There has been a lot of news on the internal combustion engine (ICE) to electric vehicle (EV) transition since our last update. The conclusion from the news and everything going on in the economy is that the transition is picking up momentum and to the benefit of the Mid-Central Electric Valley via the reshoring of the industry’s supply chain. However, Tesla has just a massive lead and scale advantage that both the incumbents and other entrants will be challenged to reach the necessary scale to reach positive business economics and claim their rightful market segment and meaningful share. Consequently, as the industry’s supply chain challenges ameliorate during 1H 2023, we expect all brands to double-down on explaining their proposition to consumers in 2H 2023 and 2024, be it pop-up stores, experience centers, and other ways of connecting. However, connecting and closing the sale will likely be more challenging than it was in 2022 given likely higher job insecurity and tighter credit. That dynamic will put pressure on out-the-door prices, which in turn puts more pressure on the unit economics and amplifies the need for greater scale. To say the least, it’s going be a “dynamic” drive over the next three years for the industry.
- New vehicle sales for January and February were at an improved 15M on a seasonally adjusted annual rate (SAAR) and above the Q4 2022 average of 12M. One can see the levity in food traffic to the dealerships for Ford, Honda, and Toyota over the past two months, following a lull at the end of 2022. The sales rate has improved due to higher dealer inventory levels and a slight increase in incentives; that said, unusually low inventory levels at Toyota and Honda are still constricting their sales, and given the large size of the two OEMs, the industry’s total sales level. Also of note is the declines for Stellantis’ brands (Alfa Romero and Jeep).
Source: Cox Automotive February 2023 Monthly Industry Update
Source: Cox Automotive February 2023 Monthly Industry Update
- All of Stallantis’ brands (including Ram, Chrysler, and Dodge) had a difficult 2022 and have been on the decline since 2017. Stellantis’ business generates about $10B per year after $10B in capex, and so it is well-resourced for now. Its plan is to offer more than 75 EV models and reach global annual EV sales of 5M units by 2030; however, that timeline would put it behind most of the incumbents and that target compares to Tesla’s 2030 objective of 20M on only five or so models. Scale efficiencies?
- One would expect that the financial stress caused by the SVB and other regional bank crises will lead to tighter lending standards in the months ahead. That said, the average age of vehicles in operation (PARC) continues to rapidly increase and escalating repair costs are simply going to force many into a purchase decision. (Readers will recall that the aging PARC has been one of the principal drivers of auto part retail over the past two years.) EVs outpaced total industry sales in February, increasing +60% versus +9%, and Tesla was up +44%. EV penetration hit 7.8% in February, up from 6.5% in December.
- Tesla held a Capital Markets Day this past week. Recall that we’ve written that Tesla would soon need to announce its plan for a new factory in the U.S. in order to meet its production targets; however, one element of the IRA Act and $7,500 tax credit that we didn’t foresee is eligibility is for vehicles in North America, not just the U.S. As such, the next location is Mexico. That said, many more will be needed beyond this plant to get Tesla to its 20M vehicle target for 2030. Shanghai took 12 months from greenfield to first customer delivery and now runs at a 45 seconds cycle time (i.e. it spits out one new Tesla every 45 seconds). How much is Tesla going to spend over the next several years building out its manufacturing base? $165B. That’s a big number for others to catch up to, both individually or in some combination.
Tesla’s current capacity is shown in the figure below. Higher levels of productivity for each continue to be achieved; for example, Fremont’s capacity has doubled since mid-2018. More shifts worked is proportional to more units as well. Placer shows that the activity levels at Austin is now at roughly half Fremont’s levels with progressive increases each month; moreover, shifts worked at Fremont continue to march higher.
- The big news coming out of the Tesla CMD was the company's intent to lower its production cost per vehicle by half over the next several years (i.e. 1-2m units per model and more than 1M units per factory) via culture, simplicity, focus, vertical integration, and enormous scale efficiencies are all contributors. We have frequently written about Tesla’s cost advantage. (Its 2022 figure was $38K per unit. Ford was at $28K, but Ford has a lot of lower-end models in its average. BMW by contrast is at $46K.) As shown in the first figure below, the reduction in cost per vehicle includes engineering the cost of the Tesla’s powertrain down to $1K, which is inclusive of permanent magnets that do not use any rare earth materials. That $1K next-gen powertrain (motor, gearbox, inverter) replaces nearly everything under your ICE’s hood. Also of note, their new lithium battery is expected to last for the life of the car (more on that below).
