An aggregate analysis of the earnings calls from Ford, General Motors, and Stellantis provides a directional roadmap for the auto industry, with relevant news for fleets.
With the 2023 first-quarter conference calls in the books, here are the macro trends:
- Supply chain issues continue to ease.
- Production, sales volume, and deliveries are up.
- Pricing will remain flat year-over-year, but it depends on the segment. Incentives will rise.
- Commodities costs are improving but are proving to be stickier than anticipated, primarily based on higher steel prices. Pricing to be flat year-over-year.
- Parts availability and logistics challenges easing, but we’re not out of the woods.
- Seasonally adjusted annual rate (SAAR) is hovering at 15 million units for 2023. (A nice bump from last year’s supply-constrained level of 13.8 million, but nowhere near pre-pandemic sales.)
- Dealer inventory levels are normalizing as well. GM’s U.S. dealer inventory in Q1 was flat compared to December. GM expects to end 2023 with 50 to 60 days of total dealer inventory. Dealer stock at Stellantis dealers had about 69 days of inventory to end the first quarter, in line with pre-pandemic levels.
Drilling down further and distilling common threads between the calls, here are six trends to follow:
Price Erosion: Trading Volume for Profits?
With the ability to produce more vehicles as supply chain issues ease, analysts questioned whether Ford, General Motors, and Stellantis will go back to discounting vehicles to gain share — as historically, auto sales are dictated by volume.
This is a common refrain at any public company’s investor meetings as it relates to unit sales. But with a post-pandemic reset, has anything changed?
Ford CEO Jim Farley said the company’s growth strategy is not a “win vehicle share at any cost” mentality but to focus on customer conquest. He pointed to the opportunity with electric vehicles, particularly that the F-150 Lightning’s owners haven’t owned a pickup before. Ford expects to conquest in the three-row crossover segment with a new EV model and will have more EV models to sell to commercial customers.
Nonetheless, both analysts and automakers see price pressures developing in the second half. “It's a little bit of a first half, second half story,” said GM’s CFO Paul Jacobson, regarding moderating demand in the face of increased volume capacity.
Stellantis expects “to be very disciplined on our pricing,” said CFO Richard Palmer on the company’s call. “Our margins are clearly very strong in North America. … So that if there is any sort of price erosion in the marketplace, then we’re in good shape to manage it and not have significant impacts on our margin performance.”
Strong Demand, Favorable Pricing on Fleet Sales
Fleet sales are leading the volume recovery to start in 2023.
For the first quarter, Ford Pro increased its sales, earnings, and margins on higher pricing, increased volume, and a favorable mix. Ford launched the all-new Super Duty in March, a critical revenue driver. Ford is expecting big things from its fleet and commercial division: The automaker expects to double Ford Pro’s earnings this year over 2022.
Ford CEO Jim Farley pointed out that the huge back order of commercial vehicles “is still not even close to being satisfied” and there is “a ton of pent-up demand for Pro vehicles with small and medium-sized businesses.” Regarding those SMBs, “They have been waiting literally three to four years for their Transit and Super Duty’s,” Farley said.
GM is also seeing this continued pent-up demand. “Obviously, we're seeing gains in fleet (profitability),” said Jacobson.
Stellantis asserts that profitability on commercial vehicle sales is above average compared to the overall portfolio, driven by pricing strength on pickups and vans.
Aftermarket Sales a Key Profit Driver
Vehicles are lasting longer; EVs won’t generate the same service revenue; software apps solve problems; consumers are comfortable (to an extent) with subscription models.
These factors are playing into automakers’ forays into selling products and services with recurring revenue after the initial vehicle sale.
Ford divides its aftermarket software play into three stacks: safety and security, productivity for Pro customers, and partial autonomy in the form of BlueCruise.
“All those are really great hedges against the inevitable overcapacity in certain segments,” Farley said.
Ford is trumpeting a 30% “attach rate” of aftermarket products and services for Ford Pro vehicles. Ford sees Super Duty as a platform for software and services that help commercial customers maximize uptime and productivity.
Ford Pro's paid software subscriptions (for telematics and charging software, for instance) rose 64% in the first quarter, though Ford did not divulge sales figures. Profit margins on recurring software products are as good as the margins on parts, according to Ford.
