Posted on October 21, 2018 by Matt Pressman
Legacy automakers have a dilemma on their hands. Transitioning to electric cars is hard. A few German automakers have calmly voiced their concerns. Others have resorted to all-out whining. So what about Big Auto in America? To get some perspective, Seeking Alpha's Scott Morton takes a look at GM's vexing EV challenges as the company tries to face-off with Elon Musk on Tesla's turf.
GM should be applauded for launching the all-electric, long-range Chevy Bolt. And Morton notes, "GM currently operates at a scale of vehicle production that Tesla can only envy." But there's trepidation, "the company is reluctant to [really] put its resources to use. In order to compete with Tesla, GM must expend additional capital in order to transition from manufacturing ICE-vehicles to manufacturing electric vehicles." Is GM facing a "damned if you do, damned if you don't" moment?
No, EVs are destined to spark growth downstream. The bigger issue for a legacy automaker like "GM is that, by nature of being a mature player in a mature market, they [may] have experienced all of the significant growth that they are ever going to." In fact, "legacy automakers must undertake [significant] R&D simply to maintain current revenue streams. Between 2013 and 2017, GM spent a combined $36bn in R&D yet revenue declined from $155bn to $145bn. Over the same period, Tesla spent a combined $3.7bn in R&D, but revenues grew from $2bn to $11.7bn."
Above: Tesla and GM are at completely different stages in their business life cycles (Source: Seeking Alpha)
While some of GM's R&D efforts went to EVs, some (likely) went to improving internal combustion engine tech. And looking ahead, "shifting the focus to EVs, GM will render their current factories, production lines, patents, designs - anything that specifically relates to ICE products and production - either partly or fully redundant." Some of those assets could become liabilities. "This is the equivalent of owning a printing press in the advent of the Internet or a Blockbuster franchise during the birth of Netflix."
And whether they like it or not, "EV sales will simply cannibalize and replace ICE vehicle sales." This is a hard pill to swallow. At this stage in their business life cycle, "GM must therefore undertake all of these additional challenges and expenditures knowing full well that [short term] revenues will not grow by any significant amount," writes Morton. In turn, GM’s CEO Mary Barra rightfully argues that the US federal tax credit for EVs should not only be continued, but extended.
Above: GM's Renaissance Center (Source: Michigan Radio via Flickr / Andrea_44)
Long term, the change over to electric cars is mission critical. Yet Morton notes that "GM has little incentive to rapidly transition to EV manufacturing and would rather stave it off as long as possible... regardless of it being widely accepted as the socially responsible thing to do. You may label me as a conspiracy theorist for suggesting this, but the unfortunate reality is that for [car] businesses, profits often trump ethics." Proof? Look at Germany's massive Dieselgate scandal.
In contrast, Elon Musk is turning away from fossil fuels. So, Morton concludes, "Tesla has no such internal conflicts... and is therefore free to pursue a future which represents nothing but growth for the company. The combination of a lack of internal conflict for Tesla and the extreme baggage that is the legacy for established auto manufacturers may very well lead to Tesla significantly outpacing the competition."
Above: Ben Sullins gives his take on the so-called 'Tesla Killers' coming from legacy automakers (Youtube: