GM's race to outflank Tesla may be stalling out

Key Points
  • GM CEO Mary Barra promised the automaker would launch 20 models of electric cars by 2023, beginning early this year.
  • The company denies claims in the trade press that it missed its self-imposed deadline for the first two product introductions this spring.
  • A slowdown in China, a ratcheting up of trade tensions and the looming expiration of a key U.S. tax credit to encourage EV adoption promise to make the job harder.
GM's latest self-driving vehicle is a modified Chevy Bolt without a steering wheel or pedals.
General Motors

Back in 2017, General Motors CEO Mary Barra painted a future in which America's largest carmaker would prosper by phasing out the American Graffiti vision of V8-powered freedom on the open road. GM would launch 20 models of electric cars by 2023, beginning early this year, she said, preparing for a time when cars would drive themselves and many people would use ride-hailing services rather than own cars themselves.

"The future is coming fast, and we're doing everything we need to do, as fast as we can, to be ready for it," GM President Mark Reuss said at a GM investor day in January. 

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But as hard as GM is pushing, the world pushes back. The company denies claims in the trade press that it missed its self-imposed deadline for the first two product introductions this spring, saying two models introduced in China kept the vow. But a slowdown in China, a ratcheting up of trade tensions and the looming expiration of a key U.S. tax credit to encourage EV adoption still promise to make the job harder.

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Paying for some of the process by cutting costs in the existing business by $6 billion a year has added to labor tension, too, especially when Chevy announced plant closings in Ohio, Michigan, Maryland and Canada last November, even as it doubled down on its bets on electric vehicles and offered relocation to affected factory workers.

A woman gets in a self-driving Chevy Bolt EV car during a media event by Cruise, GM’s autonomous car unit, in San Francisco, California, November 28, 2017.
Elijah Nouvelage | Reuters

And the mixed reception for initial public stock offerings this spring by Uber and Lyft — which like General Motors are promoting a future vision of transportation where many people stop owning and driving cars in favor of hailing rides in automated, emissions-free vehicles that never pollute the air or have accidents — highlight investor skepticism about the rapid arrival of the future that GM is betting on.

All of that is happening while the company is waiting to see whether those trade tensions accelerate the arrival of a U.S. recession or global economic slowdown, fears that have taken 13% off GM's stock price since April 18. President Donald Trump is threatening to slap 25% tariffs on a wide range of Chinese products over China's lax intellectual property protection and state-imposed limits on access to China's markets, which he repeated while in France for D-Day celebrations. Now automakers are waiting to see how the trade war will affect their global supply chains.

Overall, auto sales in China have been particularly volatile in recent months — dropping to an annual pace of about 15 million units in February, rebounding to a 25-million clip in March and back down to 20 million in April — all after posting their first annual decline in years last year. Those may be the company's biggest near-term challenges, well before GM's evolution to electric vehicles is completed, Morningstar analyst David Whiston said. Sales of traditional cars are also paying for the huge development budget for electric and self-driving cars.

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"They're moving forward, but plans change based on movements in markets and trade," said Brett Smith, director of propulsion technologies at the Center for Automotive Research in Ann Arbor, Michigan. "They may not be where they hoped to be, but they're probably doing better than they expected to be."

If GM has made any mistakes in pushing toward its future, it's probably that it began its EV push in 2010 with its lower-end Chevrolet brand when the most eager early EV buyers wanted higher-end cars like Teslas. In addition, GM was pushing sedans, just as sedans were losing their cachet with U.S. buyers, said Garrett Nelson, an analyst at CFRA Research in New York.

That helped hold U.S. sales of the plug-in hybrid Chevy Volt to about 155,000 units over 10 model years before GM announced last fall that it would phase out the model. The company kept the fully electric Bolt, which has sold about 45,000 units since its 2017 introduction, from living up to predictions that it would quickly challenge early mover Tesla's dominance of the EV market.

They're moving forward, but plans change based on movements in markets and trade.
Brett Smith
director of propulsion technologies, Center for Automotive Research

That performance, while not enough to separate GM from Volkswagen and other next-tier aspirants to the No. 2 spot in EVs, has used up GM's allotment of $7,500 federal income-tax credits, available to the first 200,000 EV buyers from each car company. The credits are designed to encourage customers to buy EVs, which are still more expensive than internal combustion engine-powered counterparts.

Barra said in January that GM will be lobbying to extend the tax credits, along with Tesla, whose tax credits are also expiring, and Nissan, which expects to offer the full tax break until 2021. "Extending them helps extend and support U.S. innovation,'' she said.

2020 Chevy Bolt
Adam Jeffery | CNBC

Now GM electric-vehicle buyers are eligible for a $3,750 tax credit, which is still big but making a smaller dent in the difference between a GM EV and competitors that use internal combustion engines. And the smaller U.S. credit is expected to be used up completely by next April, the CFRA's Nelson said. Using up the tax credits on a slow stream of Bolts and Volts risks putting GM at a competitive disadvantage later, when manufacturers like Volkswagen will still have credits available as bigger, more popular classes of vehicles go electric, he added.

