Behind GM, Ford’s new EV strategy is old-time financing: Cash
The cab to a Ford all-electric F-150 Lightning truck prototype is seen on an automated guided vehicle (AGV) at the Rouge Electric Vehicle Center in Dearborn, Michigan, September 16, 2021.
Rebecca Cook | Reuters
Detroit’s automakers have brought a surprisingly conservative financial strategy to making EVs the next vehicle of choice for American consumers.
They’re paying cash.
General Motors and Ford are investing $65 billion between them – $35 billion at GM and $30 billion for Ford – and, so far, don’t propose to borrow any of it. Instead, the most radical change in auto products in a century is being paid for out of the companies’ operating cash flow – seriously reducing the risk to the companies over time, and, for now, boosting their stock prices.
“The short answer is that they are doing it because they can,” said Nishit Madlani, automotive sector lead at bond rating agency Standard and Poor’s. “The popularity of trucks [since the pandemic began] and strong pricing is giving them confidence.”
Detroit’s aggressive investment and conservative financing has been years in the making. It has been aided by $4 billion borrowed by GM in May 2020, and by Ford drawing down a revolving credit line by $15 billion around the same time, moves intended to cushion a feared sales implosion from Covid-19. As sales declined more modestly than feared in 2020 and then began to bounce back in 2021, cash flow remained strong, taking the companies’ stock prices higher and letting Ford repay high-interest debt.
At the same time, both companies held on to cash by suspending dividends and share repurchases. And the companies have cut billions in annual costs, by slashing whole lines of unprofitable sedans, withdrawing from unprofitable markets overseas, and focusing tightly on trucks, which remain the most profitable part of their business.
Put all of this together, and the two biggest native-born U.S. automakers have the cash to take on the industry’s biggest technological transformation since its founding.
Record auto profits, record car prices
“Auto manufacturers are expecting record profits once we get through supply chain issues and chip shortages, which we expect to last most of this year,” CFRA Research analyst Garrett Nelson said. “The existing business is good, and the driver is car prices at a record high.”
The Detroit 2’s financing strategy stands in stark contrast to how Tesla, then a start-up, financed its push into EVs over the last decade. The EV leader repeatedly raised money from the stock and bond markets to pay for its plans, filing paperwork with federal regulators for $10 billion in stock sales as recently as 2020. Tesla’s first EV factory in California was financed with a loan that was federally guaranteed in 2010, when the EV market was nascent, before the company went public or had material revenue.
GM and Ford are ready to spend even more.
“If anything, it will go up from there,” a Ford spokesman said.
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