Last year, GM's (NYSE:GM) stock had a huge 16% pop, while Ford (NYSE:F) lagged far behind with just a 1.6% gain. In this week's Industry Focus: Energy episode of 2018, analysts Sarah Priestley and John Rosevear explain why that is and what both companies are doing now to plan for the future of a rapidly changing industry.

Find out how a shift in Ford's management might be just what the company needed to turn its stock around, why you shouldn't write off Ford's deal with Domino's (NYSE:DPZ) as pure buzz, how GM is making big leaps into autonomous vehicle production and what it could mean for the world in the next few years, and more.

A full transcript follows the video.

This video was recorded on Jan. 11, 2018.

Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, the 11th of January, and today we're going to be discussing two American auto giants, GM and Ford. I'm your host, Sarah Priestley, and joining me on Skype is Motley Fool contributor and senior auto specialist, John Rosevear. John, thank you for joining me today! How are you?

John Rosevear: I'm well! Thank you for having me! How are you today?

Priestley: I'm good. Do you have any outstanding New Year's resolutions?

Rosevear: Oh, good question. More consistent gym attendance. I had a bunch of little injuries last year and it got a little sloppy about going to the gym. No big injuries, but aches and pains. So, I'm hoping to get back this year.

Priestley: At the rate people were queuing for the treadmills last night at my gym, I think everybody has the same idea. Including me. I'm on that bandwagon, too. As I said, we're going to be looking at General Motors and Ford. Taking advantage of the new year to recap 2017 for these two American titans, and look ahead for this year as both continue to pivot toward becoming mobility companies away from just automakers. This means embracing new tech in Silicon Valley on things like connected vehicles and driverless cars and big data. 

Let's just start with some background on the auto industry. Generally, 2017 was a good time to be a car buyer, that's for sure. Dealers were offering some great discounts, and last year saw the continued trend of consumers upgrading from cars to SUVs, trucks, and crossovers, partly driven by low fuel cost, partly by improved energy efficiency of these cars. So, automakers started the year out strong after record sales in 2016, but by March 2017, car sales declined, and so began the whisperings of peak auto sales, a phrase auto investors will know all too well. It's essentially the idea that the car market has plateaued. John, for all the predictions of the apocalypse, it never really came to fruition. What do you make of all the rumors and speculation?

Rosevear: Like the economy, auto sales are cyclical. They go up when people and businesses are feeling flush -- businesses buy a lot of vehicles, especially from Ford and GM, fleet trucks and so forth. And they shrink when the economy is tight. People and businesses say, "We'll drive the old ones another year," because you can do that. So, there is a cycle here. This has been a long, good cycle coming out of the bottom of 2008 and 2009. There are a bunch of techie reasons to think we're past the peak of the cycle. Sedan sales are way down. Both Ford and GM were hit by that last year, and we'll see that again this year. But, the good news is, pickup sales are still strong. Those are big drivers of profits for both Ford and GM. And, as you said, the buyers that are there are migrating toward SUVs, especially the new generation of what we call crossover SUVs, which are SUV-like vehicles built on car architecture, so they drive more like cars. These have become wildly popular. People are opting for crossovers as family vehicles and personal vehicles over traditional sedans in ever-rising numbers, to the point where some automakers are having trouble selling sedans. Ford's Fusion was down over 20% last year, U.S. sales. This is a good trend, because generally speaking, a mid-sized five-passenger crossover is more profitable for an automaker than a mid-sized five-passenger sedan that it's replacing. So, that's been good news. GM's U.S. sales were down a little bit last year, but its profits in North America, which is mostly the U.S., actually rose, because it lost a lot of sedan sales, and it made up most of them with its brand-new line of crossovers, which are very profitable and popular products. Sales have been up for them. 

So, that's kind of the story of 2017. And we're only a few days until 2018, but so far, there's no reason to expect those kinds of trends aren't going to continue. As long as the economy stays reasonably healthy, car sales will be at a fairly high level. Buyers are opting for products that generate better profit margins, at least for Ford and GM, over small cars, sedans. Little compact cars have become a tough sell for some automakers in particular. And those are lower profit products compared to the compact SUV that that family bought instead.

Priestley: OK, so we're seeing a transition play out that began a couple of years ago with this move toward SUVs and crossovers, light trucks and trucks. The big three reported in January modest declines in annual sales, but given that 2016 was this bumper year, it wasn't this precipitous decline that a lot of the commentators would have us believe. But, I suspect that 2018 will see continued rumors, as we saw before. GM and Ford, two of the big Detroit 3, as they're often called, which are GM, Ford, and Fiat Chrysler. Last year, GM dominated the market with a little over 19% market share. Ford came in second with 15%. And actually, Toyota was a close third with almost 14%. So, we have a tale of two halves here. Last 12 months, GM's stock is up 16%, Ford lags behind at just 1.6%. Let's start with Ford, John, the only U.S. automaker to post year over year sales gains last month, but profitability-wise, they're not doing so well. What were the highlights, lowlights, of 2017 for them?

Rosevear: Last January, last year, it'll be a year ago from next week, Ford's management came out and said, "Here's our guidance for 2017. Our profits are going to be down this year. We see some costs rising. We're spending a lot on future technology, future products, so forth. We don't have a lot of new products coming out in 2017. We're at that point in the cycle. But profits will go up in 2018." That's what they said. Sure enough, first quarter, profits were down significantly because of some big costs. It was more or less as they had predicted. But, I think Ford's board of directors after that thought there were some reasons to change the direction of the company, let's put it that way. I just pulled up, a little while ago, a chart showing, if you were looking for March of 2017, the one-year performance of Ford and GM's stock, GM is up 20% and Ford is down. I think it would have been reasonable for Ford's board to be having that conversation at their March meeting, "Wait a minute, we just had the two most profitable years, 2015 and 2016, in Ford's century-plus history, and our stock is down? What's going on? We're not doing a good job of telling the story of how these investments that we're making that are going to cut into our profits in 2017, how these investments are going to pay off." 

I think that was a big part of why they sacked Mark Fields -- or rather, ushered him into early retirement. I like Mark Fields a lot personally, so I want to be kind to him in how we talk about this. He was ushered into early retirement and replaced by Jim Hackett, former Steelcase CEO. He had been working with Ford for a couple of years running a subsidiary that was doing all this future tech, future mobility exploration experimentation. He was brought in by Bill Ford, the executive chairman and great-grandson of Henry Ford, as this deep thinker for this company. He's very much a deep thinker. He's a reader, he's a futurist, he talks to the kind of people who see where technology is going and understand technological disruption and so forth. He is a big thinker around this, and I think Ford wanted him to come in and set and communicate the vision for how Ford becomes a vehicle and mobility company, which had been the catchphrase they've been using for a couple years under Fields. How does Ford become provider of personal mobility, rather than seller of F-150s and SUVs and Mustangs? And the answer is, it has to be both, probably for many decades to come. But, Jim's thing is to tell the story and lead Ford into the future. He immediately revamped Ford's management structure and essentially split what might have been a chief operating officer job between several different very senior Ford veterans. They're actually running the company and making the decisions about where the cup holders should be, and which factory should build what vehicle and all that stuff.

Priestley: That's a smart move, I think.

Rosevear: Because Jim Hackett is not an auto industry veteran. He came out of a very different industry. But he's a leader and a deep thinker, and he's someone who understands technological disruption. And he's who Bill Ford and the board thought should lead Ford right now. Later in the year, he began communicating his plan. And we can see signs of it. More aggressive movement toward developing electric vehicles, more spending on self-driving related things, new mobility visions. He's talked about it more very recently just this past week at CES. I think it's still fuzzy, and I think that's why Ford's stock performance hasn't yet been great. I think Wall Street doesn't quite get it yet, but he'll get them there, I think. 

That was really the big story for Ford in 2017, this big change from a CEO who had been a Ford lifer, who was a car guy, who understood the nuts and bolts of the business in great detail, who had come up the ranks, with this voice, who is very much oriented on where is the company going and into the future, and has a good understanding of what Ford's role might be in 2040, in a world where vehicles drive themselves, and they all talk to each other and so forth, and how Ford might thrive in that kind of world.

Priestley: Absolutely. And as you rightly pointed out, Mark Fields, in January, gave a talk about the new products and how this money is going to be spent on self-driving systems, electric drivetrains. But as he said, he didn't contextualize why this was important. And in an era where you have Tesla, which continues to be unprofitable, but continues to be a phenomenal stock for people, people are really buying the story, and he just couldn't sell the story. So, I think you're exactly right. As soon as Hackett starts to sell people on the vision that he's creating, I think we'll start seeing improvement on the stock. But, last year, we did see some kind of gimmicky moves. They partnered with Domino's Pizza on self-driving pizza delivery. But then more seriously, the deal with Lyft to test Ford's self-driving vehicles might actually come to something.

Rosevear: Don't underestimate the Domino's deal. No, really. This is how Ford works. It sounds silly, and they made it look silly -- they dressed up the car with crazy graphics and did it in a college town, Ann Arbor, Michigan. But this is how Ford works. They're taking a very, very careful look at the tiny details of how people react to this. And it's things like, should the car pull in your driveway or stopped at the curb? How should the pizza come out of the car? Should the car tell you how to take it out, or should it take it out on this lever? All this kind of stuff. Ford is very deep thinking around commercial vehicles. It's why they've had the success they've had with commercial vehicles. It's why the work trucks and police cars and things like that you see, so many of them are Fords, because Ford has worked for this business for decades. And now, I think, they're thinking, the pizza thing is funny, it's silly, it made for some jokey headlines, but they're thinking seriously about, "What would a self-driving pizza delivery vehicle look like? Because we're going to try to sell 10,000 of them to Domino's in four years." Or, 50,000 of them. They're thinking about this in terms of building a business around this in a few years. And it sounds funny now, but this is how the research goes. It's a real deal.

Priestley: I think they recently announced at CES a partnership with Postmates, which underscores exactly what you're saying. They're talking about making these self-driving deliveries to really free up a lot of small and medium sized business owners, and hopefully escalate that up to an Amazon -worth level of delivery. So, huge potential.

Rosevear: Yeah. If they go from these jokey tests to, seven years from now, selling 500,000 self-driving delivery vans to companies like Amazon and UPS all over the world, it's not going to be a joke anymore. It won't be half a million, but maybe 100,000, and it's not a joke anymore, that's a good business. And that's where they're going with this. Other companies, when we talk about GM, are focusing on personal mobility, robot versions of Uber or Lyft in cities. Ford would like to wade into that market, certainly, but it's also thinking of its traditional strength -- commercial vehicles, fleet operations, delivery vans, work trucks, things like that, how do we bring this technology to those markets and retain and win new customers using our existing strengths? It's smart for them.

Priestley: One thing that they're doing that I think it's incredibly smart is, they're partnered with Autonomic to develop the Ford Transportation Mobility Cloud, which is connecting cities and cars together. This potentially has huge consequences, the biggest one being, a lot of these strategies and plans that people are envisioning are relying on this connected network of cars with cities and people and everything else. There has to be a platform, there has to be a singular platform that people are able to do that on. So, if Ford does have a first mover advantage on setting up that kind of technology, that could be incredibly lucrative for them in the next 20 or 30 years.

Rosevear: And even going back before Jim Hackett, you can see how Ford has been thinking about, how would we piece together a soup to nuts mobility offering, and go to a mayor of a city and say, "Adopt our system?" They have a bike sharing thing, they have crowd-sourced shuttle busses that look at where the bikes go in a city, and then they run these shuttle vans at a considerably lower cost than an Uber or a taxi on these routes. And it's all small scale right now. But they bought these businesses a couple of years ago, and you can see where they're starting to think about -- they have this app now called FordPass, which doesn't do a whole lot, but maybe seven years from now, FordPass will get you a bike, a ride on one of these Chariot shuttle buses, a Lyft, maybe, a car for the day, parking, and it's all done on FordPass, and it's all Ford branded. This seems to be where they're going. And if they can bring this cloud technology to the city, then it all operates, and that's a Ford city.

