What happened
Shares of automotive behemoth General Motors (GM -0.17%) tumbled in Thursday trading, down 5.3% as of 2 p.m. ET.
You can probably put much of the blame for that on a Wells Fargo analyst.
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So what
In a note out Thursday morning, Wells Fargo analyst Colin Langan blasted General Motors -- and Ford (F 0.66%), too -- and double-downgraded both stocks from overweight (i.e., buy) to underweight (i.e., sell). Langan's position is that established gasoline-powered automakers are going to face serious cost issues as they go all-in on converting themselves into electric vehicle (EV) companies.
Rising input costs for the batteries that power EVs have pushed up the cost of building an electric vehicle from $105 per kilowatt-hour of battery capacity to $168 per kilowatt-hour, warns Langan in the note covered by StreetInsider.com. In the case of Ford, this works out to an increase of $4,800 worth of "unplanned costs" for each Mach-E electric SUV, and an extra $8,500 when building a Ford F-150 Lightning electric pickup. And GM's situation is even worse. By Langan's estimation, it's going to cost GM $12,600 more than it expected to build each electric Silverado EV pickup.
Now what
Assume Langan has his math right. What will this mean for General Motors stock?
Well, first, foremost, and most obviously, $12,600 is a bigger number than $8,500. That implies that GM's electric trucks are going to get larger sticker-price hikes than Ford's electric trucks, or that GM's trucks will less be profitable for it -- or both. Higher prices are likely to cut into unit sales -- that's Economics 101 -- giving us a second reason to worry that GM's future may be less profitable than its past. This means that the consensus Wall Street forecast that GM will deliver 15% long-term profit growth may turn out to be overoptimistic.
And arguably worst of all, this isn't a problem that Ford and GM can avoid, because recently updated fuel efficiency regulations from the Environmental Protection Agency require automakers to boost the average number of miles per gallon (MPG) achieved by the vehicles they sell. The easiest way to do that is by building more cars and trucks that don't burn any gas at all.
Long story short, Ford and GM are now essentially required by law to increase their electric vehicle production to meet the tightening emissions standards, no matter how much those vehicles cost to manufacture.
