Why General Motors May Have Already Lost To Tesla
Originally published in Forbes on March 14, 2017
The car industry is in the throes of a once-in-a-lifetime disruption towards electric vehicles, but traditional car companies—like General Motors—are, in my opinion, out of position. It’s a classic innovator’s dilemma. Instead of using capital to invest in the future (i.e. Gigafactories), it’s my belief that GM is squandering shareholder cash by buying back company stock.
The numbers tell the story: In the five years from 2012 to 2016, GM spent $16.8 billion on stock buybacks. Just to give you some perspective, that cash represents 30 percent of the value of the company, assuming GM’s current market cap of $56 billion. Meanwhile, Tesla is investing $5 billion to build the Gigafactory, which will dramatically lower the price of electric vehicle batteries, and help Tesla produce their Model 3 at scale. (Disclosure: We own shares in Tesla.)
By 2020, Elon Musk says, Tesla will have the ability to produce up to one million electric vehicles per year.
Investors, take note. This is how the story plays out in a disrupted vertical. A young upstart emerges on the scene, on an epic mission and willing to risk it all in an effort to produce an incredible value proposition. Meanwhile, the old guard—in this case GM -- plays protect and defend. And how do they do that? Buybacks.
Buybacks may have inflated the GM’s short-term value by boosting the company’s per share earnings, but the buybacks did nothing to invest in the company’s future. In GM’s 2016 proxy, CEO Marry Barra wrote that the company’s strong performance “enabled us to reinvest in our business...” But “importantly,” she added, “it also enabled us to increase shareholder returns through dividends and our expanded share repurchase program.”
In the same letter, Barra also trumpeted the introduction of the company’s first all-electric vehicle, the Chevrolet Bolt. It’s certainly an impressive vehicle that’s generating positive reviews. But while Barra publicly touts the importance of innovation, renewable energies, and the Bolt—which has its batteries and most of its parts reportedly made in South Korea—I think it’s lip service.
In reality, I don’t see how GM isn’t making a meaningful strategic pivot to electric, especially compared to Tesla. Why?
By March 2017, GM sold a little over 2,000 Bolts, which retail around $37,000. By way of comparison, Tesla has delivered “over 183,000 Model S and X vehicles over the last four years,” according to Electrek. And then there’s the Model 3. Tesla has received over 400,000 customer deposits for its Model 3, which is priced at $35,000.
The future is indeed electric, but if manufacturers refuse to face the music, they may not be around for much longer. Bloomberg New Energy Finance, for instance, predicts that by 2040 the electric vehicle market will hit 41 million cars sold, “representing 35% of new light duty vehicle sales.”
To get there, the auto industry will need to re-tool its manufacturing in order to create a steady source of cheap, reliable lithium-ion batteries. That’s where the Gigafactory comes in. As strategy professor Howard Yu writes: “By producing batteries at a scale far exceeding the current capacity of today’s global supply chain, the Gigafactory is set to drive down the production cost to a level the world has yet to see.”
Now, let’s go back to GM’s buybacks. With $16.8 billion, GM could have built three Gigafactories and given Tesla a run for their money, not to mention providing tens of thousands of jobs, securing a vital source of their supply chain for decades, and, most importantly, helping to usher in the next generation of electric vehicles. But they didn’t.
This is big deal for the investors who can recognize the opportunity. We’ve already seen this story play out in disruptions in other verticals, such as retail and cloud. Here we go again, only this time it’s a revolution that will not only rock the car industry’s world -- it appears destined to turn the energy industry upside down too. As Musk has stated over and over again, Tesla’s “Master Plan” isn’t just to build cars -- it’s to completely disrupt the energy industry with renewables.
As an investor, you don’t get these sorts of opportunities very often, where a wealth pie that measures in the trillions (if you include the energy complex) gets divided up anew. It’s healthy for consumers, and it’s healthy for the economy, when you rip out the old and bring in the new.
This is what makes a disrupted vertical so unimaginably fun to watch and to invest in: We can’t know for sure how it will play out. In the early days of a disrupted vertical, you can’t identify all of the players. Nor can we define the boundaries of a disrupted vertical. Nor do we yet know the rules, which are still evolving: How much of driving will be automated? Will people continue to own cars, or will it be pay-as-you-go? Will human drivers be allowed on roads in 2030?
To be sure, the road to electric is not without its challenges. As Tesla makes clear in its recent 10-k, the company could potentially face future product delays, unanticipated costs, and competition from other automakers. The company's future growth also depends on the willingness of consumers to adopt electric vehicles.
Ultimately, the Gigafactory exemplifies a possible long-term value creation for Tesla. The investment won’t pay off in terms of operating results for a few years, so you likely won’t see an immediate boost to Tesla’s income statement. But, you do see something else happening: Tesla is creating interest for Gigafactories all over the world.
Officials in Denmark and Cyprus, for instance, have openly propositioned Tesla to build their next Gigafactory in their home countries. Portugal, too. As Deutsche Welle, Germany’s international broadcaster reported in December 2016, “Euphoria has nevertheless gripped many Portuguese over a possible Tesla investment. There’s even a Facebook group called “Bring Tesla Gigafactory to Portugal.”
So while Tesla is playing the long game, GM is focused on the short term.
Now, it is true that there were activist investors that were agitating for the buyback in 2015. But those investors represented hedge funds who were looking for a short-term boost in the stock. To be clear, though, there was hardly universal support for the buybacks. Warren Buffet, for instance, publicly advised GM against the buybacks, saying in 2015 that "the idea of doing something now that will get a little pop in the stock" shouldn't be part of the GM plan.
GM also has a massive shareholder base, and the interests of hedge funds who seek to profit from short-term fluctuations in the stock price shouldn't be confused with the thousands of other shareholders (especially pension funds) who are looking for long-term value, and who never specifically asked for the buybacks.
General Motors is saying they’re making a commitment to electric cars, but when I take a deeper look, I believe they have other priorities. GM executives seem more intent on making their quarterly numbers than in leading a revolution.
Just a few years after taking a government bailout and getting booted from the Dow Jones Average after an eighty-year run (1929-2009), GM executives suddenly decided that they should repurchase hordes of stock. In GM’s 10k, the company talks about its commitment to “renewable energy” and how they are working “to drive growth and scale of renewables.”
But in January 2017, the company announced another $5 billion for buybacks. Is that the best way money could be spent?
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