GM Doesn’t Need Trump’s Advice on Electric Cars
(Bloomberg Opinion) -- President Donald Trump is mad at General Motors Co. He’s been mad at the automotive giant since late last month, when GM announced a major overhaul that would likely involve closing four U.S. factories (and three foreign ones) and shedding thousands of jobs. This week, he reiterated his displeasure in an interview with Fox Business, calling GM’s action “nasty.”
This is not particularly surprising. Job losses on that scale are awful anywhere; and, in GM’s case, many of them will occur in Ohio and Michigan, states critical to Trump’s re-election hopes in 2020.
What was more interesting was Trump’s musing in the same interview on GM’s new strategy. This will see the company largely abandon traditional sedans in the U.S. in favor of more profitable trucks and SUVs at one end and emerging technologies of electrification and autonomy at the other. Focusing on the latter, he said: “They've gone to all electric. All-electric is not going to work.”
Besides the most obvious observation — GM hasn’t gone “all electric” — the second-most obvious is this: Trump has no idea if an “all electric” strategy would work or not.
This isn’t merely because he’s never run an autos company. It’s mainly because no one knows right now exactly what will work or not with regards to changing vehicle technology and business models. That’s the nature of industry transitions.
What is clear is that GM is right to try and get ahead of it. Cheaper gasoline, relative to pre-2015 prices, has reignited Americans’ love of bigger vehicles. And as this summer showed, Trump likes cheaper gasoline. This offers solid ground in an otherwise flat autos market, and GM’s move away from sedans echoes those of rivals Ford Motor Co. and Fiat Chrysler Automobiles NV. With all three trading at roughly 3 times forward Ebitda or less, versus the S&P 500 at almost 11 times, it pays to be defensive. That’s especially true as Trump’s trade war has also hit margins via higher raw materials costs and raised uncertainty around tariffs on vehicles (though there was some encouraging news on this front Friday). It’s worth remembering that it was Ford’s decision, under former CEO Alan Mulally, to move quickly ahead of the 2008 downturn that saved it from bankruptcy, unlike GM.
Equally, GM would be remiss to abandon investment in electrification. In China, where vehicle sales overall have now fallen for six months in a row, electric vehicles continue to take market share, spurred by government incentives. While electric vehicles remain a small part of the global market, their share of growth in that market is significant already, and they may account for all the growth by the early 2020s (see this). No company trading at 3 times Ebitda — and looking at a minnow like Tesla Inc. sporting a market cap 30 percent bigger than its own — can afford to ignore that trend. GM’s decision to ditch the plug-in hybrid Chevy Volt model is itself a recognition that full electrification — while still subject to a wide range of market, political and technological risks — is where things are headed.
Trump’s dismissal of this may simply reflect a mix of spleen and bravado. But it also fits with his generally regressive views on energy, most notably championing coal power to the extent of wanting to directly subsidize it. It also fits with an ideological reaction against anything that smacks of acknowledging climate change prevalent in Republican circles.
While none of that is a basis for sound corporate strategy and carries an air of King Canute facing the tide, GM must be nervous about a president whose interventionist impulses are undeniable. It shouldn’t be deterred, though. Trump’s earlier threats of removing electric vehicle subsidies are largely toothless, given that GM has almost exhausted its entitlement anyway. Moreover, it’s worth remembering GM’s single biggest shareholder is the UAW Retiree Medical Benefits Trust. A swipe at the company might generate a certain emotional satisfaction for Trump and his allies, but it won’t necessarily win other hearts and minds.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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