Investors 'cannot ignore' GM, Ford transformation. Here's why.

This image provided by General Motors shows the GM Logo. The nation's largest automaker says, Wednesday, June 9, 2021, it can support greenhouse gas emissions limits that other car manufacturers negotiated with California, if they are achieved mostly by promoting sales of fully electric vehicles. It is a new stance for General Motors, which had supported the Trump administration's efforts to end California's ability to set its own limits. (General Motors via AP)
This image provided by General Motors shows the GM Logo. The nation's largest automaker says, Wednesday, June 9, 2021, it can support greenhouse gas emissions limits that other car manufacturers negotiated with California, if they are achieved mostly by promoting sales of fully electric vehicles. It is a new stance for General Motors, which had supported the Trump administration's efforts to end California's ability to set its own limits. (General Motors via AP)

Legacy automakers General Motors Co. and Ford Motor Co. have used the past few months to demonstrate two advantages their electric-vehicle rivals can't match: traditional vehicle businesses to generate cash and the scale to leverage that capital into EV investment.

Investors are noticing, sending shares of Detroit's Auto 1.0 behemoths soaring by double digits as Tesla slumps 16% on the year and troubled startups, such as Lordstown Motors Corp., struggle to remain viable. With planned investments in the industry already soaring 41% year-over-year to $330 billion by 2025, according to consulting firm AlixPartners LLP, traditional automakers might have a big edge in the electrification profit desert coming over the next several years.

"We do see this period as being a difficult period to go through, but not one anyone can wait out," said Mark Wakefield, AlixPartners' co-leader of the automotive and industrial practice. "While sales are not really at the inflection point in many places, the investment has reached an inflection point."

On Wednesday, GM once again stomped on the accelerator: the Detroit automaker said it would increase its spending on electric and autonomous vehicles to $35 billion through 2025 and would fast-track plans to build two more U.S. battery plants with partner LG Energy Solution.

That news comes just weeks after rival Ford wowed investors with its F-150 Lightning electric pickup, its plans to use over-the-air updates and connected technology to create a new line of multi-billion-dollar business, and its strategy to leverage its commanding position in commercial vehicles here and in Europe to grow revenue and fatten profit margins.

Surging investor interest in legacy automakers and their evolving electrification stories is visible in stock prices: GM's shares are up 46% since January, and Ford's are 72% higher even as shares in EV companies lose altitude this year.

"Investors are betting on both the legacy players Ford and GM as well as making one or two bets on the startups, so I view it as kind of a hedge strategy," Wedbush analyst Dan Ives said. "But investors cannot ignore the transformation that's going on at Ford and GM. It's a renaissance of growth it's really the biggest change that we've seen since the 1950s for the auto industry."

The market valuations for traditional automakers are double what they were pre-pandemic, AlixPartners' Wakefield said: "There's a lot to live up to" at a time when profits from these investments are distant and recurring revenues from in-vehicle services are in their infancy. For now, however, the industry has remained net debt neutral.

That could be an indication automakers with their existing supply-chain relationships and traditional business to back up future investments can better face disruptions such as the present global semiconductor shortage or longer-term raw material price hikes than up-and-coming competitors.

"Doing a car is more than just putting some software and hardware together," said Stefano Aversa, AlixPartners' chair of Europe, Middle East and Africa. "To be efficient, (a vehicle) has to be highly integrated with hardware, software, steel, aluminum and everything else. This capability still resides firmly with OEMs. And I think it will stay there for many years to come."

While GM and Ford have lost thousands of units of production during the semiconductor shortage, the interruption hasn't stopped them from making consistent EV and future technology news. For GM, that news has included a Tennessee battery plant announcement in April and the reveal of the GMC Hummer EV SUV that same month.

The automaker still plans to introduce 30 EVs globally by 2025 with two-thirds available in North America. And with the additional investment announced Wednesday, GM is now adding new electric commercial trucks and other products to its North America plan. It's also planning to add additional U.S. assembly capacity for electric SUVs.

