle Center in Dearborn, Michigan, September 16, 2021.
Rebecca Cook | Reuters
Detroit’s automakers have brought a surprisingly conservative financial strategy to making EVs the next vehicle of choice for American consumers.
They’re paying cash.
General Motors and Ford are investing $65 billion between them – $35 billion at GM and $30 billion for Ford – and, so far, don’t propose to borrow any of it. Instead, the most radical change in auto products in a century is being paid for out of the companies’ operating cash flow – seriously reducing the risk to the companies over time, and, for now, boosting their stock prices.
“The short answer is that they are doing it because they can,” said Nishit Madlani, automotive sector lead at bond rating agency Standard and Poor’s. “The popularity of trucks [since the pandemic began] and strong pricing is giving them confidence.”
Detroit’s aggressive investment and conservative financing has been years in the making. It has been aided by $4 billion borrowed by GM in May 2020, and by Ford drawing down a revolving credit line by $15 billion around the same time, moves intended to cushion a feared sales implosion from Covid-19. As sales declined more modestly than feared in 2020 and then began to bounce back in 2021, cash flow remained strong, taking the companies’ stock prices higher and letting Ford repay high-interest debt.
At the same time, both companies held on to cash by suspending dividends and share repurchases. And the companies have cut billions in annual costs, by slashing whole lines of unprofitable sedans, withdrawing from unprofitable markets overseas, and focusing tightly on trucks, which remain the most profitable part of their business.
Put all of this together, and the two biggest native-born U.S. automakers have the cash to take on the industry’s biggest technological transformation since its founding.
“Auto manufacturers are expecting record profits once we get through supply chain issues and chip shortages, which we expect to last most of this year,” CFRA Research analyst Garrett Nelson said. “The existing business is good, and the driver is car prices at a record high.”
The Detroit 2’s financing strategy stands in stark contrast to how Tesla, then a start-up, financed its push into EVs over the last decade. The EV leader repeatedly raised money from the stock and bond markets to pay for its plans, filing paperwork with federal regulators for $10 billion in stock sales as recently as 2020. Tesla’s first EV factory in California was financed with a loan that was federally guaranteed in 2010, when the EV market was nascent, before the company went public or had material revenue.
GM and Ford are ready to spend even more.
“If anything, it will go up from there,” a Ford spokesman said.
The U.S. car market’s bounce back 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.
“We prepared for the known and the unknown,” said the Ford spokesman. “The unknown part was the pandemic. The known was that we needed to be a leader in electric vehicles.”
The sales rebound, while still well below pre-pandemic pace, has translated into $7.8 billion in free cash flow over the nine months that ended in September at Ford. At GM, where automotive operations barely broke even on operating cash flow in the first nine months of 2020, liquidity was still strong enough to let the company spend more than $4 billion on capital expenditures. GM is due to report fourth-quarter results on Feb. 1, with Ford set to announce its results Feb. 3.
Analysts expect Ford to report profits of 42 cents a share on $35.8 billion of revenue, up 75% since the September quarter, according to Thomson Reuters data. GM is forecasted 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 will earn $14 billion in earnings before interest and taxes, up from $11.5 billion to $13.5 billion it had previously predicted.
Ford and GM profits have held up, even though U.S. industry unit sales are off the 17 million-vehicle annual pace before Covid, because the companies aggressively cut costs to prepare for the transition, Nelson said. Ford got almost entirely out of the business of making sedans, for example, and GM laid off 4,000 salaried workers in 2019. That’s in addition to factory closings that included GM’s storied Lordstown, Ohio plant, later sold to EV start-up Lordstown Motors.
On top of that, the companies are holding plenty of extra cash as a reserve if their cash flow misses forecasts. As long ago as 2019, analysts who spoke warily of all the money Ford needed to invest in its business respectfully noted that it also had $37 billion in cash and short-term securities. Ford now has $46.4 billion, and generated more than $12 billion in operating cash in the first nine months of 2021.
Both companies have had plenty to say about financing strategy, and EV planning, at investor conferences in the last year. The common theme: Building Ford’s EV strategy around existing model names like the Mustang and especially the F-150 pickup truck, for which the company has garnered 200,000 pre-orders, is paying off in both customer acceptance and cost containment.
“Within the next 24 months, based on the demand on these products, [we] would be the number two EV automaker, probably close to 600,000 EVs a year globally [from Ford’s current product lineup] and we don’t plan to stop there,” Ford’s North American chief operating officer Lisa Drake told a Goldman Sachs-sponsored investor conference in December. “The complexity of the product in EV space is much less than at [internal combustion engines]. …And that’s going to allow us to be more efficient with our capital and more efficient with the labor and the assembly plants.”
At GM, the EV strategy includes a wave of new vehicles using new and existing nameplates – most recently, the company unveiled a $42,000 electric version of its Chevrolet Silverado SUV – as well as its Cruise joint venture with Honda, Microsoft and other investors to build an EV-centered autonomous-car business.
That has meant manufacturing complexes devoted to EV production that are in progress – or in production – in two Michigan towns and in Spring Hill, Tennessee, with planned battery plants near the sold-off Lordstown plant and in Spring Hill. GM chief financial officer Paul Jacobson said in March 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.
For now, the challenge is that electric vehicles are much less profitable than the big pickups and SUV that dominate the two companies’ business, Nelson says, but that isn’t likely to last. Nelson says that as battery costs continues to drop and Ford and GM build scale in their EV business, they can surpass the profitability of internal combustion powered vehicles – noting that Tesla is more profitable, per dollar of sales, than Ford or GM’s auto businesses. Ford says its Mustang Mach E is profitable even though it sold fewer than 30,000 units in 2021.
“We do eventually expect to match [internal combustion engine] profitability with EVs as battery cell costs decline and we scale our operations,” a GM spokesman wrote in an e-mail.
At Morgan Stanley, analyst Adam Jonas – a longstanding EV bull – says Ford’s surge which led its stock to outperform Tesla last year, suggests that its EV-focused businesses are now worth about $50 billion, with every 100,000 sales of EVs likely to add $2 to its stock price. But he warned in a Jan. 13 report that hard-to-avoid bumps in the rollout of the electric F-150 and other vehicles will likely cause the stock to dip temporarily later this year.
“From a $25 level, we believe expectations for Ford’s success in EVs, while possible to achieve, are difficult to exceed,” Jonas wrote.