GM bullish on 2024 EV margin improvement
Automaker expects to reap Ultium ramp-up benefits next year
Detroit legacy automaker GM has finally revealed the extent of the hike in manufacturing costs on its EVs — which has had the market wary of the firm’s future e-mobility competitiveness — several weeks after reaching a tentative labour agreement with labour union the UAW on new terms that include its battery production.
“The labour contracts at Ultium Cells will increase our cell costs by about $3/kWh,” CEO Mary Barra tells analysts.
In June, GM said it planned for an annual battery capacity output of 160GWh in North America by 2025. The company’s recent EV headwinds have made management reluctant to reaffirm earlier targets, but if this battery capacity remains the plan, GM is now committed to an additional $480mn/yr more than at current terms on battery production alone.
The company, however, is developing a plan to offset these and other UAW deal costs through any avenue available to it, with Barra saying that “as we look to next year, we are finalising our 2024 budget that will fully offset the incremental cost of the contract”.
“Offsetting higher labour costs and meeting our financial targets will require us to continue reducing capital intensity of the business,” the CEO says.
This will include a reduction in certain salaries, marketing, and other overhead costs. But Barra says that GM has also succeeded in baking in some more favourable agreements into its EV supply chain.
In the second half of 2023, GM has backed off some of its production targets for its first generation of EVs, instead urging patience while it ramps up its vertically integrated battery production business. The hope has been that, once the Ultium platform can reach scale, then the company will approach profitability on its EVs.
“I am disappointed with our Ultium-based EV production in 2023. As you know, we have had difficulties with battery module assembly,” Barra concedes. But management is confident that GM is approaching the point of payoff from the Ultium ramp.
“In 2024, we expect significantly higher Ultium EV production and significantly improved EV margins,” Barra says, citing GM’s vertically integrated domestic cell production as a driver of lower costs as Ultium scales.
“If you look back, we have spent years preparing the company for this transformation and our long-term EV profitability and margin goals remain intact despite the recent headwinds,” Barra says. “Because we started this journey earlier, we are much further along than the market is giving us credit for,” she adds.
The street does, though, seem to have appreciated GM’s update, reflected in a 9.5pc jump in the company’s share price. Admittedly, this vote of investor confidence has also been driven by GM’s announcement of a $10bn share buyback and an increased dividend.
And while the company is anticipating improved margins on its EVs in 2024, Goldman Sachs analyst Mark Delaney is worried if “selling more EV units [would] mean that EVs are a dollar headwind year-on-year” on the company’s earnings. “We actually believe that the EV losses would be lower next year-over-year,” GM CFO Paul Jacobson says.
And GM remains confident in a strong market outlook which it says will reward its improved margin Ultium platform once it reaches scale. “EV sales in the US are on track to surpass 1mn units for the first time this year, which is about 7pc of the total market,” says Barra.
“And there is really no reason that EV demand will not be higher in the years ahead. Consideration is rising; the policy environment is favourable; public charging infrastructure is growing; and customer choice is expanding.”