Subsidies Supercharge GM’s EV Strategy

General Motors could make decent margins on electric vehicles in three years’ time, but only with help from Uncle Sam…

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By guest author Stephen Wilmot from the Wall Street Journal.

The transition to electric vehicles might not kill traditional auto makers after all—as long as they qualify for Washington’s flagship subsidy programme.

At an investor day Thursday, General Motors GM 2.92%increase; green up pointing triangle laid bare the economics of its technological shift. The bad news: GM estimated that its operating margins on EVs would still only be in the low to mid-single digits at the end of 2025. That calculation includes sales of regulatory credits for greenhouse-gas emissions, but excludes new tax credits that President Biden signed into law in August as part of the Inflation Reduction Act.

GM also said its capital expenditures would rise to between USD 11 billion and USD 13 billion a year through 2025, from USD 9 billion to USD 10 billion this year, as it brings forward EV investments. Such numbers play into investors’ fears that Detroit is on a hugely expensive road to a technology that expensive battery metals will make less profitable for years to come.

The good news: GM expects the Inflation Reduction Act to add between USD 3,500 to USD 5,500 per vehicle in profit—a transformative 5 to 7 percentage points in margin. Suddenly, EVs could be as profitable as conventional equivalents.

GM is better positioned than its Detroit peers. Ford has signed a JV with LG’s Korean rival SK On, but it won’t start production until 2025. Stellantis is further behind the curve. Building battery factories earlier will bring GM more production subsidies while also making it easier to shift its supply chain to qualify for the full value of purchase subsidies.

Other comparisons are less flattering, though. Ford said in July, before the passage of the Inflation Reduction Act, that it was targeting an 8% operating margin for EVs by 2026. If this proves realistic, it would reflect badly on the cost efficiency of GM’s approach, at least for the next several years. Big investments into battery production and a modular battery platform to serve its entire EV range, Ultium, were supposed to keep GM’s costs down by maximizing scale effects. The benefits may become more apparent later in the decade.

Building battery factories earlier will bring GM more production subsidies.Photo: Erin Kirkland/Bloomberg News

Then there is the awkward reality of Tesla’s automotive operating margin, which consultants at AlixPartners estimate at 16.8% for the first three quarters of 2022, compared with 9.8% on average for traditional players. The EV pioneer’s perilous path to success has made it a leaner operator than its peers. That comes with its own risks, such as a limited and aging product portfolio, but for now it means Tesla is reaping prodigious cash flows from EVs even before it becomes a prime beneficiary of Washington’s new subsidies.

GM will do very nicely out of Federal largess, but otherwise its EV strategy still has much to prove.