Priestley: Absolutely. General Motors, which most people recognize for car brands that such as Buick, Cadillac, Chevrolet and GMC, had a much better year. I think they got much better press. How we use summarize 2017 for GM, John?

Rosevear: I would summarize it by starting out a year ago, again, in January when they gave their guidance. I was actually at this press conference in Detroit. They surprised the room. They came out and gave very upbeat guidance for 2017. And there was a lot of peak auto talk, at least for this cycle, going on at that moment. We knew that Ford was going to guide to a lower year. And GM came out and said, "We think things are going to be pretty good in 2017, more or less like 2016." And we said, "Wait a minute, how's that going to happen?" And they said, "We have these new crossovers." They had completely renewed their whole line of crossovers across all four of those brands. The new products are very up-to-date, very competitive and were engineered to be more profitable, which is another way of saying a little less expensive to build. [laughs] And, with more appealing options that maybe took the top trend levels upscale, and that's where a lot of money is made on products like this. And they said, "Car sales are going to get clobbered. We think we can hold our ground on pickups, even though Ford has a newer pickup. We can roughly hold our ground on pickups, and we think the crossovers are going to make up, at least in terms of profit, a lot of the difference." And everybody said, "Really? We don't buy this." And the story of 2017 is, that's basically what happened. [laughs] So, don't sleep on Mary Barra, she's on things. She's a step ahead of a lot of people out there. That was one of the big stories for GM in 2017. Another huge one is that they gave up on trying to make money in Europe and sold the whole thing, lock stock and barrel, to Peugeot.

Priestley: I think that's probably a smart move. Years of not being able to generate a decent operating profit probably convinced them. Didn't they take a writedown of, was it $5 billion for the sale?

Rosevear: Yeah, there was a $5.4 billion one-time charge for costs, and of course, GM takes a step down, a couple of steps down, in the ranks of the world's biggest selling automakers, because they gave up 1.2 million vehicle sales per year, give or take, by selling this operation. But they had been trying since the late 1990s to make their European operations sustainably profitable. And they had almost gotten there, and then Brexit happened. And the exchange rates went wonky on them, and it became very hard, and I think Barra and people like Dan Ammann, GM's president who was an investment banker before he joined GM, and thinks very much in returns on investment, I think they said, this isn't worth it anymore, we'll sell it. And Peugeot was willing to buy it. And they more or less gave it to Peugeot. When new balance all the numbers and so forth, GM almost paid Peugeot to take it. Almost, not quite but almost. But, I think GM was glad to say, "We'll take a big one-time charge for this and then we'll just look ahead."

Priestley: And this is also, they can concentrate much more on the North American market, and a lot of the growth initiatives that they're starting there, isn't that right?

Rosevear: North America and China. They actually sell more vehicles in China now than they do in North America. But, nowadays, GM senior management doesn't think in terms of total sales, which was GM's thing for years -- we need market share, we need market share. Now, they think in terms of return on invested capital. As an investor -- I own stock in GM -- I love that. They want returns on invested capital ideally over 20%. They're making good margins in China and North America, and we'll get into more detail on that in a moment. Those are the places where they want to spend their money. They think that -- some of the countries in South America have had recessions, places like Brazil and so forth. As those countries recover, they think they'll make good margins in Latin America. So, they're continuing to invest there as well. And then, even looking within North America, they're ratcheting down investments in sedans. They recently renewed most of their sedans. They think those can go a couple of generations without completely being reengineered from the ground up. So, they won't have to spend a ton of money to have good sedan offerings in the market. They'll just update them over time. They just spent a lot of money renewing their crossovers, and those are huge sellers. Up next are the trucks. GM has new pickup trucks coming, and we'll talk about that when we talk about the year ahead. But, the idea here to take away is, at GM, it's all about investing the money where they think it'll make the biggest returns.

