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Companies facing massive technological change have two choices: bet on the next era or raise money in a declining industry before hanging up. Many companies fail to take the plunge: Kodak in digital photography, Blackberries in smartphones, and most Internet newspaper companies, to name a few.
GM will try. On Thursday, Detroit’s largest automaker announced plans to offer exclusively electric cars and light trucks by 2035, five years ahead of a previously announced target and part of a larger mission to make its production and carbon neutral operations by 2040. GM well ahead of market forecast: Less than half of the US vehicle market is expected to be electric by 2035.
GM is taking a big risk, but that’s not a profile of courage, says Sven Beiker, a former BMW engineer who now heads consultancy firm Silicon Valley Mobility. The writing is on the wall. Overseas, where GM sells about two-thirds of its cars (pdf), Europe, Japan and China have all said the days of the internal combustion engine are numbered. In the United States, combustion engines will be phased out in California and Massachusetts by 2035, and other states will certainly follow suit. The Biden administration also plans to use the federal government’s budget and procurement policies to accelerate the transition of EVs.
The market, too, is sending a strong signal and it has been nasty to laggards in the EV race. Tesla’s stratospheric valuation – multiplied by seven since 2019 – leaves other U.S. automakers in the dust, while investors pounce on companies seen as moving too slowly. Ford, for example, has seen three general managers roam the boardroom since 2014.
The great radiation
By increasing its EV objectives, the company is accelerating the depreciation of its factories and its supplier relationships, but also of its decades of intangible know-how. The world’s automakers have learned better than anyone how to get the most out of their mastery of the internal combustion engine, a technology first installed in commercial cars in 1886. Getting away from it is more than juicy stuff; it is to abandon a competitive advantage formed over more than a century.
In its place, legacy automakers must build entirely new assets: electric batteries, autonomous driving software, mobility networks, etc. This is one of the main reasons why Tesla, valued at $ 752 billion, is the world’s most valuable automaker, even though GM sold more than 20 times as many vehicles in 2019 (pdf). The market now values something else, says David Keith, engineer and professor at MIT Sloan School of Management. “Do you want to be the company that bends the metal into a very low margin company,” he says, “or a technology company with recurring revenue and a blue sky valuation?” The strengths of today’s car manufacturers are the blocked strengths of tomorrow.
Think of it like this: GM could double the sale of internal combustion engine vehicles through 2040, while electric vehicles (still only about 3% of new car sales globally) are eroding its market. By then, however, it would be too late to catch up with companies that have spent billions of dollars to retool their factories and workforce. Traditionally, it takes about six years to roll out new vehicle models and more than a decade to design a new engine, Keith explains. That kind of mismatch would qualify GM for the Kodak and Blackberry ranks.
“Within five years, the best thing you can do is make money selling Silverados and Escalades,” says Keith. “All the money is in the sale of SUVs and pickup trucks. It’s incredibly difficult to actively step back and say it’s all going to pay off in five or 15 years. This is not what a lot of investors want to hear. But that’s the bet almost all of the major automakers are making.
VW has been the most aggressive so far. After a disastrous bet on diesel and a 30 billion euros ($ 36 billion) emissions scandal, the German automaker is spending 73 billion euros ($ 86 billion) to reverse the scenario with self-driving electric cars . Time is running out: electric vehicles topped diesel car sales for the first time in Europe in September. By 2028, the company aims to produce 28 million electric vehicles and 70 different models, a target some analysts believe is out of reach.
We are no longer in the 20th century
GM’s dilemma mirrors the existential question in every fossil fuel industry: to make the leap or stay committed to an industrial model destined to shrink as the world cuts greenhouse gas emissions.
So far, oil and gas have mostly made noises of renouncing old economic models: the French Total has described itself as an “energy company” while the “energy transition company” Shell promises that a third of its turnover will come from electricity by mid-1930s. But in practice, oil and gas are only making progress towards the energy transition. Less than 10% of the industry’s capital spending is on renewables, while $ 166 billion in new oil and gas projects are planned over the next few years, according to an analysis by Rystad Energy.
A few fossil fuel companies are associating new technology with a bolder strategy. The former Danish oil and gas company, one of Europe’s leading coal utilities, changed its name to Ørsted in 2009, pledging to move away from fossil fuels. By 2017, it had sold its oil and gas assets and is now on track to completely phase out fossil fuels from its energy mix by 2025. It has turned out to be a good bet: Ørsted has practically tripled in value since then. its IPO five years. since. Last February, the big British oil company BP made similar suggestions, pledging to phase out or offset all emissions from the operations and combustion of the oil and gas it supplies by 2050 (a target long on ambition and not very detailed).
Few oil and gas companies will be able to do this, says economist and energy analyst Philip Verleger. The new energy industry will run on electrons, not oil, a skill far removed from the traditional realm of oil and gas companies. “They’re going to fail,” Verleger told Quartz, comparing the challenge to Kodak’s failure to master digital photography. “Very few companies have gone from very good in one company to very good in another.”
The auto industry can be different. Mass production vehicles, as Tesla discovered while narrowly avoiding bankruptcy, are difficult. Only a few companies can do it well, and fewer consistently make a profit. But GM is better positioned than most. It pioneered EV technology in 1997 with the launch of the EV1. Today it is America’s largest automaker, and its vans and trucks throw money away. GM already owns the relatively popular but uninteresting Bolt EV and plans to introduce 20 more models by 2023.
GM could see its big risk paying off. The company will just have to bet on whatever it needs to find out.
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