Farley brought the equation one step further for commercial customers with software that can predict component failure and have the part waiting for the customer at the shop to minimize downtime.
Ford expects software revenue to be an important part of its Model e division’s strategy, particularly with BlueCruise. Upgrades — and further revenue opportunities — will mostly come through over-the-air (OTA) updates instead of physical installs. This digital connectivity also plays another important role for Ford, to understand which features customers find valuable and cater to them.
Similar to Ford Pro, GM just unveiled its new fleet and commercial division, Envolve, a single pane of glass for fleet and commercial customers. Stellantis is further behind on its after-sales software services offerings.
Reducing Model Complexity
A decade ago, an automotive trend was to offer the customer a plethora of model choices and powertrains but that didn’t increase profit margins. That mindset has morphed into finding ways to reduce model complexity to save on design, engineering, and manufacturing costs.
For instance, GM is touting the affordability of its new Trax and Envista platforms because of reduced complexity and parts sharing. The Trax is only offered with one powertrain. GM’s Mary Barra pointed out that the company is reducing software and hardware configurations, including infotainment screen configurations, by 60%.
One of the reasons for forming Stellantis was to leverage global scale and reduce complexity, according to Palmer.
The issue becomes even more acute in the transition to EVs. Ford has been candid regarding its desire to be first to market with its EV models to win customers — though the engineering of those models was not optimized for electrification.
Ford’s second-generation EVs are expected to reduce costs substantially, and thus contribute to profits. Farley said a mid-cycle redesign of the electric Mach-E reduced $5,000 in production costs, with “a significant reduction in play on Lightning as well.”
Growing Trend to Derivatives, High-End Trim Levels
While automakers work to reduce overall complexity, they also are concentrating on high-end model offerings that drive higher transaction prices and higher returns.
For the first time, Ford will have a Raptor trim for the next iteration of the small Ranger pickup. Mustang will get a new high-performance Dark Horse Mustang model. The Bronco lineup gets Everglades, Raptor, and Heritage trims.
GM has evolved its premium truck offerings “from a niche to a franchise,” Barra said, with a spike in orders for high-end trims on Chevy Colorado and GMC Canyon purchases. The move is happening in the commercial segment too, as over half of Silverado HD orders are for the high-country trim, and 30% of Sierra HD is for the Denali Ultimate — a trim that didn’t exist a year ago.
At Ford, high-end model derivatives often have a parts commonality of 80% with their base models, but with 30% higher margins.
EV Margins and Overcapacity of EV Models
Ford laid out an alarming market assessment that crystallizes the demand vs. volume equation for EVs: By 2025, an expected 45 EV models will be offered in the U.S. in the small to medium utility segment. “It will be a very saturated two-row EV market,” Farley said.
For this reason, Ford said driving cost reductions of the Mustang Mach-E now was crucial, and believes that the software play becomes even more important to stand out in this pack.
This brings up an ongoing and growing investor concern: How will automakers profit from electric vehicles, particularly considering the recent price wars instigated by Tesla?
Stellantis claims its European business mix of BEVs and PHEVs (plug-ins) is delivering double-digit margins. Stellantis claims to not be directly competing with Tesla in its EV segments (predominantly in Europe) and therefore expects to hold its EV pricing positions.
On the other hand, Ford is targeting “a contribution margin approaching breakeven in Model e and for our first-generation products to be EBIT margin positive by the end of next year,” said Farley. Ford pointed to being able to take Lightning’s price up by $11,000, even amidst concerns that there is now dealer stock. According to Ford, E-Transit van sales are up substantially.
GM is targeting low- to mid-single-digit EBIT-adjusted margins in the EV portfolio from 2025.
Ford and GM have aggressive sales targets for EVs, and investors question the timeline to profitability. Getting there relies on a complicated mix of investments in sourcing raw materials such as lithium and nickel, bringing battery plants online and optimizing battery technology, and keeping EV models within the cap to take advantage of the $7,500 IRA incentive.
GM has a 1 million EV target in 2025, a 50% by 2030, and then all-electric vehicle production in 2035.
“We need to be able to ramp up the capacity to realize the scale benefits and get to the pricing efficiency that we're targeting to be able to drive those margins going forward,” Jacobson said.
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