GM may have mortgaged its future last week.
On Wednesday, the automaker announced that it would boost its dividend and buy back $10 billion worth of its shares, effectively erasing this year’s net income and then some. The move pleased shareholders, with GM’s stock trading about 10% higher than before the financial engineering moves were announced.
But shareholders’ delight may be fleeting. Profits from sales of fossil fuel vehicles are supposed to bankroll the transition to electric vehicles, GM president Mark Reuss said last year. That doesn’t appear to be the case anymore, in part because the company is desperate to prop up its share price, which is the same as it was five years ago.
CEO Mary Barra probably thinks the market is being unfair given that the company has, with the exception of a few quarters, been profitable for more than a decade. The share buybacks are undoubtedly a ploy to wrench GM out of its rut.
Any boost the buybacks give to the share price will only paper over the likely reason shareholders are lukewarm on GM: The company lacks the ability to execute on its plans.
Starting in March 2020, GM announced a string of ever more aggressive investments in EVs and autonomous vehicles. As pandemic pricing buoyed the automaker’s quarterly earnings, the company said in June 2021 that it was bumping up its pledge to invest $20 billion in EVs and AVs to $35 billion. Shareholders applauded moves, and GM’s share price tripled in that time.
GM’s first new-wave EV offerings should have been hits. The Hummer EV was a 9,000-pound, $113,000 statement (and apologia) that grabbed headlines, and the $60,000 Cadillac Lyriq hit right at the sweet spot of mass-market luxury SUVs. It soon became clear, though, that the company was fumbling the rollout.
Though GM said the Hummer reservation list was 90,000 strong and that the Lyriq waitlist was full, the company sold fewer than 1,000 Hummers and only 122 Lyriqs in 2022, the year they became widely available. Over the summer, Barra blamed a supplier for the delays. Production this year has been better, but not by much.
In October, GM said it would be dialing back its EV ambitions. No surprise given the problems it has been having producing them at volume. The company didn’t mention that as the reason, though, instead blaming flagging customer demand.
Yet industry data doesn’t back that up. EV sales hit a record in the U.S. in Q3, rising to 313,086, according to Cox Automotive. Around 9% of all new vehicles sold today are EVs, according to J.D. Power, more than double the share that BloombergNEF predicted in 2020. If anything, EV adoption is outpacing past expectations.
And yet some legacy automakers have either dialed back their ambitions, which Ford and GM both have done, or treated battery EVs as a passing fad, a notion that Toyota still clings to.
The risk, of course, is that their offerings won’t align with consumer demand. BloombergNEF expects that 28% of all light-duty vehicles in the U.S. will be EVs by 2026, Bank of America predicts the share will be 26%, and J.D. Power anticipates it will be 24%. In other words, two and a half years from now, demand for EVs is likely to quadruple. (Worldwide, EV market share will be even larger, hitting 42% in Europe and 52% in China, according to BloombergNEF.)
Let’s take a look at how that might affect GM. The company now says it will be able to produce 1 million EVs in 2026, which will be 17% of its current global sales. (Global sales growth is expected to slow for the remainder of the decade, according to McKinsey, so while last year’s numbers aren’t a perfect baseline, they’re probably not far off.) Absent a significant boost in overall market share, that means GM’s production capacity will be at least 10% short of market demand.
Toyota is the other legacy automaker likely to fall short on demand. The company has placed big bets on both solid-state batteries and hydrogen, though both are many years away from being significant forces in the market. Toyota’s plans for solid-state batteries have been pushed back a couple years, with the automaker now claiming that it will make enough for “several tens of thousands of vehicles” in 2027. Hydrogen is probably even further out, given that the company sold fewer than 4,000 fuel cell vehicles last year.
The automaker doesn’t have a 2026 forecast, though it has said it will sell 3.5 million EVs globally by 2030, or about 33% of total sales based on last year’s numbers. By the end of this decade, BloombergNEF expects that EVs will make up 44% of the global market, suggesting that Toyota’s production capacity will also be about 10% short of market trends as well.
Ford will probably be in a similar boat. It recently backed off its plan to produce 2 million EVS per year by 2027. That would have put it ahead of demand, but it also would have given it an opportunity to pick up market share as consumers disappointed by GM’s and Toyota’s offerings looked elsewhere.
Stellantis appears to be in better shape. If it sticks to its current pledges, it should be able to comfortably meet demand, potentially adding to its market share in the process. The automaker has said it is targeting 3 million EVs by 2027, which is half its current sales.
Given that the industry has settled on EVs as the future, why aren’t more legacy automakers using the disruption to gain market share? There are a few possible answers. For one, legacy automakers, probably still shell-shocked by the Great Recession and chip shortages during the pandemic, have tended to play things safe.
As a result, they haven’t locked up sufficient supplies of battery materials to meet future demand. That would mean they’d have to sign potentially pricier contracts down the line to make up for any shortfall.
Lastly, Tesla’s price cuts have squeezed legacy automakers’ EV margins, and their executives don’t think they can sell shareholders on a price war in an attempt to grab market share. They’re probably right, but they’re running the risk that delivering returns today will end up costing them several times more than that in the future as their models don’t line up with customers’ expectations.
In recent years, the EV market has become a race to see who can ramp up fast enough so automakers can have all the pieces in place when the predicted wave of demand materializes. As a result, it’s become a game of corporate chicken, and many legacy automakers are blinking.
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