DETROIT There is an addiction in the auto sector. It is a capital-hungry company that has been spending astronomically on all-electric and driverless cars for years. And it’s waking up from the drug and going to treatment now.
Amid economic concerns, billions of dollars wasted on self-driving cars, and a longer, if not unclear, return on investment in EVs amid slower-than-expected uptake, automakers from Detroit to Japan and Germany are trying to cut costs and expenses.
These problems accompany declining consumer demand, rising commodity prices, and some Wall Street experts warning that global auto sales and earnings are set to peak as China’s sector continues to grow.
While other manufacturers like Nissan Motor, Volkswagen Group, and Chrysler parent Stellantis are taking even more dramatic steps to slash headcounts and spend less, General Motors and Ford Motor are reducing billions in fixed expenses, including the layoff of thousands of people.
In a September investor note, Morgan Stanley analyst Adam Jonas stated that Western [automakers] are putting more emphasis on capital efficiency, which entails probably cutting spending, working together more, and restructuring EV portfolios to put profits first.
Tens of thousands of parts are produced by a global network of businesses that make up the automotive industry. Every time an automaker introduces a new product or upgrades existing models, a substantial capital investment is needed, which has an impact on global supply chain spending.
However, automakers have accelerated their spending in electric and self-driving cars in recent years. Tens of billions of dollars were spent by businesses on the technology, yet the majority of them saw little to no return on their investment in the short to medium term.
According to auto consulting firm AlixPartners, capital spending and R&D expenses for the top 25 automakers have risen 33% from about $200 billion in 2015 to $266 billion in 2023.
Even though global sales fell 38% between 2015 and 2023, GM’s costs climbed roughly 62% to $20.6 billion (excluding sold European divisions). Comparatively speaking, other increases over that period were 42% for Volkswagen, 37% for Toyota Motor, 27% for Stellantis, the successor of Fiat Chrysler, and 18% for Ford.
EV start-upsSince 2022, Rivian Automotive and Lucid Group have spent $16 billion and $8.8 billion of their free cash flow, respectively. Both businesses are working to reduce their losses and increase vehicle production.
The auto industry has previously spent a lot of money and then made a hasty attempt to reduce expenses. Periods like these occur in cyclical businesses like the automobile industry, but is there any way that the expenditure might have been prevented or at least lessened this time?
Capital junkie
The most recent round of cost-cutting measures follows almost ten years after the late Fiat Chrysler CEO Sergio Marchionne’s notorious Wall Street presentation, Confessions of a Capital Junkie.Marchionne was certain that consolidation and shared capital spending might address the industry’s enormous capital expenditures on overlapping or niche items, which were brought to light in the April 2015 study.
Marchionne’s report, which was issued in the midst of unsuccessful attempts to merge with Fiat Chrysler that involved GM, has surfaced again as automakers reduce expenses and announce cost-sharing agreements between GM and Hyundai Motor and Volkswagen and Rivian Automotive.
In a November 2023 investor note, Jonas cited Marchionne’s addict manifesto, which he has since cited, and stated, “We believe the concepts within this deck [are] highly insightful and as relevant today as ever.”
‘The Sergio Quotient’
The average S&P 500 business spends its market capitalization on capital expenditures and research and development over a period of around 50 years, according to Jonas, who uses a metric known as the Sergio Quotient.
In 1.9 and 2.6 years, respectively, GM and Ford spent their market capitalization. The only conventional automaker to lag behind GM was Volkswagen, at 1.8 years. At 14.4 years, Toyota was the most appropriate.
In terms of capital expenditures relative to market capitalization, Ford and GM were rated 402 and 403 out of 406 nonfinancial businesses in the S&P 500 as of September.
During an automotive symposium this summer, former Ford executive Joe Hinrichs cited Marchionne’s 2015 manifesto, denouncing the sector for its waste of money.
Capital destruction is a well-known characteristic of the auto industry. Hinrichs, who is currently the CEO of the railroad business CSX, stated that this is a bad thing. You should be held responsible if you waste billions of dollars on electrification or billions on driverless cars. Shareholder money, that is.
Although the majority of automakers’ capital expenditures are not squandered, the industry’s efficiency is lower than that of other sectors, and the return on investment is low.
According to FactSet, tech companies like Google parent Alphabet have a ROIC of about 22, while traditional, mainstream automakers have a ROIC of seven or less.
“Given the slowdown and low utilization in manufacturing plants, we’ve seen major CapEx spend with extended ROIs,” Rebecca Evans, a principal at management consulting firm Roland Berger, said.We have been examining cost in great detail.
Specifically, automakers have not observed ROIC for EVs and driverless vehicles.
Despite having already spent over $10 billion on the troubled autonomous vehicle division Cruise since purchasing the business in 2016, GM is still investing in it.
