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.

Tesla:

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.

Volkswagen:

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.

Ford:

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.

GM:

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.

Stellantis:

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.

Honda:

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.

Toyota:

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.

Let’s start with some definitions. There are two types of hybrids: hybrid electric vehicles (HEVs), which require the gas engine to be running and offer improved gas mileage in the city; and plug-in hybrid vehicles (PHEVs), which can run up to 50 miles on a charge and switch to the gasoline reserve when the battery is depleted. An EV, of course, solely runs on electricity.

Big Auto has been talking more about demand for hybrids and, more recently, hybrid plug-ins. While the category is getting increased attention, the reality is that demand for these vehicles has spiked and pulled back since the Prius was introduced in 2000 in the US. In other words, we have not had a sustainable hybrid inflection point. 

I believe hybrid adoption is increasing because it offers a compelling value proposition: better gas mileage, no range anxiety, reduced emissions, and it’s slightly cheaper than an EV. 

This begs the question: What’s not to like about a hybrid? The answer is that a hybrid is less efficient than an EV. That means over time, a hybrid is more expensive to own and comes with more emissions compared to an EV. Additionally, for those buyers who care about performance, an EV outperforms a hybrid. A 2023 Prius (base price $28k) goes 0-60 in 7.2 seconds, compared to a standard Model 3 (base price $39k), which goes 0-60 in 5.8 seconds.

Based on conversations with dealers, I believe demand for PHEVs is high and lead times are excruciatingly long (2+ years) for affordable models (e.g., those priced under $40k); a Toyota dealer recently quoted a three-year lead time for the Prius Prime hybrid plug-in. In other words, I believe demand is outstripping the supply of PHEVs. 

Toyota, Ford, Stellantis, and Honda are committed to expanding their hybrid businesses, while GM has remained largely on the sidelines.

Full autonomous driving technology is a much larger challenge than any automaker anticipated. Companies are taking different approaches to solving the problem. Given the cost and years of development needed to bring these systems to market, there is an outsized advantage to the company that first delivers autonomy. 

The reason is that autonomy eventually will be a utility, which means it will be difficult for carmakers to differentiate around the technology. One potential area of differentiation is in the car’s mix of LIDAR, digital radar, and cameras. An autonomous system that leverages LIDAR will not be able to power a car that is camera only.

In the end, I believe there will be two autonomous driving systems for the West and one for China. The first company to reach autonomy will likely license the technology to the other automakers. 

Below is the recent commentary from the automakers on their ambitions in autonomy, ranked in order of most to least aggressive:

Tesla:

Status: On the September earnings call Musk confessed that achieving FSD was harder than he imagined, adding, “[FSD] is basically baby AGI (artificial general intelligence). It has to understand reality in order to drive.”

Our Take: In Walter Isaacson’s recently released book, Elon Musk, he used the word “mirage” to describe Tesla’s FSD progress. Elon’s been annually predicting an FSD breakthrough since 2017. Setting aside Musk’s inaccurate predictions, Tesla is the odds-on favorite to get to full commercialized autonomy first. We believe the company will have a ChatGPT breakthrough moment where in a matter of months driverless systems go from concept to reality.

Waymo:

Status: On Google’s September quarter earnings call, the only Waymo update included that the company is “onboarding more riders to its commercial ride-hailing service as it gradually adds over 100,000 people from its San Francisco waitlist. Austin will follow as its next ride-hail city.”

Our Take: Waymo is in the second-best position to deliver on autonomy even though the company has driven less miles than Tesla’s 300M life-to-date, hitting only 1M in February of this year.

Baidu:

Status: In 2013 Baidu began a research project named Apollo to solve for autonomy. Apollo is considered the odds-on favorite to be first to solve autonomous driving in China. This year it was reported that BYD opted not to test Apollo.

Our Take: Baidu has been chipping away at autonomy for over a decade, and China is the most forward-thinking country when it comes to adoption of EVs and AI, which sets the table for Apollo to lead in China autonomy. Baidu is currently testing robotaxis in Beijing.

Volkswagen:

Status: In July, Volkswagen announced its new autonomous program using all-electric ID Buzz (aka Electric VW Bus) vehicles using technology developed by the global Volkswagen Group in partnership with Mobileye. The new subsidiary in charge,  Volkswagen ADMT, includes former Argo AI employees that stayed on after the project was canceled between VW and Ford. VW anticipates a commercial launch of autonomous driving vehicles in Austin by 2026.

Our Take: No updates have been provided since the new autonomy announcement back in July. VW is picking up the Argo pieces and now has an group working on full autonomy. Given GM Cruises recent setbacks, I put VW in fourth place in the race for autonomy behind Tesla, Waymo, and Baidu. It’s no surprise that Tesla and VW have a shared urgency around EVs and autonomy.

