Big auto has taken a big step back on EVs
Over the past month, the Big Three have encountered headwinds, most notably the UAW strikes and high interest rates that have negatively impacted sales, causing carmakers to scrutinize cost structures.
Despite the setbacks, Big Auto has not abandoned the transition to EVs. The Big Three’s message to investors most recently has been that they remain committed to EVs, albeit the transition is at a slower pace. In contrast, Toyota and Honda are not fully committed to an EV future, but instead a future that consists of a combination of gas, electric, hybrid, hybrid plug-ins, and hydrogen-powered vehicles.
The big question is still: When does the market hit an inflection point? If EVs don’t take off until around the year 2050, then kicking the can down the road and optimizing short-term profits while delaying the inevitable costly transition is the right approach.
However, If EVs take off in the next 5-10 years, then Tesla will have a greater lead in EV production, charging locations, sales process, and maintenance infrastructure that will make it difficult for traditional carmakers to build a profitable EV business.
Below, we highlight each company’s current stance on EVs and our take, ranked in order of most to least aggressive.
Status: On the September earnings call, Musk surprisingly questioned the feasibility of Tesla’s 50% CAGR outlook. For the past several years he has suggested Tesla will grow at a 50% CAGR through the end of the decade. Additionally, margins have been decreasing due to lower manufacturing utilization and price cuts.
Our Take: If Tesla were to grow at 50% from 2025-2030 it would exit the decade with 17M annual deliveries. That now seems unlikely. If Tesla were to grow at a compound rate of 30% from 2025-2030 it would exit the decade with 8.5M annual deliveries. I think a 30-40% compound growth through the decade is more realistic. As for margins, they will remain close to traditional auto for the next year before they start to improve. And the slope of improvement will be gradual. This is a setback to the view that Tesla is a tech company that has margins much higher than other carmakers.
Status: In October, Volkswagen said it remains “absolutely committed on the ramp-up of our total EV business” which accounts for 9% of deliveries and grew 45% YoY in the first nine months of 2023 (an acceleration from 25% growth in the first nine months of 2022). In total, Volkswagen has sold 531k EVs in 2023 through the end of December.
Our Take: Volkswagen has the most optimism for EVs among traditional carmakers. In 2022 then-CEO Herbert Diess predicted Volkswagen would be all electric in 2035. Later that year he was replaced by Oliver Blume who is also committed to EVs but appears to have stopped short of predicting the year the company will be all EVs.
Status: In mid-October, Ford reaffirmed the $4.5B loss estimate on EVs, losing another $1.3B in Q3. Despite the continued losses, Ford’s electric vehicle shipments increased by 44%. The higher volume contributed to Ford’s Model e unit’s revenue growing 26% YoY to $1.8 billion. “While our Gen 2 EVs were targeting to deliver an EBIT margin comparable to ICE by 2026, the dynamic changes in the market, pricing, adoption rates, and regulations are forcing us to further reduce the cost of our EVs. The key levers to deliver this competitive cost structure are scaling, vertical integration, and batteries.” Ford has been troubled by the EV transition this year, turning to producing more hybrids after revealing widening losses on EVs.
Our Take: The company still expects to lose $4.5B, as stated in July, and continues to rack up the losses. It previously forecast a $3B loss for all of 2023, so I wouldn’t be surprised if FY23 losses are even higher as the goal to deliver an EBIT margin has been delayed past 2026. Ford cannot commit to EV production given all the setbacks incurred this year. Interest rates causing slow demand, increased labor costs, and limited EV infrastructure makes it impossible to sustainably pursue EVs at this time.
Status: In October, GM reported strong EV demand but that it was moving to a more agile approach to manufacturing and adjusted production schedules to maximize profitability. As a result, it has pulled its EV production goals for the foreseeable future.
Our Take: GM made contradictory statements on the health of its EVs. At one point it said EV demand was strong, and at another point it highlighted lack of visibility, resulting in them scrapping EV production targets. My sense is that it’s seeing decent demand for EVs and having a hard time making them.
Status: In the September quarter, EV sales were up 37% YoY, mainly driven by European sales of the Jeep Avenger and growing commercial EV sales led by the Citroën ë-Berlingo. Stellantis does not sell an EV in the US. In October, it purchased 20% of Chinese EV maker Leapmotor for €1.5B. This gives Stellantis exclusive rights to export Leapmotors cars outside of China.
Our Take: Stellantis grew deliveries 37%, which is faster than Tesla’s 27% growth in September. It’s hard to believe the company won’t sell its first EV in the US until next year. I believe the acquisition of Leapmotor shows the lack of internal progress and distance it must overcome.
Status: At the end of October, Honda ended its plan to build an affordable EV through a joint venture with GM. Previously the companies had expected to release a low-priced EV in 2027. Separately, Honda continues its plan to invest $700M to retool Ohio plants to prepare them for producing EVs.
Our Take: Tesla’s ambitions to produce the robotaxi for less than $30k is more difficult than I originally realized as evidenced by Honda abandoning its low-cost plans. Separately, Honda is still committed to EVs as evidenced by its continued plans to build EV production in the US.
Status: At the end of October, Toyota reiterated its view on EVs, saying there isn’t a single answer to reducing carbon emissions. Toyota believes the auto industry should invest in other clean energies outside of electric, like hybrid, hybrid plug-ins, and hydrogen Fuel Cells.
Our Take: Toyota has been the outlier with its electric apprehension. The company is using the recent EV slowdowns as evidence that it has had the right approach all along. The company is still committed to building cleaner vehicles, which begs the question: Can you profitably manufacture three vehicle energy sources simultaneously? Alternatively, Toyota could be waiting to see which one takes off and focuses its energies behind the winner.