Carmakers face challenges to transition to EV future
Carmakers face challenges in the present as they strive to transition to an electric vehicle future. Automakers are expressing concerns about the potential impact on their profits in their traditional car businesses, which further compounds the challenges they already face due to the expensive shift towards electric vehicles.
Last week, the share prices of Ford Motor, Tesla, and Jeep-maker Stellantis took a hit as their posted results failed to meet the expectations of Wall Street. Despite exceeding expectations and revising its annual profit forecast upwards, General Motors’ stock experienced a decline.
Various factors contributed to the decline in profits, including increased warranty expenses, excessive vehicle inventory, and challenges in international operations. Collectively, these factors indicated to investors that car manufacturers, as they strive towards a transition to technology-driven electric vehicles, are encountering obstacles.
There is a growing concern among auto investors that the strong pricing power that carmakers have enjoyed in the pandemic era is gradually diminishing. According to several auto executives, there is an expectation that the average price paid by customers will decrease in the second half of the year.
“The results of our competitors do not indicate a disappearance of price pressure,” stated Carlos Tavares, the CEO of Stellantis, which also manufactures Ram vehicles.
For years, car companies have been making the argument that they are prepared to transition into technology companies. They have ambitious plans to turn cars into battery-powered smartphones on wheels. These aspirations, combined with an exceptional streak of financial success driven by strong pricing, boosted stock prices.
Wall Street’s initial excitement for that vision has waned, as the anticipated surge in U.S. electric-vehicle demand has not materialized. Now, with indications that pricing is slowing down as the American car buyer deals with high interest rates, investors are searching for reasons to stay invested.
“The prevailing sentiment within the auto industry is that the current prosperity is unsustainable,” commented Martin French, who serves as the managing director at Berylls Strategy Advisors, an auto consulting firm.
Automotive CEOs attempted to convince Wall Street to shift their attention from the potential challenges in their current operations and instead concentrate on the potential opportunities of their future investments.
Last week, Tesla reported a decline in quarterly profits for the second time in a row. Unfortunately, the earnings did not meet analysts’ expectations, primarily due to pricing pressure on electric vehicles, particularly in China. Elon Musk, the Chief Executive, once again emphasized his belief that Tesla’s future lies in autonomous cars and humanoid robots, rather than simply assembling cars.
“The value of Tesla is primarily driven by autonomy,” Musk stated when asked about the potential impact on Tesla’s EV business if EV-related tax subsidies in the U.S. were reduced. “These other things can be seen as a hindrance when considering autonomy.” Tesla’s stock price experienced a 12% decline the following day and concluded the week with an 8% decrease.
Ford’s profit fell short of expectations due to expenses incurred from addressing safety recalls and making repairs on older models. During a call with analysts, Chief Executive Jim Farley attempted to refocus the discussion on Ford’s software for commercial fleets and the company’s initiatives to create affordable electric vehicles.
Wall Street was completely focused on the surprising profit shortfall, causing shares to plummet by 18% the following day, marking the largest single-day decline in over 15 years. “The market is hesitant to acknowledge the company’s new and promising projects,” commented Adam Jonas, an analyst at Morgan Stanley.
Automakers have previously showcased ambitious transformations, only to witness their aspirations dwindle and revert back to their traditional, low-profit origins. Several automakers made significant investments in driverless cars and vehicle-sharing ventures during the mid-2010s. However, they later had to abandon these projects due to technical challenges or the failure to establish a viable business case.
Executives from the traditional automakers maintain their commitment to electric vehicles, despite scaling back investments in new factories and EV models. The increasing focus on reducing tailpipe emissions and the growing competition from Tesla and Chinese EV makers have generated a sense of urgency.
These substantial investments are putting pressure on traditional car manufacturers to maximize profits from their conventional combustion-engine operations. The high prices that American shoppers have been paying in recent years have been influenced by pandemic-related vehicle shortages, which created a seller’s market.
Experts suggest that if pricing experiences a significant reversal, it could potentially impact the profits that automakers are relying on to support their transition to electric vehicles.
Last week, GM announced its plans to increase spending on discounts in order to maintain buyer interest. This decision is expected to have a negative impact on the company’s financial performance, reducing its bottom line by approximately $1 billion in the second half of the year. Despite GM’s record second-quarter pretax profit of $4.4 billion, that was enough to unsettle investors.
Car prices have remained elevated for a longer duration than anticipated by analysts, despite a steady increase in the number of vehicles available at dealerships this year. However, analysts and auto executives are anticipating increased pricing pressure in the coming months.
Analysts are highlighting Stellantis’ substantial backlog of Ram pickup trucks and Jeep SUVs. Tavares mentioned that the company is exploring potential deals and price adjustments to address the inventory situation. Additionally, he hinted at the possibility of reducing vehicle production to manage the surplus of cars. Stellantis shares experienced a significant decline of 10% over a span of two days subsequent to the release of its earnings report.
According to Barclays analyst Dan Levy, there is growing concern among investors that Stellantis’ high inventory levels may result in aggressive discounting, which could potentially impact GM, Ford, and other competitors.
Such a price battle, which used to be a common occurrence in the car industry, has not been seen since the beginning of the pandemic in early 2020.
Ford’s Farley provided a concise summary when explaining the challenging quarter to investors: “The transformation of Ford is not without its challenges.”
