Taking On Tesla Comes at a Cost for GM

The Detroit car maker’s third-quarter results contained a warning that its EV-centric growth strategy will require substantial investments.

By guest author Stephen Wilmot from the Wall Street Journal

General Motors GM pitches itself these days as a growth-focused technology company. It turns out that comes at a price.

On Wednesday, October 27, 2021, GM reported a 45 % drop in third-quarter adjusted earnings before interest and taxes from a year earlier. With the exception of the lockdown-affected spring quarter last year, revenues were the lowest in more than a decade as the chip shortage finally caught up with the Detroit auto maker.

But this poor performance was hardly a surprise. The industry’s semiconductor-related production problems have been exhaustively discussed, and GM’s particular woes became clear earlier this month when third-quarter sales reports gave the longtime U.S. market leader a markedly lower share on its home turf than Toyota for the first time ever.

GM’s adjusted Ebit was actually better than expected, at USD 2.9 billion for the quarter. The number was lifted by a favorable outcome of its discussions with battery partner LG Chem 051910 3.03% over responsibility for the Bolt electric-vehicle recall as well as a strong result from the car-financing business. GM Financial reported operating income of over USD 1 billion, which was more than the core automotive business.

So why did GM stock fall roughly 5% in morning trading? The answer is probably some early hints that the company’s wildly ambitious plan to take on Tesla with an onslaught of new EVs will involve a ramp-up in costs.

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The clearest indication was in GM’s guidance for full-year profits. The company said it would “approach the high end” of its previously announced range of between USD 11.5 billion and USD 13.5 billion in adjusted Ebit. But the first three quarters have already brought it to the bottom of that range so it essentially told investors it will make about USD 2 billion in the final quarter—lower than last quarter, and analyst forecasts, despite rising production as chip shortages ease.

Commodity-price inflation is one reason GM’s costs are rising. Another is investment in the EV portfolio and related software businesses it showcased at a big capital-markets day in Detroit earlier this month when it pledged to double revenues and raise margins by 2030. In Wednesday’s call with analysts, Chief Financial Officer Paul Jacobson didn’t shy away from the implications: “We’re going to be in a pretty sizable launch cadence going forward for the next few years, and we’re going to make sure we invest in that,” he said.

While it may seem obvious that a growth strategy involves compromises on profitability, at least in the short term, it isn’t the approach GM investors are used to. As recently as late 2018, when it announced a wave of job cuts and factory closures, the bankruptcy-scarred company was focused on reducing its break-even costs so that it would never again need to go begging to the government.

Chief Executive Mary Barra has changed tack since Tesla’s meteoric stock-market rise. Investors have responded warmly to the growth promises. Now they also need to get used to the costs.