Earnings season is upon us, always a good time to measure the headwinds and tailwinds of the automotive industry and dissect how they might affect fleet operators.
For Ford and General Motors, their fourth quarter 2022 and full-year reports were a Tale of Two Cities. While GM was able to crow about record revenues and profits last year, Ford had to address earnings that fell short by some $2 billion due to “execution and supply chain management issues.”
Digging into the reasons for that breakdown at Ford is best left to the financial pundits. Here, we’ll analyze the common issues around pricing, inventories, production, volume, and outside market forces that, when assessed in aggregate, reveal developing trends for fleet operators and give a glimpse of the road ahead for the industry at large.
Expect Higher Incentives
Both manufacturers see slightly higher incentives on the horizon.
Ford combined that with a predicted fall in transaction prices of about 5%, with some of that coming from the manufacturer and some from compressed dealer margins. “As we go through the year, particularly in the second half, you'll start to see prices come down through higher incentives by the OEMs,” said Ford’s CEO Jim Farley on its Feb. 3 call.
This is to be expected, according to Ford’s CFO John Lawler, as incentives come off record-low levels in 2022 and as supply and demand rebalance. On GM’s Jan. 31 call, CFO Paul Jacobson said the rise is more of a function of high interest rates than waning demand or an imbalance of inventories. “We still feel good about where demand sits,” Jacobson said.
On the EV side, price drops have already begun, as Ford recently responded to Tesla’s price cuts with cuts of its own. On GM’s call, CEO Mary Barra was asked if GM would follow. She gave a non-committal response about monitoring the situation and turned instead to “the strength of our product portfolio.” Jacobson later followed with, “We’re not doing anything to prepare for a price war.”
Whenever manufacturers bring up the specter of lower prices on a quarterly call, the antidote is to hype their new model releases, which will partially offset lower transaction prices overall with higher MSRPs command higher transaction prices and margins.
GM believes it will gain margin on its midsized Chevy Colorado, overhauled for MY-23, and upcoming refreshed MY-24 Chevrolet Silverado and GMC Sierra HD pickups.
Ford is banking on price gains from its major redesign of the midsized Ranger for MY-24 and the all-new 24-MY Ford Super Duty. In the words of Farley, “The fresher the ICE portfolio, the greater the pricing power.”
Supply Chains Improving Yet Inventory Tight by Design
Both automakers are benefitting from improving supply chain and logistics that started in the second half of 2022. Both are seeing softening costs for raw materials, commodities, and logistics costs as a slight tailwind. GM expects volumes will increase 5%-10% year-over-year.
Dealer inventories are increasing but will remain tight through 2023. GM ended the year with inventory (including in-transit vehicles) averaging 50 days, which is only a third of inventory compared to mid-2019. That figure may only increase to 60 days by the end of 2023, and that’s by design, as GM “actively manages production levels to balance supply with demand.”
GM’s trucks are expected to run at higher inventory levels, as they have many more trims and options, and sedans and SUVs will run lower.
Ford is pegging overall sales in the U.S. at 15 million units for 2023, which is slightly aggressive compared to non-OEM organizations’ targets: Edmunds – 14.8 million, Cox Automotive – 14.1 million, NADA – 14.6 million.
Will Sourcing Battery Materials Hinder EV Production?
Both GM and Ford have set aggressive targets for EV production for the next two years. Ford said it remains on track to produce 50,000 EVs per month and 600,000 EVs globally by the end of this year. (Ford’s run rate in Q4 2022 was only about 12,000 units.) Ford claims to be still on track to produce 2 million EVs globally by the end of 2026.
GM claims to be on track to produce 400,000 EVs in North America from 2022 to mid-2024 and is planning for a million units of EV production in North America by 2025.
As GM and Ford are building their future profits on EVs, showing investors they have the capacity to build them is critical. EV production is dependent on a new set of external factors they’re actively trying to control.
If the factory buildout slows, or the contracts to get the materials break down, those run rates aren’t achievable, pent-up demand remains pent-up, and investors loose confidence.
Both OEMs stressed, as they did in last quarter’s presentations, that their construction, retooling, and expansion of domestic vehicle and battery production facilities are still on track. Another critical part of the plan is to secure the raw materials for those batteries such as lithium and nickel.
Ford expects to have “100%” of the raw materials needed for that 2 million-unit run rate secured by the end of 2023. Barra said GM has secured its needed battery raw materials through 2025. She touted a landmark transaction with Lithium Americas to source enough lithium domestically to support production of up to 1 million EVs per year.
ADAS & Autonomous Tech: Divergent Revenue Opportunities
Last quarter’s conference calls came just as Ford publicly exited, for now, the full autonomy path when it pulled the plug on Argo AI. At the same time, GM recommitted to expanding its Cruise autonomous unit.
During this call, Barra again brought up the rollout of Cruise’s fully driverless commercial robotaxi service in San Francisco and its expansion to Austin and Phoenix.
That service relies on retrofitted Chevy Bolts. At some point those rides will transfer to GM’s Origin, purpose-built for autonomous transportation, which will go into “volume production” later this year. The rides are “revenue generating,” a big step from the years of testing.
Meanwhile, Ford is banking on more incremental, yet immediate, advances in ADAS/autonomous technology that offer recurring-revenue potential through its BlueCruise handsfree system. That’s where those former Argo AI engineers are focusing their efforts now.
Will customers pay extra upfront, and a monthly fee, for active driving assistance? Ford believes so, as partial autonomy is the first pillar in Ford’s new emphasis on software the revenue opportunities from it.
Software & Aftermarket: OEMs as Service Providers
Lawler broke down the three pillars in this order: partial autonomy, safety and security, and productivity, i.e., fleet management. The partial autonomy play is through monthly subscriptions for BlueCruise’s ADAS features. The productivity software will stream through Ford Pro.
Lawler mentioned the use of video as it relates to safety and security and tied it to insurance. “Think of your cars as an extension of your Ring and all the safety and security you have in your house now, all that technology (transferred to the car).”
Note that some fleet customers of the Ford F-150 Lightning are presently receiving software to manage the vehicle and charging for free, with the understanding that this will convert to a per-unit subscription in two years or a designated period.
Ford claims the biggest opportunity in the short term, however, is the aftersales business. “Only 10% of our Pro customers do business with us, and we hardly do any financing with them. And so between financing and parts and service, we have enormous upside in the short term,” said Farley.
Farley pointed to sales of parts and services via its network of mobile service vehicles. The “next level,” said Farley, is prognostics, in which telematics predicts component wear and failures and can tie that into parts and service at physical repair facilities.