Wall Street urges on General Motors and Ford spending in Tesla ‘arms race’

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Investors are urging on plans by General Motors and Ford to spend tens of billions of dollars on electric vehicles, even as the carmakers capitalise on booming revenues from cars and trucks with traditional engines.

GM will announce second-quarter earnings on Wednesday after saying in June that its results for the year’s first half would be “significantly better” than previously forecast, despite the semiconductor shortage that has hit the industry.

Last week Ford surprised investors when it reported a $561m second-quarter profit on surging demand for trucks and sport-utility vehicles.

The companies will need all the profit they can earn to meet their new goals for building factories and hiring more software and electrical engineers as they shift to manufacturing electric vehicles. In June GM again increased its planned spending on electric and autonomous vehicles, to $35bn by 2025, while Ford has committed $30bn over the same period.

While the investments are smaller than they seem — some of the dollars are simply reallocated from the carmakers’ annual budgets for producing traditional vehicles — they still represent significant new money. Yet far from worrying at the impact on future earnings, analysts say investors are eager to see more spending, faster.

“The Street wants to see an accelerated EV vision where more investments happen over the next two, three, four years rather than waiting to the end of the decade,” said Dan Ives, an analyst at Wedbush Securities. “It’s an arms race right now . . . There’s a fear that if they’re not aggressive enough over the coming years, they’ll be left in the dust by the likes of Tesla.”

The enthusiasm is new, notes Morningstar analyst David Whiston. A few years ago investors would have punished the carmakers’ stock prices had they embraced EVs, which make up just 2 per cent of the US market.

Now GM and Ford “are both investing for the future while also riding out the [internal combustion engine] as long as they can”, Whiston said. That is their advantage over Tesla: while neither Detroit company can claim a celebrity chief executive or a retail investor base to send their valuation skyrocketing, Tesla only recently began making money. GM and Ford have profits from traditional vehicles to plough into battery-powered ones.

About a third of GM’s $35bn goes toward engineering and two-thirds toward capital expenditures. The company is expanding assembly capacity at three factories located in Michigan, Tennessee and Ontario, Canada, with more to be announced later. Electric vehicles are built using different tooling than traditional vehicles, which must be purchased and installed.

Ford, too, is expanding capacity, with $700m going to outfit its River Rouge complex in Michigan.

GM is building four battery cell plants in the US, with factories already under construction in Lordstown, Ohio and Spring Hill, Tennessee. Battery plants are more expensive than assembly plants. They require enormous amounts of electricity to operate as batteries must be charged and drained to “cure” them before they can be placed in cars and trucks.

GM and Ford also will need to spend money to change the composition of their workforce, said Gartner analyst Michael Ramsey. They still need mechanical engineers, but fewer of them, while software and electrical engineers are in demand.

The companies are “unquestionably double counting” a portion of the dollars in their EV investments, including dollars for capex and research that already are included in the company’s total expenses, Ramsey said.

In 2019 GM’s expenses totalled $132bn but they will not automatically jump to $138bn annually over the six-year period covered by its $35bn spending commitment. Instead, some of the dollars currently allocated to petrol-powered vehicles will be redirected toward EVs.

The investments “are substantial, and they are probably spending additional money”, Ramsey said, but “these companies are not going to go $30bn in debt to invest in electric vehicles. They’re going to take their existing pot of money and reallocate it a bit.”