If anyone tells you making cars is easy, turn around and leave. Prep yourself for getting into the world of earnings and EVs, as things get weird. All that and more on The Morning Shift for Wednesday, May 1, 2019.
1st Gear: GM Has Two Legs to Stand On and They’re Both Wobbling
GM’s big business is in trucks and strong sales in the world’s largest car market, China. With that in mind, today’s news that GM’s profits are down comes as no surprise. Here’s a good summary of everything from a Bloomberg wire report, pointing to China’s auto market still slouching away and pickup sales struggling as GM is still somehow rolling out its new generation of high-profit-margin vehicles:
General Motors Co. shares slumped the most in over a month as earnings fell on the prolonged introduction of new pickups and a slowdown in China’s auto market.
Net revenue fell to $34.9 billion in the first quarter and was more than a half-billion below what analysts were projecting. Adjusted earnings of $1.41 a share topped estimates entirely because of the higher valuation of stakes in Lyft Inc., which listed its stock in March, and French carmaker Peugeot SA, which has revived GM’s German castoff brand, Opel.
GM has been losing market share in North America as it’s killed off slower-selling sedans, including the Chevrolet Cruze, and taken months to roll out redesigned trucks. While higher- margin crew cab pickups are performing well as they trickle into showrooms, Fiat Chrysler Automobiles NV’s Ram has pulled ahead on the sales charts. In China, a broader industry slump forced the automaker to slash production.
For a slightly more detailed analysis, you can look to the Financial Times, which more specifically pinpoints the issues here in the U.S.:
In its North American heartland, adjusted earnings for the first three months fell to $1.9bn from $2.2bn a year as planned downtime in the production of its SUVs was partly offset by rising sales of high-margin pick-up trucks.
The group is in the middle of a turnround plan that will see it save $6bn and shutter four US plants, one in Canada and two more internationally, in order to reduce its reliance on traditional passenger cars, a declining segment as car buyers switch to high-riding SUVs.
The idea of “general” motors is the founding principle of GM, and staking America on pretty much only gas-guzzling pickups is looking like it’s getting the company trashed.
2nd Gear: Mercedes Will Start Making AMGs in China
The rest of today’s news is all about more drama with sales and earnings and electric vehicles, so let’s take a quick digression. That is, let’s enter another episode of the What The Fuck Even Is Mercedes-AMG Now files.
Today we look at the diminutive Mercedes-AMG A35, which will be soon made in China, as Automotive News China reports:
Daimler will begin building Mercedes-AMG cars in China when the A 35 long-wheelbase sedan runs off the assembly line in Beijing toward year end
The A 35 L 4MATIC will be built at Daimler’s Chinese joint venture with BAIC. Its wheelbase is stretched by 60 mm (2.4 inches). It is powered by a 302-hp, 2.0-liter four-cylinder turbocharged engine sourced from Daimler’s plant in Koelleda, Germany, and can accelerate from 0 to 100 kph (62 mph) in 4.9 seconds.
I always thought the appeal of AMG was getting not just a higher-power Mercedes, but one hand-built in the sleepy town of Affalterbach. But I also thought AMGs were all about rear-wheel drive and big burnouts, but it looks like that is changing, too.
3rd Gear: Things Get Weird with Tesla’s Other Source of Income
Alright, back to the hard stuff. One of the weirder facets of the car world is in emissions credits. The principle of the way we regulate auto emissions these days is that we fine car companies that pollute more than is allowed by our emissions standards. But we also allow extra dirty carmakers to buy credits from extra clean ones as if they were its own.
This is big business for Tesla, as it’s all-electric, and it’s a challenge for companies like Fiat-Chrysler, which makes its money selling giant Ram trucks and whatnot.
This is why Tesla and FCA are in a business tie-up over European emissions standards and emissions credits to comply with them.
In any case, things got weird with Tesla’s recent earnings call, as the company didn’t exactly make the profits from its emissions credits operation clear, as noted in a Bloomberg wire report:
A Tesla Inc. analyst is disappointed Elon Musk neglected to mention a major source of revenue last quarter was the sale of certain regulatory credits the company discloses days after its initial earnings reports.