Priestley: So, they had a great year, they had record sales for pickups and crossovers, and they had an all-time record for sales of electric vehicles, too. As you touched on, what do you expect coming up in 2018? I know they have a self-driving car initiative that you're interested in.

Rosevear: GM has emerged as one of the leaders in the race to self-driving vehicles. That was one of the most interesting stories of 2017. GM bought, I guess it was about two years ago, Cruise Automation, which is a San Francisco start-up that had some really innovative work going on around self-driving software and vehicle systems, and put them to work, basically set them up as a GM subsidiary, give them a bunch of money to hire people, and put them to work on building self-driving vehicles. Meanwhile, they launched the Chevrolet Bolt, this little electric car, which they described when it came out as, "This is a platform." And they didn't quite explain that. They were inviting people to read between the lines. And you look at the Bolt. When it first came out, a lot of people said, "It's kind of squat and upright, the interior is surprisingly roomy, but the trim is really plain, how is this ever going to compete with Tesla? GM blew it, they don't know how to build an electric car that can compete with Tesla. Ha-ha-ha." And there was a whole lot of that from the tech press. 

Well, it turns out that the self-driving taxi of the future looks a lot like the Chevy Bolt, and that was the idea from the beginning. This is their platform for building electric vehicles. They did a presentation late in the year where they explained that, "Our self-driving system will improve as it collectively gets more miles on the road. It improves faster when we accumulate those miles in cities, so we're running cars around San Francisco and we're going to spread this to other cities as well." Test cars, they're expanding the test fleet. The more cars in the test fleet, the more challenging the environments they're running in, the faster the system learns. They said, "We will mass produce it and bring it to market as soon as we think it's safer than a human driver." And then they said, "At our current rate of progress, that'll be 2019."

Priestley: Which is incredible.

Rosevear: And the world said, "Wait a minute, what?" Because unlike a lot of the companies that are working on self-driving software, or even automakers that are talking about designing a self-driving car in the future, GM already has the self-driving hardware more or less in production. These self-driving cars will be the Chevy Bolts, they'll be built on the same assembly line in Ryan Township, Michigan that's building the Bolts right now. It's all set. In fact, in September, Kyle Vogt, who's CEO of the Cruise Automation subsidiary, said, "We have the mass producible self-driving Bolt. In terms of the hardware, we have something that could be put into mass production right now." They're still refining it. GM bought a maker of LIDAR sensors shortly after that announcement, so one assumes those new LIDAR sensors will become part of this mass producible Bolt and its next iteration. But, they're going to keep iterating on that until the software brain is ready to go, and then they start rolling out the assembly line. And the idea, GM has said, is that these are going to be used for automated self-driving ride hailing in dense urban environments, starting initially in America and then possibly elsewhere as well. What isn't clear is whether they're going to do this with Lyft, which GM owns a stake in, or if they're going to set up their own business to do it. And it seems almost like they're leaning toward the latter, which would be really interesting.

Priestley: They could have a real first-mover advantage, which I'm sure is why they're doing this. They also announced last year that they're going to launch 20 all electric vehicles in the next six years. And they've just generally had an incredible year. Mary Barra did a fantastic job. And as you said, incredibly shareholder-friendly. I think they've returned, between 2016 to 2017, $7 billion to investors. So, there's a lot of reasons for investors to be happy. Sadly, that's all we have time for. John, thank you so much for joining me on the show and bringing, as you always do, all of your knowledge.

Rosevear: Thank you!

Priestley: That's it from us today. If you would like to get in touch, please feel free to email us at industryfocus@fool.com or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For John, I'm Sarah Priestley. Thanks for listening and Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Rosevear owns shares of Amazon, Ford, and General Motors. Sarah Priestley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Ford, and Tesla. The Motley Fool has a disclosure policy.