GM:

Status: GM’s Cruise has been in the headlines lately. Cruise had its driverless-car permit suspended by the California DMV over a pedestrian accident, effectively halting GM’s efforts to create a robotaxi service in San Francisco. In the aftermath, Cruise is now accused of knowing its technology had safety gaps (i.e., could not see small children) and has admitted it relies on human assistance for autonomy. Cruise’s CEO disclosed that remote human assistance takes place in 2-4% of the drive time, which means about every 4 miles.

Our Take: Cruise is standing still in its pursuit of autonomy and losing money in the process. Cruise had an operating loss of $1.3B in the last six months. Building autonomy is expensive, and it’s unclear if GM has the financial strength and patience to stay the autonomy investment course.

Ford:

Status: Latitude AI was established in March of 2023, developing automated driving technology with an initial focus on a hands-free, eyes-off driver assist system for Ford vehicles. Latitude AI replaces Argo AI as Ford’s autonomy program. As a reminder, Ford disbanded Argo AI in October 2022, which it jointly owned with Volkswagen and had significant losses.

Our Take: Similar to Toyota’s approach, Ford does not have a true autonomous program. After the failed Argo AI project, it is focusing on safer human driving. Although it aims to reach autonomy, the company’s current focus on driver-assisted technology will make it difficult for Ford to win the race to full autonomy.

Honda:

Status: In October Honda partnered with GM (Cruise) to create a driverless ride-hailing company in Japan.

Our Take: Honda is using GM as a way to get access to autonomous technology. Cruise testing is now on pause in the US following questions about the vehicle’s safety. In other words, Honda’s autonomy partner is struggling to test and improve the product which is critical to advancing the technology.

Toyota:

Status: Toyota’s autonomy initiatives are inside the company’s Woven Planet research lab. On the recent September quarter earnings call there was no mention of autonomy. The company’s initiatives around the topic have been centered on safety, taking the risk of human error out of the equation rather than building fully autonomous vehicles. The vision is to explore how computers can teach people to be better drivers.

Our Take: For all practical purposes, Toyota does not have an autonomous program. They do have a program that looks to use technology to make cars safer (in other words, using cameras and radars for collision avoidance). This approach is consistent with the company’s reluctance to commit behind a vehicle type that will be predominant in the future.

Stellantis:

Status: Stellantis is quiet about their autonomy approach, Advanced Driver Assistance Systems (ADAS), which is functional in vehicles and includes partially automated functions. In terms of full self-driving, Stellantis has launched Level 2 automation driving solutions and tested the potential of Level 3 autonomy.

Our Take: Stellantis is in the same boat as Toyota and Ford and without a true autonomy program.

The big picture with autonomy is that it is difficult and expensive. Tesla has failed for the past seven years in making good on Musk’s prediction that autonomy will be solved. Cruise’s technical challenges have put the program on hold, and financially the division will lose close to $2B this year. Ford and Volkswagen ended the Argo program, with Ford now more focused on driver safety, and Volkswagen going the path to move forward in autonomy with a new partner, Mobileye. 

I believe Tesla, Google’s Waymo, Baidu’s Apollo, VW, and GM Cruise all see the long-term potential in autonomy. My take is Tesla and Waymo have the best chances to commercialize autonomy with the progress they have made thus far. 

As for next milestones, a ChatGPT-like breakthrough will be needed for any of these companies to crack the autonomy code. I believe this will happen in the next 2-3 years. Musk predicts they need to reach AGI (artificial general intelligence) to deliver on autonomy, because the system must handle complex driving situations that would normally require human decision making and risk management. I believe autonomy can be reached with ANI (artificial narrow intelligence) that is much more advanced than the current ANI that is powering autonomy testing today.

Of course Tesla remains all-in on electric and autonomy, while most of the big traditional automakers have taken a step back to protect near-term profits. Going into profit protection mode will make the eventual transition to EVs more costly, because when they eventually go all in on EV and autonomy, they will be further behind Tesla. 

Tesla’s first-mover advantage (established over the last 15 years) paved the way for the company to be a clear leader in EVs today, with about 1.8M, more than any other carmaker. Now, as the industry slows its embrace of EVs, it’s creating a new window for Tesla to advance while others are stationary. 

The question is: Will Tesla begin to regain EV market share in 2025 as other companies have slowed electric investments? Most would say no because, despite the slowdown, more EV competition is coming into the market. I believe it will maintain or grow market share in 2025, because Tesla will have the margins to win new customers on the most important EV purchase metric: price/range. 

The ever-evolving mix of hybrids, hybrid plug-ins, EVs, and autonomy strategies are all on the table as the industry contemplates the pace of change. 

The recent pause in large carmakers producing EVs is testimony that they’re in a catch-22. If they want to compete in EVs, they need to reach volume production. If they want to reach volume production, they need to lower prices to win share. If they lower prices, they lose more money, which makes it more difficult to pursue an all-EV future. 

The reason why I highlight traditional auto is in trouble is because it opens the window for one or two car makers to reach 20-25% market share, more than the 15% market share ceiling the industry has averaged over the past 75 years. More market share equals more sales, more efficiency, and more profits and value to investors.

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