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Cars
Published on November 27, 2018 |
by Frugal Moogal
November 27, 2018 by Frogal Moogal
When I learned yesterday that GM was closing five factories and laying off nearly 15,000 employees, I was surprised. Not because it happened, but because it could be a very forward-looking initiative on the part of society.
Before continuing, I think it's important to present this article from a business perspective. In other words, what does it mean for GM as a business? The personal history of people who lose their jobs is not really something to consider, although it should be.
That said, GM, like all companies, is fighting to stay ahead of the industry. Companies do not make the decision to dismiss these people without having thought about it. Even beyond any sense of potential empathy for workers, layoffs generally give rise to bad publicity and, in the case of GM, will also trigger a battle with the union of workers in the auto sector, what society does not want. However, the decision to remove positions is ultimately tied to a corporate strategy that management believes makes the most sense at the time. Sometimes it works and sometimes not.
This always has a negative impact on those who have lost their jobs. But this is not the purpose of the rest of this article.
That being said, let's see why GM made this decision and why the timing was right.
GM sales: down?
The majority of articles on GM's announcement deal with the decline in GM sales and the reason for these closures. And it's true, sales fell 11.1% in the third quarter of 2018 compared to the third quarter of 2017.
But there are some problems with that. The first is that the third quarter of 2017 was affected by sales above normal due to Hurricane Harvey.
In addition, the results published by GM for the third quarter of 2018 were … well, I'm just going to let this article from Automotive News describe it:
"Stronger-than-expected results in China and North America resulted in a 25% increase in pre-tax earnings in the third quarter and a net profit of $ 2.5 billion."
As a result, sales fell, but these declines were expected due to exceptional circumstances. They were smaller than expected and GM still managed to improve its profitability. It's not exactly the kind of results that lead companies to lay off thousands of people and cut off large segments of their market.
However, it works as a good scapegoat to change your business strategy in an attempt to meet a new market.
The SUV is king?
The media seem to have recently adopted the idea that SUVs and crossovers are all that we want now, and I hate that. I could have devoted a whole article to that, but, in my opinion, factors affect change, so I will try to summarize them here.
First, automobiles last longer than ever before. When gasoline prices rose significantly, the majority of cars sold were smaller vehicles, many of which are still on the road today and almost as good as newer models. As a single and unique data point, the car in which I exchanged my model 3 was a 2008 Nissan Sentra. The 2015 Nissan Sentra is physically identical to my car.
At the same time, a dealer derives most of its money from the sale and service of used cars, which encourages dealers to sell consumers these cheaper and new-looking sedans instead to orient them in the latest 100% new model.
On the other hand, if you want a crossover or an SUV, there are a lot less old options being used. Do not forget that when the price of gasoline rose rapidly, about 10 years ago, people were getting rid of their SUVs because they could not afford to buy them anymore. The sedans accounted for the majority of new sales, and the used-car market was cluttered with SUVs that dealers could not give up.
Used SUVs have aged on the market – for example, how often do you see the Hummers driving now? In other words, if a driver wants to move into that vehicle segment, chances are he's choosing a new vehicle or paying a lot for a used one.
At the same time, the 2010 fuel standards are based on vehicle size or footprint. Thus, a larger vehicle must achieve a lower fuel consumption than a small vehicle. This example from the Wikipedia article on the average fuel economy of companies (CAFE) explains it perfectly:
"For example, the fuel economy goal of the 2012 Honda Fit with a floor area of 3.7 m2) is 6.5 l / 100 km, equivalent to a reported fuel economy of 8.7 l / 100 km, and a Ford F-150 with a footprint of 65 to 75 m² (6.0 7.0 m2) has a fuel economy goal of 22 miles per US gallon (11 l / 100 km), that is, 17 miles per US gallon (14 l / 100 km) are published. "
This does not encourage automakers to sell larger vehicles – not only can they charge more, but the technology to make them compliant with CAFE is cheaper.
I think these two factors are often overlooked in the SUV "boom", and it may be less of a boom than a temporary realignment. The story of the rise of SUVs and the changing tastes of car buyers is a good excuse for automakers, however, to prevent the expensive development of new cars.
Electric vehicles represent a significant risk for traditional car manufacturers
This can not be underestimated, but it seems that the majority of investors did not understand it. Electric vehicles represent a significant risk for traditional builders.
The gasoline car market is extremely developed and competitive. Margins are hard to find. GM made a profit of 2.5 billion dollars based on a margin of about 10% on its vehicles. While 2.5 billion dollars seem huge, GM pays its shareholders a considerable dividend, hovering around 25% of its expected profits in one year. (Ford is about 45%!)