- Tesla CFO Zach Kirkhorn stated:
“As we look forward to our next-gen vehicle, our target is to reduce 50% of cost, and we've talked about that a bit earlier today. Going from the Model S and X platform to the 3 and Y platform, we took out 50% of costs, so the task here is to do it again. And this is very important because as we improve affordability, the number of customers who have access to our products dramatically increases. And as we link this back to our Master Plan, it enables exponential growth in our volume with linear reductions in the cost of our products. The second point I'll make here is that -- and again, cost reductions don't come from any single one place. And so you can see the buckets here on the vehicle side, the battery and powertrain, manufacturing cost reductions and others, these buckets are relatively equal in size. And so in order to take 50% of cost out of the product, we have to go through everything.
But more importantly than just the cost of the car upfront, when we're transitioning to a sustainable economy, particularly with vehicle ownership, it's really important to think about the lifetime cost of the products. And this chart here is showing what the total cost of ownership per mile is over the course of 5 years. And we have to think about financing costs, insurance costs, the cost of power. Drew talked a little bit about that with the plans that we're doing in Texas, wear and tear and maintenance on the cars, et cetera. And we're already at a place today in the U.S., where a base Model 3 on a cost per mile basis is less than a Toyota Corolla, which is the highest-selling car in the world. And as we move towards our next-gen platform, we will continue to reduce this.”
Source: Tesla 2023 Investor Day Presentation
Source: Tesla 2023 Investor Day Presentation
- Ford also held an analyst event where it reiterated its aspiration to reach a 600K EV production capacity level by the end of this year and 2m by the end of 2026. Like all EV manufacturers, save Tesla, current production levels don’t provide sufficient scale efficiencies to be profitable. Should it get to production levels of 2M, Ford expects the EV business to have an 8% profit margin. This year, the loss for the EV segment (called Ford Model e) is to be -$3B.
- On the 2026 targets, CFO John Lawler said, “The 8% EBIT margin target for Model e I just talked about, which is tied to our global EV production run rate target of 600,000 units by the end of this year and 2 million units by late 2026. 10% adjusted EBIT margin for the total company. And to hit this, we need to grow and reduce our costs. We are still focused on taking out billions of dollars of cost, primarily in Blue from reducing vehicle complexity, which flows through our manufacturing and engineering systems. And this savings will help.
Source: Ford Financial Reporting Teach-In (March 2023)
Source: Ford Financial Reporting Teach-In (March 2023)
- Recall that one of GM’s goals is to have the capacity to produce 1.3M EVs in the U.S. and 1.3M in China by 2025. For January, GM sold 27K EVs globally for a 6% share of the 456K sold by all manufacturers for the month (Per Morgan Stanley). GM is still struggling with supply chain challenges, and it doesn’t expect those to clear up until the 2H 2023, similar to Rivian. Another near-term challenge is the risk of a consumer pullback in China where there is a glut of inventory and a more cautious consumer; China is significant to GM’s profits at around $1B of the $11B total. As part of its EV-transition, GM announced a $2B cost reduction / restructuring plan and a voluntary separation plan. $2B / $150K per FTE = 13.3K FTEs.
- Volkswagen leads GM in EV production, total production (10M versus 3.6M), and produces nearly twice the operating profits. Additionally, it’s important to keep in mind that Volkwagen’s consolidated profits are principally driven by Audi and Porsche. Its larger scale allows Volkwagen to invest twice the capital that GM intends over the next few years to retool for the transition ($23B versus $11B per year). ID4s should be coming out of its Chattanooga, TN plant this spring.
- In terms of Q4 2022 results, Rivian produced 10K trucks, fewer than expected, which brought the year’s total to 24.4K (half management’s earlier 50K target). The contribution profit per truck is still hampered by low production efficiencies; revenue per truck was $82K versus production costs of $211K. The start of a second shift should improve the contribution profit in Q1 2023, as will a new “efficiency program,” however, management does expect to reach a positive contribution margin till 2024. That said, the second plant in Georgia is still a go with the current timeline being 2026. The cash burn for the quarter was $1.7B, leaving them with $12B in cash and equivalents. The cash burn for 2023 is expected to be around $6.3B and for the production of 50K trucks; the 50K number is still being held back by supply chain issues (power semiconductors). Last week, the company announced plans to rise $1.4B via convertible notes to fund the development and launch of its smaller-SUV model, the R2. Most Wall Street analysts see “2023 as a pivotal year for Rivian to show they can achieve a path to GM breakeven in 2024.” As such, it’s going to doozy of a year for the company.