While Musk noted in his April 24 letter to shareholders that Tesla sold $15.4 million in zero-emission vehicle, or ZEV, regulatory credits in the first quarter, the company didn’t notify investors of $200.6 million in non-ZEV credit sales until posting its 10-Q filing Monday.
When taking the non-ZEV credit sales into account, Tesla’s fundamental automotive margins were “worse than first believed,” Toni Sacconaghi, a Bernstein analyst, wrote in a report Tuesday. “We are disappointed at Tesla’s decision to not report or discuss non-ZEV credits explicitly on last week’s earnings call, given their material impact on this quarter’s automotive gross
margins,” Sacconaghi said.
The report goes on to note that it’s not even clear where Tesla’s credit money could be coming from, as that FCA deal isn’t exactly transparent:
It’s unclear whether the deal with Fiat Chrysler is already yielding non-ZEV regulatory credit sales. When an analyst asked for more detail on Tesla’s arrangement with the carmaker during last week’s earnings call, Musk demurred.
“It’s a confidential deal with FCA,” he said. “We agreed with FCA not to comment on it publicly, so we must abide by that.”
As it stands now, Tesla shares went down with the news and are down about 28 percent this year, per Bloomberg.
4th Gear: Let’s Review the Tesla Panasonic Relationship and Oh, This Isn’t Good Is It
Remember how Tesla partnered up with Panasonic a few years ago? It was going to be a revolution for the new carmaker as well as the old battery company, the two working together on the first Gigafactory.
Well, now Tesla is on Gigafactory 3 and Panasonic isn’t involved. Why is that? Read this great report titled “Sparks fly: Inside the strained Tesla-Panasonic relationship” in the Nikkei Asian Review to get a full picture. I’ll just nab a tiny section to show you what I mean:
Panasonic’s management grew uneasy about having its car battery business — crucial to its plan to reinvent itself — depend on a man who, while considered a visionary, is also erratic and prone to making outrageous statements. In the tweet that landed him in trouble with U.S. regulators, Musk said he had secured funding for a privatization plan at $420 a share — a number that is also used as slang for marijuana. A senior Panasonic executive described Musk’s announcement, which could have triggered a class-action lawsuit if the plan had been pursued, as “unimaginable.” The next month, the same Panasonic executive was stunned to watch Musk taking a deep drag on a marijuana cigarette during a webcast.
Again, read the whole report, it’s an interesting example of how a clear deal on paper can grow strained once the actual humans involved start getting into a bit of a culture clash.
5th Gear: It’s More than Just Policy Holding U.S. EV Dev Back; We Don’t Have the Lithium
To round out this very EV day of news, let’s take in another perspective on batteries, once taking it in light of American and Chinese development. “U.S. Has Battery Problem in Race for Electric Car Supremacy,” Bloomberg writes in a wire report today, putting things in as stark a light as possible. Basically, we need lithium for batteries and lithium is something we don’t have as good access to as China does. Per the report:
The U.S. push to challenge China’s dominance in the production and sale of electric vehicles has at least one weak link: Most of the raw materials needed to make the batteries are dug elsewhere.
Both Chinese and U.S.-based companies have invested heavily in lithium mining projects in Chile, Australia and Argentina, some of the world’s top producing nations. But unlike the U.S., Chinese companies have also invested at home, with the Asian nation producing almost eight times more lithium domestically than the U.S.
The report goes on to note that not only are we currently behind, it has been decades since we’ve built a lithium refining facility Stateside. This balance of resource access doesn’t look particularly good for the U.S. side of things in the future, and I’m starting to feel like the EV world is looking like a game of Settlers of Catan.
Reverse: Senna and Ratzenberger
Neutral: What’s GM’s Move?
Let’s say that the ghost of Kafka visits you in the night and transforms you into a top executive at the General. You roll out of your pillowy bed, you make your way down the stairs of your respectable mansion, you roll in to work in your corporate car. What do you bring up with Barra and all of your new coworkers today? What’s the action plan?