In addition, Ford has squandered billions of dollars on strategy changes and warranty and recall expenses. After substantial development costs of almost $1.9 billion in cash and expenses, the carmaker recently suspended manufacturing of a three-row electric SUV. This includes $400 million for the write-down of production assets unique to a few products.
Rehab
Nissan, Volkswagen, and Stellantis are undergoing significant corporate restructurings that involve output reductions, layoffs, and other cost-cutting measures following years of investment. Although they are not making as much of an effort as the others, companies like Ford, GM, and EV startups Lucid and Rivian are all making an effort to reduce prices.
Do we have to make cost reductions with each new car we produce? “Yes,” Lucid CEO Peter Rawlins told CNBC in October, referring to the company’s task group on cost reduction. We are diligently working on it.
Unusually, Volkswagen is implementing a significant cost-cutting effort that includes layoffs and possible plans to close manufacturing in Germany, the company’s home country.
VW Chairman and CEO Oliver Blume said in an interview published earlier this month that such actions are needed to remedy years of ongoing problems at the German carmaker, which reportedly expects to spend 900 million euros ($975.06 million) to execute the turnaround.
According to Reuters, Blume told the German newspaper Bild am Sonntag that decades of structural issues at VW are evident in the company’s sluggish European market demand and even lower profitability from China.
The rise of Chinese automakers has been eating away at the profits of traditional automakers such as VW, GM and others that were once dominant players in China the world s largest car market that has quickly moved from being a consumer of vehicles to exporter.
Several companies, including Nissan, Honda, and BMW, attributed China’s declines to either restructuring requirements or missing earnings projections. GM, which has raked in billions from China, is restructuring operations there, including attempting to renegotiate with its major Chinese partner, SAIC.
GM has been one of the most active in its expenditure on EVs and self-driving cars, while losing ground in China. However, it is still quite successful and ended the third quarter with about $27 billion in free cash flow. It continues to be one of the best at striking a balance between cost-cutting and investment while still turning a profit.
On Wednesday, GM CFO Paul Jacobson reaffirmed the company’s intention to level capital expenditures at approximately $11 billion in the future.
Jacobson said at a Barclays conference, “I think we’ve established over the last couple of years a pretty disciplined track record of capital expenditures.” Being a part of an organization that has more ideas than it can finance is what you desire. It is our responsibility to prioritize and distribute that.
Partnerships
Newer automakers such as Rivian and Lucid are cutting costs and raising capital to stay afloat as the companies continue to lose tens of thousands of dollars on each EV they sell.
Lucid s largest shareholder, Saudi Arabia s Public Investment Fund, hasinvested billions of dollarsinto the company, while Rivian has teamed up with Volkswagen for an up to$5.8 billion software deal, which is expected to close by the end of this year.
GM and Hyundai this summerentered into an agreementto explore future collaboration across key strategic areas in an effort to reduce capital spending and increase efficiencies. The companies have not announced any actions since then.
Marchionne argued such partnerships were effective but not enough going forward. He said companies could save billions of dollars annually in capital by sharing costs involving commoditized parts such as transmissions, standardized safety equipment and advanced driver assistance systems.
It s fundamentally immoral to allow for that waste to continue unchecked, Marchionne said in the three-hour conference call with global industry analysts in 2015. Something needs to give. It cannot continue like this.
Some things have changed, but there have not been large systemic shifts. Major automotive industry mergers and joint ventures don t always result in long-term successes. Many fall apart before producing significant results.
Both VW and Rivian have experienced such failures with Ford in recent years. Rivian and the Detroit automaker canceled plans to codevelop EVs two years after Ford took a12% stake in the startupin 2019. Around that time, VW also announced a $2.6 billion deal with Ford for autonomous vehicles that didn t pan out.
Stellantis
Stellantis formedthrough the mergerof Fiat Chrysler and French automaker PSA Groupe in January 2021 has proven that not all mergers enacted to produce scale guarantee a profitable company. After a record profit last year, the company has struggled in 2024.
While Stellantis CEO Carlos Tavares has touted achievingroughly $9 billion in cost reductionsfollowing the merger, the automaker has mismanaged the U.S. market its prime cash generator with a lack of investment in new or updated products, historically high prices and extreme cost-cutting measures.
When asked by Bernstein analystDaniel Roeskaabout Stellantis not performing to capital junkie standards despite the massive merger, Tavares said the company achieved the scale needed to be more efficient but it s still working on a product blitz andcorrecting mistakes in North America.
Tavares said Stellantis remains more profitable than Fiat Chrysler and PSA were on their own. He also cited impacts of regulatory chaos, a reference to U.S. and Europestandards for EVsand emissions.
Stellantis is the concrete expression of the scale that you need to have to use the resources of your shareholders in a meaningful way. So, that s what we did. FCA was too small, Tavares said when discussing first-half results in July. PSA was too small. Stellantis has the right scale. That s an answer that I m sure Sergio would recognize.
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