Tesla, Ford price cuts ‘are confounding’ given EV demand: Strategist
Bank of America Managing Director John Murphy joins Finance Live to discuss price cuts from Tesla and Ford, GM earnings, auto market dynamics, lithium supply chains for EVs, and more.
Video Transcript
PAUL JACOBSON: We've seen incredible demand for our EVs and we're launching even more this year. And we've seen consumers really run towards them at the price levels that they are. So we feel quite confident with our strategy. Competition in this business is no surprise. We've been dealing with it for more than 100 years. And one of the things that I think we've said over time, this isn't an easy business to get into but one that we're ready for.
- That was General Motors CFO Paul Jacobson as the company revs up its push into the electric vehicle space. Well our next guest says GM is managing its core business well amid its EV push. He is predicting a challenging environment for the auto space in 2023. Joining us for more is a Global Research Senior Automotive Analyst John Murphy. John, always great to get some time with you.
Now, Paul right there, he pushed back on my question on if GM is going have to lower prices for EVs. Didn't say, hey, we're going to chop prices and go back to an 80s style price war. But do you think GM's going to have to make some moves here?
JOHN MURPHY: So at the moment, the current price cuts by both Tesla and Ford that have been announced in the US market are a little bit confounding because demand is exceeding supply. So on their conference call or the fourth quarter call, he was saying his demand is 2x his capacity. So cutting price is an odd thing when somebody is looking at demand while in excess of supply. And similarly, Ford has alluded to demand exceeding supply.
So I think GM is taking a more balanced approach here and letting the market come to them. And if over time, they need to make price adjustments and be competitive in the market, I think they will. But I actually think that they're taking a much more balanced appropriate response or actions relative to the market dynamics at the moment. So I think they're actually doing a better job than the other folks at the moment.
- So what does that mean for some of their free cash flow goals that they've set forth?
JOHN MURPHY: Sure. I think the biggest risk or depression in the free cash flow number is the fact that CapEx is ramping up to support these EV launches over time, not necessarily the pricing actions or lack thereof in the short run. And GM stepped up its CapEx outlook to 11 to 13 billion. They did about 9 billion last year. That 11 to 13 billion sounds like it's a relatively sticky number at least for the foreseeable future. So that's actually where there's some significant risk or pressure on free cash flow in the near term.
Beyond that, the ICE business is performing incredibly well, particularly on the truck side and on the fleet side. And I think this is something that is often missed when everybody's very concerned about what's happening in the auto industry and the retail consumer is that fleet over the last few years has been unsatiated as far as its fulfillment or it's demand. And that is an opportunity to potentially really grow volumes in reasonably good profitable fleet volume over the next couple of years, and particularly in this year. And we saw this coming out of 2009 and 10 and 11. There was a big fleet recovery relative to retail and that really dragged the industry out of the last trough and we think that's probably what will happen here.
- I want to talk a little bit more about EVs for a second, John, and particularly this investment that GM has now made in lithium Americas to try to ensure its lithium supply chain for its batteries. Do you think this was a good move to make? Do you think we're going to see other automakers making more moves like this as well?
JOHN MURPHY: Sure. The vertical integration is something that these companies are getting deeper and deeper into in following Tesla's lead on this. Obviously, there's massive concerns around the critical minerals and the potential shortages that we may see in the future around nickel, cobalt, magnesium, graphite. All the key materials that are going into batteries and electric vehicles.
So vertically integrating like this and making these investments seems like it's going to be necessary to protect supply. Forget about even pricing on that side in the near term. GM claims it's locked through 2025. These are programs that'll start supporting them or protecting them from 2026 beyond. But no, this is a growing trend. And is part of the reason that these CapEx numbers are growing for these companies and there's $1,000,000,000 explicitly in there for this vertical integration that GM has highlighted today. So you'll know it's going to be an increasing capital burden on them but it should protect supply and hopefully pricing to some extent, going forward.
- And John Paul also mentioned a new $2 billion cost cutting plan today that they unveiled. Now, he said they're not going to see orchestrate mass layoffs but does that new plan now put the ball in the Court of a Toyota, and Ford? Will they now have to find somewhere, somehow to cut billions out of their cost structure?
JOHN MURPHY: So when you look at these companies, there's a constant drudge to efficiency and cost cutting that must go on in good times and bad times. So GM has laid this out over the next two years. Mary alluded to this being sort of in their structural costs or the structural costs being reduced by $2 billion. So I think this is an ordinary course for the auto industry. You're looking at companies-- GM's revenue was $157 billion last year. So eking out dollars of cost per year is not necessarily that massive. It's difficult. These are very difficult to do but not really unheard of in the industry.
I do think one thing to also consider is that they are looking at a new labor contract that will be set hopefully late this year where if the UAW master agreement negotiations between GM, Ford, Stellantis and the UAW. And there is risk that there could be some labor cost inflation that comes in that has not been really well discussed at the moment. So that's another risk that's out there. They're organized labor are great partners in their plants. They're great partners in this EV transition. But they're probably going to be more expensive going forward. So that might be an offset to that $2 billion cost saving they're looking at.
- Back on the EV pricing, John, do you anticipate Tesla having to cut prices again? And then if they do cut prices, what do you do with the stock? Well, there are a lot of reasons that Tesla may have cut price. One may be the demand is weakening. And that may be true. The second is the competition is heating up. We know that factually based on our car wars analysis that we do. The third might be that the IRA caps. They were above and they wanted to dip below those so that they would qualify for the IRA tax credits for their consumers. And one maybe that he just wants to drop a hammer on competition and really make their competitive position that much stronger and everybody else weaker.
I think the real reason that they cut price is to broaden the market because there's only so much room to sell $55,000 vehicles globally. So if you want to increase your volume from 50% a year from about 1.3 million last year to almost 2 million this year, you're going to have to go down in price. The market is not there. You have to go deeper in the market. And they don't have an entry level or a vehicle below the Model 3 or Y until 2025. So there is a risk that they cut price again in 24 based next year.
But based on the statement that he made on the fourth quarter earnings call saying that his demand is to actually supply, you'd be silly to cut price. You'd be just eating into your profitability and not achieving any more incremental volume in the near term. So I think there's risk of another price gain in 2024. But if we hear another one this year, it doesn't seem very logical to us at all and really puts into question whether the industry and its executives are making rational decisions. And at the moment, it seems like they're actually being irrational on this price cutting so far.
- Well, I bet consumers like it. John Murphy--
JOHN MURPHY: For consumers.
- Thank you. America Global Research Senior Automotive Analyst. Love the toy car collection you got behind you, John. Thanks so much for being with us today.
JOHN MURPHY: Thanks for having me.
