Electric vehicle start-up Lucid on Sept. 28, 2021 said production of its first cars for customers has started at its factory in in Casa Grande, Arizona.
Lucid
DETROIT — The auto industry has an addiction. It’s a “capital junkie” that’s been on a yearslong binge of unprecedented spending on all-electric and autonomous vehicles. And now, it’s waking up from the bender and entering rehab.
Automakers from Detroit to Japan and Germany are attempting to lower costs and reduce expenses amid economic concerns, billions of dollars wasted on self-driving vehicles and a prolonged, if not uncertain, return on investment of EVs amid slower-than-expected adoption.
Those issues come in addition to weakening consumer demand, higher commodity costs and some Wall Street analysts sounding the alarm about global automotive sales and profits peaking, as China’s industry continues to expand.
General Motors and Ford Motor are cutting billion in fixed costs, including laying off thousands of workers, while other automakers such as Nissan Motor, Volkswagen Group and Chrysler parent Stellantis are taking even more drastic measures to reduce headcounts and trim spending.
“Western [automakers] are increasingly focusing on capital efficiency, meaning likely lower spending, more collaboration, and restructured EV portfolios to prioritize profits,” Morgan Stanley analyst Adam Jonas said in a September investor note.
The automotive industry is a global web of companies producing tens of thousands of parts to assemble a new vehicle. It requires significant capital investment every time an automaker launches a new product or updates current models, causing a spending ripple effect throughout the global supply chain.
But in recent years, automakers have put such investments in overdrive with self-driving and electric vehicles. Companies invested tens of billions of dollars into the technologies, most with little to no short- to midterm returns on their investments.
Research and development costs, as well as capital spending for the top 25 automotive companies, have increased 33% from roughly $200 billion in 2015 to $266 billion in 2023, according to auto consulting firm AlixPartners.
Such costs for GM have increased roughly 62% from 2015 to 2023, to $20.6 billion (excluding sold European operations), despite a 38% drop in global sales during that time. That compares to other increases during that timeframe of 42% for Volkswagen; 37% for Toyota Motor; 27% for Fiat Chrysler’s successor Stellantis; and 18% for Ford.
EV startups Rivian Automotive and Lucid Group have burned through $16 billion and $8.8 billion, respectively, in free cash flow since 2022. Both companies are attempting to ramp up vehicle production and narrow their losses.
It’s not the first time the auto industry has blown through money to then attempt quickly to cut costs. These kinds of periods happen in cyclical industries such as autos, but could the spending have potentially been avoided — or at least alleviated — this time around?
“Confessions of a Capital Junkie.” The April 2015 report highlighted the industry’s massive capital spending on overlapping or niche products that Marchionne was convinced could be solved through consolidation and shared capital spending.
Fiat Chrysler CEO Sergio Marchionne
Brendan McDermid | Reuters
The report, made by Marchionne amid failed merger attempts with Fiat Chrysler that included GM, has re-emerged as automakers cut costs and announce tie-ups between companies such as Volkswagen and Rivian Automotive as well as GM and Hyundai Motor to share costs.
“We believe the concepts within this deck [are] highly insightful and as relevant today as ever,” Jonas said in a November 2023 investor note invoking Marchionne’s junkie manifesto, which he has continued to reference.
Jonas points out that the average S&P 500 company spends its market cap in capex plus research and development in about 50 years.
GM and Ford spend their market cap in 1.9 and 2.6 years, respectively. Only Volkswagen, at 1.8 years, was lower than GM among traditional automakers. Toyota was the best suited, at 14.4 years.
As of September, Ford and GM ranked 402 and 403 out of 406 non-financials companies in the S&P 500 regarding their capital spend compared to their market cap.
Former Ford executive Joe Hinrichs brought up Marchionne’s 2015 manifesto during an automotive conference this summer, condemning the industry for its capital waste.