"EVs are going to remain more expensive for a while," said Smith of the Center for Automotive Research. "Whenever tax credits expire, EV sales struggle afterward. In five years it may be different. But it's hard to get over the hurdle when you lose the incentives.''

Taking a global view

As that happens, however, GM's plan is evolving to make the company's EV offerings more luxurious and more global — while developing platform technologies that allow for different models to use a common base of components to keep the new vehicles affordable.

The plan begins with the two C's: Cadillac and China. Cadillac is now the "tip of the spear" in GM's electric vehicle efforts, the company says, with a large-but-undisclosed number of the 20 expected new models likely to carry the company's traditional luxury brand, which not coincidentally is strong in China, Autotrader.com market analyst Michelle Krebs said. Cadillac's EV lineup is expected to include the first GM electric crossover for the U.S. market, an unnamed model the company showed off before the Detroit Auto Show in January, which is set for 2021.

"We're confident about the portfolio as we work hard to restore [Cadillac's] status as a luxury brand," Barra said. "One way we'll do that is through technology and innovation."

China is key because the market is so large there, Cadillac is already popular there, and because it also has tax incentives to promote electric vehicles, Krebs said. But China is also expected to phase out most existing incentives by next year, and estimates of its macroeconomic growth rate are falling, thanks partly to trade tensions with the U.S.

Reinventing the wheel

The key to making GM's plan work is cutting costs. One way to do that is to bank on decreasing EV battery costs, which have been falling by 21% a year since 2010, promising to make EV propulsion cheaper than internal combustion engines by the mid-2020s, as predicted by Bloomberg New Energy Finance.

The other way is to do what GM is doing — build EVs on a common platform that allows for widespread sharing of parts among different vehicles, including letting GM quickly vary the size of a vehicle's battery by changing the number of battery cells included in each model. "The [shared] architecture is why we're so bullish on electrification,'' said GM's president Reuss in January.

"There are multiple elements that go into the price of an EV, including battery cost, leveraging the China market to achieve global scale on a common architecture and gaining manufacturing efficiency with less complexity, " said Doug Parks, GM's vice president of autonomous and electric vehicle programs, in an e-mail interview. "We are focused on all these items to drive profitability."

But Krebs is dubious this strategy can be pulled off as rapidly as GM says it can — though she didn't offer an alternate timeline.

"We have a long way to go technologically," she said, pointing out that one reason she doesn't have an EV is that most can't get her to her son's house 260 miles away without a lengthy recharge, while fuel efficiency of existing vehicles has made major strides. "We have a long way to go to get to cost parity. And where are all the batteries going to come from?"

GM's task also includes building a new culture around the importance of electric vehicles — including the forthcoming self-driving, or autonomous, vehicles that will run on electric power. Part of that is putting top executives in charge of the effort: Reuss briefed analysts about electrification at GM's most recent investor day. His predecessor, Daniel Ammann, now runs Cruise Automation, the Bay Area start-up AV company GM bought in 2016. The pace of innovation is speeding up, and the shift requires engineers and other workers to learn new skills rapidly and flexibly, Smith said.

Cruise itself is key to the cultural opening-up GM is aiming for. It has raised billions since the purchase from GM, Honda Motor, SoftBank and most recently T. Rowe Price, which invested last month. The $1.15 billion financing announced in May valued Cruise at a reported $19 billion, with GM owning about 75%. GM as a whole is worth $48 billion in stock market value.

Cruise has struggled to overcome many of the same obstacles as other self-driving car research efforts. A report last week in The Information, a Silicon Valley digital publication, said the company's effort to launch an autonomous vehicle-powered taxi service is behind schedule because of software and other issues that leave the vehicles, for now, slower than regular cars and unable to consistently identify common driving situations, like nearby sirens.

In a report last year, Morgan Stanley auto analyst Adam Jonas called Cruise the key to getting a higher price-to-earnings multiple for GM shares, and for "entering GM on a far bigger discussion on the value of its data" to support higher-margin services like apps and advertising.

Future prospects

But the long-term value of automated driving is a long way off, as the tepid reception for Lyft's and Uber's IPOs suggests. Amman predicted in January that autonomous driving will begin to take over transportation in earnest when it costs about 60 cents a mile -- counting the cost of paying a driver (or not, if fully autonomous driving is perfected), the electricity the car uses and the car itself. Right now, the human-dependent ride-share services cost $2.50 to $3 a mile, he said.

In the meantime, GM is using the autonomous technology to refine existing vehicles, said Doug Parks, GM's vice president of autonomous and electric vehicle programs. Features like lane-departure warnings are based on some of the technology that is expected eventually to produce fully autonomous vehicles.

"The self-driving test vehicles that we are working on are for rideshare fleets," said Parks, adding that GM plans to double its undisclosed spending on autonomous vehicle development over the next two years, and Barra said in April that Cruise will hire 1,000 people this year. "We are taking both evolutionary and revolutionary paths for developing automated driving technology."

All this will be necessary in a world where manufacturers showed more than 40 new EV models at the New York Auto Show in April, and more than 250 are expected to hit the market by 2022, CFRA's Nelson said.

"2021 is when you'll see the flood of new models hit the market," said Nelson. "GM will be as ready as anyone but the competition will get greater."