This is a strange fact and yet true: GM has "burned" more money in the first quarter of 2018 than Tesla. GM has announced a free automotive cash flow adjusted negative $ 3.446 billion. Tesla, which experts were expected to report as a machine to spend money after the first quarter of 2018, said negative free cash flow of $ 785 million.
I emphasize this for a reason. Automakers are struggling to create a convincing electric vehicle on which they earn money, and they have to spend a lot more money than Tesla to maintain their position in the gasoline car business, a business which should decline under the name of electric vehicle sales increase.
Instead, GM (and all existing automakers) was forced to find themselves in a difficult situation. Developing proper EV technology is not as easy as putting a battery and an electric motor in a car and calling it a day, as Tesla clearly showed. In 2010, it was estimated that putting a new car model on the market would cost car manufacturers between $ 1 billion and $ 6 billion. I can only badume that a whole new architecture would be even more so.
Invest too much, too early, accidentally kill your gas car business and you will burn so much money that the company will go bankrupt in a year or two.
Invest too little and if the market is moving towards electric cars that you have not developed yet, your margins will collapse and you will spend all your money trying to catch up quickly and create a convincing and strong EV volume.
Is model 3 to blame?
It may sound crazy on the surface, but I do not think we would have been there without the model 3 doing what it did. For their smaller cars to remain compliant with CAFE, GM needs to spend more money to develop better technology, which translates into lower margins on these cars. A lower margin on these vehicles means that even a minor drop in sales could result in significant losses.
What could have brought down the demand for smaller sedans? According to AAA earlier this year, one in five drivers wants an electric car as the next vehicle.
I do not think it's a coincidence that Ford and GM have shut down important segments of their sedans in the last seven months. Both companies are seeing increasing development costs for a product that can be quickly replaced. Ford does not seem to have a real plan, but GM seems to be taking up the challenge.
And that will soon get worse for traditional builders. In 2020, Tesla will have Model 3 at $ 35,000 and could increase production for the Y model and the truck. If a large number of buyers hear about these new electric models and decide to delay the purchase of a new gas car to see what is on the market, this drop alone could Sufficient to put a car manufacturer in place that has not created attractive elective options in terms of electricity. their own in a pothole.
Back to yesterday's news
That's what makes yesterday's news so interesting. Most of the reporters said GM was responding to the decline in sales by focusing on its larger, more popular models.
Looking at the numbers, that's not what seemed to be happening. GM abandons the Chevrolet Cruze (31,971 T3), Impala (16,290), Volt (5,429), Buick LaCrosse (2,290) and Cadillac XTS (4,101) and CT6 (2,281). Of these, both the Volt and XTS experienced an increase in sales in the third quarter.
The Cruze, despite a 27% drop in sales, was still Chevy's fifth best-selling model and accounted for more than 6% of all Chevrolet sales.
We could contribute a lot to the decline in Cruze's sales, but if a builder thought that the drop was due in part to the fact that buyers were slow to find a convincing electric car, maybe it was time to abandon them. they bleed too much money. Perhaps it is time to launch the new electric vehicles on the market quickly. When automakers suddenly discover that a luxury sedan is competing on the list of best-selling vehicles, it can be an awakening somehow.
There is no attractive and reasonably affordable option for SUVs or trucks. Again. But with the imminent arrival of the Tesla Model Y pickup truck and the Tesla pick-up truck – and new entrances like Rivian's – a slight drop in demand (as consumers wait to see how the market slows down) could destroy the car manufacturers inherited.
I believe GM has stated that its new motto is "Zero Accidents, Zero Emissions, Zero Congestion". There's a reason why Tesla's market capitalization is way above GM's, even though GM delivered more than eight times more vehicles than Tesla in the third quarter. Tesla is not only liberated from its former gasoline car business, but it promises a future that investors, the market and consumers all expect. I think that GM's share price is significantly hampered, particularly because it operates a former gasoline and gasoline engine business that many investors are unsure of being able to easily liquidate.
Conclusion
In the past, I have said that companies say exactly what they mean, and then the experts tore it up to understand the meaning behind that reality that often did not exist. Here is the press release of General Motors. It is worth reading.
In this document, the company indicates in particular that it expects to double its electric and autonomous vehicle resources over the next two years, that it will give priority to future vehicle investments in its new battery-powered electrical architectures. generation and, what is most interesting to me, he will combine his teams of vehicle engineering and propulsion.
These statements, along with the market forces currently shaping sedans and writing for companies that do not develop convincing electric vehicles that can generate profits, tell me that GM is interested in electric technology.
Keywords: Chevy Chevy, Chevy Volt, GM, Tesla, Tesla Model 3
About the author
Frugal Moogal First a businessman, the Frugal Moogal examines electric vehicles from the perspective of a company. Having worked in several industries and in roles that have managed to manage a lot of money, he thinks that the way to convince people that the electric vehicle revolution is present is to look at vehicles as a business.
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