GM wasn't going to let the semiconductor crisis "deter us from our vision," CFO Paul Jacobson said Wednesday during Deutsche Bank's Global Auto Industry Conference. Healthy demand for vehicles - especially profit-rich, full-size pickups and SUVs - right now has aided the Detroit automaker in moving forward and increasing its investments.

"It's all built on the foundation of what we're seeing in terms of customer response for the vehicles that we've rolled out so far," said Jacobson, noting the GMC Hummer EV and the electric Cadillac Lyriq crossover.

Stephanie Brinley, a principal automotive analyst at IHS Markit, said in a statement that GM's EV and AV investment boost (the second one in less than a year) "demonstrates the ability for a legacy automaker with strong financial position and established business to largely self-fund its transition to electric vehicles, presuming we really are nearing an inflection point for consumer adoption."

With EV sales making up about 2% of retail sales in the U.S., Brinley said "there is risk that capacity could be available ahead of consumer adoption (so) GM is using its size and scale to advantage in its commitment to a broader transition to electric vehicles."

Meanwhile, the industry is still working through a chip shortage that AlixPartners predicts will cost the industry 3.9 million vehicles and $110 billion in revenue globally. Jacobson said the third quarter is expected to be affected more than previously thought as a COVID-19 outbreak in Malaysia has started to hit the chip foundries, he said.

"As long as that continues, we're losing some production there from some key chip providers, and it's things like that that really make this a week-to-week phenomenon," he said. "Now, what I have a lot of confidence in is the skills and the capabilities of our team. We've demonstrated that, but it doesn't undercut what risk is out there when you're operating really with no slack in the system at all."

Still, GM on Wednesday increased its previous first half of the year guidance from $5.5 billion to between $8.5 billion and $9.5 billion in pre-tax profits.

The month of May, however, was all about Ford. That's when the Dearborn automaker showcased its new electric F-150 Lightning pickup starting under $40,000 and when executives upped the EV spending commitment to $30 billion from $22 billion.

"Ford needs to make sure that they're not perceived as GM's little brother" when it comes to EVs, Ives said. Ford CEO "Jim Farley has hit the ground running and done a phenomenal job of turning the ship around and refocusing on EV."

Competing startup Lordstown Motors is prepping to launch production of its $55,000 electric Endurance truck built for the commercial market - where Ford is a leader. But this week its CEO and founder, Steve Burns, quit along with the CFO amid questions of management decisions and deepening financial concerns.

The resignations came after a board committee investigated a short seller's claims that Lordstown misled investors, finding "inaccurate" statements had been made about the startup's pre-orders. The report by short-seller Hindenburg Research, which stands to profit when Lordstown shares lose value, was one of a series of bad headlines for the company now in need of more capital. Lordstown's share price is down 48% year to date.

"Lordstown bit off more than they could chew," Ives said. "When you come to this market, Ford and GM are the established stalwarts - not just in the U.S., but globally -and I think that's why it took some time for these companies. But now there's no gray in terms of where they're heading."

Lordstown, in which GM holds a 5% stake, now is trying to rewrite its story. Next week, it will open the former GM plant it operates in northeast Ohio to investors, media and analysts in a bid to rekindle interest in the would-be e-truck maker.

Startup Nikola Corp. also has been hit with several setbacks, including its own report from short-seller Hindenburg that claimed it misled investors and lied about its technology and capabilities. The report blew up a partnership with GM and led to the departure of Executive Chairman Trevor Milton.

Before that, Nikola had engineered a successful entry on the stock exchange last June, hitting a valuation higher than legacy automakers and pricing at nearly $94 its first week.

Ives views the future auto market as one that's a "big enough ocean for more than two boats." But for startups, "there's a long shadow now with GM and Ford aggressively focused on this market. That's why it's that much more important for pure-play EV startups to prove their niche, product portfolio and where they belong."

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