Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

Canada Automobiles and components / Thematic (Sector/Industry)

GM announced on November 26 that it will seek to achieve $6bn in cash savings annually with a $4.5bn annual cost reduction and  a lower annual CAPEX run rate of almost $1.5bn via plant unallocations, layoffs and product portfolio optimization by the end of 2020 (see: <a href="https://www.bloomberg.com/news/articles/2018-11-26/gm-to-cut-10-000-jobs-targets-5-factories-for-closing-next-year?cmpid=BBD112618_BIZ&amp;utm_medium=email&amp;utm_source=newsletter&amp;utm_term=181126&amp;utm_campaign=bloombergdaily" target="_blank">https://www.bloomberg.com/news/articles/2018-11-26/gm-to-cut-10-000-jobs-targets-5-factories-for-closing-next-year?cmpid=BBD112618_BIZ&amp;amp;utm_medium=email&amp;amp;utm_source=newsletter&amp;amp;utm_term=181126&amp;amp;utm_campaign=bloombergdaily</a>, and <a href="https://www.wsj.com/articles/gm-says-it-will-cut-15-of-salaried-workforce-in-north-america-1543246232?mod=hp_lead_pos1" target="_blank">https://www.wsj.com/articles/gm-says-it-will-cut-15-of-salaried-workforce-in-north-america-1543246232?mod=hp_lead_pos1</a>).GM announced that it will double investment in electric and autonomous vehicles through the end of 2019 and increase parts sharing across its portfolio, while prioritizing investments in five battery-electric architectures. Plants that will be unallocated in 2019 include Oshawa Assembly, Detroit-Hamtramck Assembly, Lordstown Assembly, Warren Transmission Operations and Baltimore Operations plants. In addition to the closure of the Gunsan plant in Korea, GM will cease operations at two additional plants outside North America by the end of 2019 which it did not specify in the call. CEO Mary Barra said "[t]his is about making sure GM is lean and agile to get in front and lead in autonomous and electric vehicles.” Some immediate takeaways for us from the call were:<ol>
<li>It seems now to be a foregone conclusion by the auto industry now that it is bracing for a significant downturn looming over the horizon.</li>
<li>Complying with regulatory requirements on emissions and mandatory sales of EV/PHEV will squeeze margins for the industry we see a structural need for the industry to shed costs in the coming years.   Since EVs are cheaper to develop than low emission ICE powertrain, OEMs will need to achieve lower fixed cost bases in the coming years in our view.</li>
<li>This will likely be compounded by the auto industry's (and the stock market's) fascination with autonomous driving, on which we have held ambivalent views on for quite some time now (see <a href="https://www.smartkarma.com/insights/notes-from-detroit-the-ai-in-automotive-conference-the-suppliers-perspective" target="_blank" data-smartkarma-citation="insights:19192">Notes from Detroit: The AI in Automotive Conference - The Suppliers' Perspective</a>).  </li>
<li>Even as GM seeks to achieve a lower cost base with an eye to being ahead of the curve on disruptive technologies there is still one very important question that we think the auto industry (and regulators) has still not addressed very systematically:  how do you get customers to buy EVs? (see our rationale for this in <a href="https://www.smartkarma.com/insights/some-thoughts-on-clean-cars-that-sell-side-reports-typically-miss-how-to-get-customers-to-buy-them" target="_blank" data-smartkarma-citation="insights:14684">Some Thoughts on Clean Cars that Sell Side Reports Typically Miss: How to Get Customers to Buy Them</a>, and empirical evidence supporting our view in <a href="https://www.smartkarma.com/insights/may-global-auto-demand-tracker-ev-versus-ice-in-western-europe-implications-for-push-marketing" target="_blank" data-smartkarma-citation="insights:20557">May Global Auto Demand Tracker: EV Versus ICE in Western Europe - Implications for Push Marketing</a>).  </li>
</ol>From a stock market perspective, we like the proactive downsizing initiative as we are likely standing at cyclical peak.  While the stock market's love with EV and autonomous driving will likely keep a positive spin on GM at least in the short run, we believe in the longer term the EV/Autonomous Driving are really the risks that investors must consider carefully not just in GM but in the industry overall.

GM announced on November 26 that it will seek to achieve $6bn in cash savings annually with a $4.5bn annual cost reduction and  a lower annual CAPEX run rate of almost $1.5bn via plant unallocations, layoffs and product portfolio optimization by the end of 2020 (see: https://www.bloomberg.com/news/articles/2018-11-26/gm-to-cut-10-000-jobs-targets-5-factories-for-closing-next-year?cmpid=BBD112618_BIZ&amp;amp;utm_medium=email&amp;amp;utm_source=newsletter&amp;amp;utm_term=181126&amp;amp;utm_campaign=bloombergdaily, and https://www.wsj.com/articles/gm-says-it-will-cut-15-of-salaried-workforce-in-north-america-1543246232?mod=hp_lead_pos1).GM announced that it will double investment in electric and autonomous vehicles through the end of 2019 and increase parts sharing across its portfolio, while prioritizing investments in five battery-electric architectures. Plants that will be unallocated in 2019 include Oshawa Assembly, Detroit-Hamtramck Assembly, Lordstown Assembly, Warren Transmission Operations and Baltimore Operations plants. In addition to the closure of the Gunsan plant in Korea, GM will cease operations at two additional plants outside North America by the end of 2019 which it did not specify in the call. CEO Mary Barra said "[t]his is about making sure GM is lean and agile to get in front and lead in autonomous and electric vehicles.” Some immediate takeaways for us from the call were:
It seems now to be a foregone conclusion by the auto industry now that it is bracing for a significant downturn looming over the horizon.
Complying with regulatory requirements on emissions and mandatory sales of EV/PHEV will squeeze margins for the industry we see a structural need for the industry to shed costs in the coming years.   Since EVs are cheaper to develop than low emission ICE powertrain, OEMs will need to achieve lower fixed cost bases in the coming years in our view.
This will likely be compounded by the auto industry's (and the stock market's) fascination with autonomous driving, on which we have held ambivalent views on for quite some time now (see Notes from Detroit: The AI in Automotive Conference - The Suppliers' Perspective).  
Even as GM seeks to achieve a lower cost base with an eye to being ahead of the curve on disruptive technologies there is still one very important question that we think the auto industry (and regulators) has still not addressed very systematically:  how do you get customers to buy EVs? (see our rationale for this in Some Thoughts on Clean Cars that Sell Side Reports Typically Miss: How to Get Customers to Buy Them, and empirical evidence supporting our view in May Global Auto Demand Tracker: EV Versus ICE in Western Europe - Implications for Push Marketing).  
From a stock market perspective, we like the proactive downsizing initiative as we are likely standing at cyclical peak.  While the stock market's love with EV and autonomous driving will likely keep a positive spin on GM at least in the short run, we believe in the longer term the EV/Autonomous Driving are really the risks that investors must consider carefully not just in GM but in the industry overall.

General Motors (GM): Trading in ICE for EV and AI?