Daily Management Review

Auto Giants GM, Ford Need To Convince Investors About Their Profitability In The Face Of Falling Prices


Auto Giants GM, Ford Need To Convince Investors About Their Profitability In The Face Of Falling Prices
Next week, General Motors Co. and Ford Motor Co. are expected to report strong profits for 2022, fueled by premium-priced pickup trucks and SUVs (SUVs).
Now, the Detroit rivals must persuade investors that last year's profit formula will continue to work as EV battery costs rise, high interest rates reduce consumer purchasing power, and Tesla Inc TSLA.O slashes prices.
There are already signs that Detroit automakers are reducing spending to offset competitive and economic pressures. GM has put plans to build a fourth EV battery plant in North America on hold for the time being.
Ford is in talks with German unions about laying off thousands of workers in Europe and possibly selling a German vehicle assembly plant.
It ceased funding autonomous vehicle affiliate Argo AI in October.
Both GM and Ford derive the majority of their global profits from sales of pickup trucks and SUVs in the United States. Both automakers intend to increase sales of much less profitable electric vehicles in North America and other markets this year.
In the best of circumstances, the risk to Detroit automakers' profitability would be difficult. However, GM and Ford must now account for forecasts of a slowdown, if not a recession, in the US economy.
EV battery raw material costs are rising, but Tesla, the market leader in the United States, is slashing prices on its best-selling Model 3 and Model Y vehicles by up to 20%.
The Model Y SUV competes with Ford's Mustang Mach-E, General Motors' Cadillac Lyriq EV, and combustion SUVs sold by Detroit automakers.
According to Morgan Stanley, increased prices added an average of $3 billion to Ford's pre-tax bottom line each year, which is more than 200% of the company's pre-tax profit increase for 2022.
GM, the No. 1 automaker in the United States by sales in 2022, said higher prices added $2.1 billion to pre-tax profits in the third quarter compared to the same quarter in 2021 - nearly half of total pre-tax profits for the period.
Investors have been told that the company will spend $35 billion on electric and automated vehicles between 2020 and 2025.
Ford plans to invest $50 billion in electric vehicles through 2026.
"If we are entering a downturn," Morgan Stanley analyst Adam Jonas said, "what steps can they take to keep investing and remain strong?"