Companies facing major technological shifts have two choices: bet the business on the next era, or accumulate cash in a shrinking industry before hanging up your tracks. Many companies do not make the leap: Kodak in digital photography, Blackberry in smartphones, and most newspaper businesses on the Internet, to name a few.
GM is going to try. On Thursday, Detroit’s largest automaker said it plans to offer exclusively electric light vehicles and trucks by 2035, five years before a previously announced goal and part of a broader mission to make its production and operations carbon neutral by 2040 . GM is far better than market forecasts: Less than half of the US vehicle market is expected to be electric by 2035.
GM is taking a big risk, but it is not a courageous profile, says Sven Beiker, a former BMW engineer who now runs the consulting company Silicon Valley Mobility. The writing is on the wall. Overseas, where GM sells about two-thirds of its cars (pdf), Europe, Japan and China have all said the days of the internal combustion engine are numbered. In the US, combustion engines will be phased out in California and Massachusetts by 2035, and other states will certainly follow suit. The Biden government also plans to use the federal government’s procurement budget and policies to speed up an EV transition.
Also, the market is sending a strong signal, and it was uncomfortable for those left behind in the EV race. Tesla’s stratospheric valuation – which has increased sevenfold since 2019 – leaves America’s other automakers in the dust, while investors lash out at companies seen as moving too slowly. For example, since 2014, Ford has seen three CEOs drive through the boardroom.
The big write-off
By increasing its EV target poles, the company accelerates the depreciation of its factories and supplier relationships, but also its decades of intangible knowledge. The world’s automakers have learned better than anyone how to squeeze every last drop out of their mastery of the internal combustion engine, a technology first installed in commercial vehicles in 1886. It is more than just cargo material; it abandons a competitive advantage that has emerged over more than a century.
Instead, old carmakers need to build brand new strengths: electric batteries, self-driving software, mobility networks and more. This is one important reason why Tesla, worth $ 752 billion, is the world’s most valuable carmaker, even though GM sold more than 20 times as many vehicles in 2019 (pdf). The market now appreciates something different, says David Keith, an engineer and professor at the MIT Sloan School of Management. “Do you want to be the company that bends metal into a very low-margin business,” he says, “or a technology business with recurring revenue and a blue-sky valuation?” The strengths of the carmaker of today are the fixed assets of tomorrow.
Think of it this way: GM could double the sales of internal combustion engine vehicles by 2040, while motor vehicles (still only about 3% of new car sales worldwide) will weaken its market. By that time, however, it would be too late to catch up with companies that have spent billions of dollars on their factories and workforce. Traditionally, it takes about six years to introduce new vehicle models, and more than a decade to design a new engine, Keith says. This kind of delay will qualify GM for the ranks of Kodak and Blackberry.
“In a five-year period, it’s the best thing to make money selling Silverados and Escalades,” says Keith. ‘All the money is on selling SUVs and pickups. It’s incredibly difficult to actively withdraw and say it will all pay off in five or 15 years. This is not what many investors want to hear. “But this is the bet that almost all major car manufacturers are making now.
So far, VW has been the most aggressive. Following a catastrophic bet on diesel and a € 30 billion ($ 36 billion) emissions scandal, the German carmaker is spending € 73 billion ($ 86 billion) to turn the text around with autonomous electric cars. Time is short: EVs sold diesel cars in Europe for the first time in September. By 2028, the company aims to produce 28 million motor vehicles and 70 different models, which analysts say are out of reach.
We are no longer in the 20th century
GM’s dilemma reflects the existential question in every fossil fuel industry: Make the leap, or stay connected to an industry model destined to shrink as the world emits greenhouse gases.
So far, oil and gas have mostly made noises about giving up old business models: France’s Total has described itself as an ‘energy company’, while ‘energy transition company’ Shell has promised that a third of its revenue will come from electricity. -2030’s. But in practice, oil and gas rise only after the energy transition. Less than 10% of the industry’s capital expenditure is spent on renewable energy, while $ 166 billion is planned for new oil and gas projects over the next few years, according to an analysis by Rystad Energy.
A few fossil fuel companies are linking new technology with a bolder strategy. The former Danish oil and natural gas company, one of the leading state-owned coal companies in Europe, changed its name to Ørsted in 2009 and promised to abandon fossil fuels. By 2017, it has sold its oil and gas assets and is now on the verge of removing fossil fuels completely from its energy mix by 2025. It turns out to be a good bet: Ørsted has roughly tripled its value since its IPO five years ago. Last February, the British oil giant BP made similar strides and promised to eliminate or compensate all emissions from the operations and the combustion of oil and gas it will produce in 2050 (a target for ambition and short details) .
Few oil and gas companies will be able to do it, says economist and energy analyst Philip Verleger. The new energy industry will be used on electrons, not oil, a skill far removed from the traditional domain of oil and gas companies. “They’re going to fail,” Verleger told Quartz, comparing the challenge to Kodak’s failure to master digital photography. “Very few companies have transformed from the fact that they are really good at one business into a good business into another.”
The car industry can be different. Mass-producing vehicles, as Tesla discovered while bankruptcy was hardly avoided, are difficult. Only a few companies can do it well, and less consistently make a profit. But GM is better positioned than most. It was a pioneer in EV technology in 1997 with the launch of the EV1. It is America’s largest carmaker today, and its pickups and trucks are throwing out cash. GM already has the relatively popular, if uninspiring, Bolt EV, and plans to launch another 20 models by 2023.
GM can see that its high risk is bearing fruit. The company will just have to bet everything it needs to find out.