Investors long ago realized that major automakers such as General Motors (GM -0.07%) were making a significant push to electrify their vehicle lineups. However, at least one big question remained: How long would it take for their massive investments in electric vehicle (EV) production to start returning value for investors?
Let's take a look at how exactly GM plans to turn a profit on its EV lineup, and how quickly that could happen.
The formula
GM's formula for driving EV profits revolves around a few key points: its retail strategy, battery cost reduction, and improved manufacturing efficiency. The combination of those factors will enable GM to generate roughly $50 billion in EV revenues in 2025 with low- to mid-single-digit EBIT profit margins.
While investors are accustomed to seeing lofty targets from management teams, there are a few reasons to think GM's 2025 target is easily within its reach.
GM's EV retail strategy
Consumer interest in EVs in the U.S. has grown by 110% in the past five years and, as EV market share finally hit a significant milestone, there's now enough demand for GM to expand its range of EV offerings. Perhaps even more important, GM can now more effectively target those vehicles at a wider range of price points. GM can now cover more segments and price points with larger EV full-size trucks, Hummer, and luxury Cadillac options, which roll out soon, in addition to its mainstream entry level Bolt EV.
GM aims to manufacture an EV in one-third of the high-interest vehicle segments that represent nearly 70% of the industry volume by 2025. That strategic focus should position it to rapidly expand its revenue.
Image source: General Motors Investor Presentation.
General Motors' EV retail strategy goes beyond its traditional routes and includes a recent agreement to sell up to 175,000 electric vehicles to Hertz Global Holdings (HTZ -4.78%) over the next five years.
Investors need to understand the difference between these commercial sales to companies like Hertz, and its deals in decades past. Previously, GM would use fleet sales to fill out its production capacity with cheaper vehicles, selling them at high volumes and low margins to commercial customers. That's no longer the case and GM has turned its commercial fleet sales into a much healthier business than it's been stereotyped in the past.
As GM expands its EV offerings and sells them at prices in the most important market ranges, and as its commercial business becomes more valuable, it sets the stage for its EV lineup to reach profitability on schedule. But there's another critical task it will need to perform if it's to achieve its 2025 profit target.
Bringing battery costs lower
There are a number of factors going into GM's battery cost reduction strategy, including its Wallace Batter Cell Innovation Center. It will improve speed-to-market for new batteries and enable GM to develop and manufacture prototypes in one location. It's one component of GM's goal to reduce battery costs by up to 60% by mid-decade.
More broadly, GM boasts the largest battery systems validation lab in North America, and has over 2,000 granted and pending EV-battery-related patents. The Detroit automaker also has raw material agreements with several companies to support an annual production capacity of 1 million EVs in North America by 2025. Deals like that have become increasingly important to auto industry players.
GM's battery development prowess in broad terms is a good thing, but the centerpiece that will drive GM's EV profitability is Ultium -- the shared modular battery system that combines batteries, motors, and software that will drive a wide range of its EV lineup.
As GM improves Ultium's scale -- and as it benefits from chemistry improvements and supply chain efficiencies -- the company's battery costs should fall drastically. In fact, GM expects it will be able to reduce cell costs for the Bolt EV by 40% through Ultium.
There is a massive scale opportunity here, as GM estimates it will use around 19 battery and motor combinations for EVs compared to roughly the 550 engine/transmission combinations it uses currently.
The finish line, or a new beginning?
Many investors have anticipated that automakers' EV strategies would be full of buzzwords and empty promises. But while GM has certainly given us plenty of buzzwords, EVs will almost certainly be contributing to its profits far sooner than some had previously predicted. GM's 2025 target of EBIT margins for its EVs in the low- to mid-single-digit range is not only attainable, it should just be the beginning of a much more profitable long-term story.
