Morgan Stanley: Pay attention to 'the melting of the ICE cube'

Posted on August 13, 2020 by Charles Morris

If you’re looking for confirmation that the internal combustion engine (ICE) is in jeopardy, ask Wall Street. Shares in electric vehicle maker Tesla are soaring, as the company prepares for a 5-for-1 stock split and possible inclusion in the S&P 500 stock index. Trying to find the next Tesla, investors have started throwing money into the EV sector in a way that’s reminiscent of the 1990s internet boom (and yes, there’ll be a bust—some of the companies raking in the Robinhood-fueled riches have yet to build a factory or sell a single vehicle). 

Above: GM looks to make moves into the EV space (Source: GM)

Meanwhile, the legacy automakers, deeply entrenched in the ICE business, are getting no respect on the Street. GM, Ford and Fiat Chrysler all recently reported second-quarter earnings that beat expectations, but saw their share prices post significant drops for the week.

As CNBC’s Michael Wayland reports, electromobility, or the lack of it, is a big part of the story here. On GM’s recent earnings call, analysts asked CEO Mary Barra some uncomfortable questions about the company’s electrification progress. Deutsche Bank analyst Emmanuel Rosner floated the idea of GM spinning off its EV line into a separate brand, and Morgan Stanley analyst Adam Jonas mischievously asked whether the company might do well to change its name to “Ultium,” which is GM’s brand name for its next-generation EV batteries.

To be sure, one big reason analysts have soured on the Big Three is the belief that traditional ICE sales will take a long time to recover from the pandemic-induced slowdown. But that's not the only factor in play. According to Wayland, there's a failure to “successfully adapt to emerging technologies such as electric and autonomous vehicles.”

Above: A look back at GM CEO Mary Barra's take on Tesla's Cybertruck and GM's upcoming gas and electric truck offerings (YouTube: CNBC Television)

The automakers are making some moves in the right direction. In May, Ken Morris, GM’s VP for Electric and Autonomous Vehicles, said that GM will be all-electric “sooner than people would think,” and that there would be “no slowdown” to the company’s EV programs. On the earnings call, Mary Barra reiterated that GM is standing by its plan to invest $20 billion over the next five years in autonomous and electric vehicles.

That may sound like a lot, but it represents a small fraction of the company’s total vehicle production. According to data from AutoForecast Solutions, GM and Ford collectively plan to produce about 325,000 EVs in 2026—about 5% of the two automakers’ combined vehicle production in North America. Tesla produced over 367,000 EVs in 2019, and some analysts predict that it will be building over a million units per year once the Berlin and Texas Gigafactories come online.

What does GM have in its electric pipeline? The electric Hummer pickup, which will surely be a high-priced, low-volume model, is scheduled to go into production in the fall of 2021—about the same time Tesla’s Cybertruck is supposed to start rolling out of Texas. The Cadillac Lyriq crossover, the first of a promised range of electric Cadillacs, won’t arrive at US dealerships until late 2022, as John Voelcker points out in a recent article in The Drive. Meanwhile, you can buy a Tesla Model Y today.

Top: GM's Hummer EV; Bottom: Tesla's Cybertruck (Source: GM / Tesla)

The Big Three, along with their German and Japanese counterparts, have fallen far behind in the electrification race, and it’s not just granola-baking EV boosters who are saying this—it’s mainstream stock analysts.

"Right now in the market, it’s Tesla’s world and everyone else is paying rent," notes Wedbush analyst Dan Ives. 

Credit Suisse analyst Dan Levy said Wall Street is focused on Big Auto's long-term strategies for electric and autonomous vehicles.

Morgan Stanley analyst Adam Jonas eloquently summed up the situation, citing prevalent concerns about GM’s ability to “confront the end of the internal combustion era... otherwise known as ‘the melting ICE cube.’”

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Written by: Charles Morris; Source: CNBC

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