Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector
of the stock market every day. Today is Thursday, January 17th, and we're talking about cars.
I'm your host, Nick Sciple, and today I'm joined by Motley Fool senior auto analyst
John Rosevear via Skype. How are you doing, John? John Rosevear: I'm doing great, Nick! How are you?
Sciple: I'm doing well! I'm really excited about this show today! We've had a lot of
news coming out of the North American International Auto Show in Detroit, which I believe is still going on.
But first, I want to look back at 2018.
We got some numbers out about the top-selling vehicle models from Car and Driver. Out of
the top 25 selling vehicles in North America, the top three were pickup trucks -- the Ford F-Series
with 900,000 units sold blowing out of the water the next-closest performer, which was
the Chevy Silverado at 585,000 units sold. Another story we see in these numbers is the
death of the sedan. Out of the top 25 selling models, the first sedan came in at No. 7,
and the only U.S. sedan in the top 25 was the Ford Fusion, and that car is getting retired
this year. John, what are you seeing out of these model numbers? What trends can we pull out of that?
Rosevear: The death of the sedan is overstating it.
There will always be people who want sedans. But, certainly, there are fewer of those people
than there were eight, 10 years ago. This is a trend that has been going on for a while,
and it actually predates the big drop in oil prices that we saw earlier in the decade.
It's crossovers, which is an SUV-shaped vehicle designed on a sedan-style architecture so
it's unibody rather than truck-based. So, instead of riding like a truck, it rides like
a big car, it gets fuel economy more like a car, and so forth.
We started to see these emerge 10, 15 years ago. Some people will point to Subaru and say,
"Subaru has been doing crossovers all along." But, the current explorer when it
came out moved away from the old pickup truck base to a unibody base. It actually shared
an architecture with the now-defunct Ford Taurus sedan.
People love these things. They offer the ride that they're used to. In a sedan, they don't
ride like trucks, they don't bounce like crazy. They're designed for heavy cargo, so they
don't have to have the stiff springs and so forth. They get somewhat better fuel economy.
But you're sitting higher up, you feel safer. They often have all-wheel drive. If you live
in snow country, or places where it rains a lot, or someplace where the roads are rough,
those are all advantages. It's got more room for your stuff in back. Your kids have more
elbow room than they would if you stuffed three of them in the back of a midsize sedan.
People love them, they're eating them up. Crossover sales have boomed.
This isn't just a U.S. thing. Chinese customers love crossovers. They're selling huge over there.
Even in Europe, where gasoline is heavily taxed and people have forever chosen smaller vehicles,
well, smaller crossovers are picking up. Smaller hatchbacks and sedans and what
they call MPVs in Europe, which is like a mini mini van. Folks who remember the Ford C-Max,
it's that sort of vehicle, where it looks like a cross between a small station
wagon and a minivan, that kind of thing. Sales of those things are falling down as more people
in Europe, now, even choose crossovers. This is a global trend.
I don't think it's going to completely eliminate sedans. But, given that vehicle per vehicle,
you can generally get higher margins on a crossover than a sedan, especially right now,
where the demand is, a lot of automakers are moving to crossovers. That's what the customers
want right now. Sciple: I don't blame them. We've got a lot of stuff.
I want room for my stuff. Can you talk for a minute about how dominant the F-Series
is when it comes to trucks? The No. 1 performing seller last year. As I mentioned, they blew
the next-closest vehicle out of the water by over 300,000 units. How dominant is that
F-Series truck in that market? Rosevear: Of course it's dominant, it's been
king for years. One thing I'll point out is that really, when we talk about GM, we have
to count the Chevy Silverado and the GMC Sierra together. The Sierra is the Silverado's upscale sibling.
They're all built on the same architecture. They're all built in the same factory. Together,
they cover most of the same basis that Ford does with the F-150 and the F-Series Super
Duty models in that you can option up a Super Duty to almost $100,000 now. [laughs]
And, if you say, "Oh, wow, that's Sierra Denali money," sure, and those vehicles compete.
GM sold almost 220,000 Sierras last year. When you add those in, say 805 for GM. So,
the gap isn't as drastic. Yes, Ford had a clear win. Ford seems to know its truck customers
better than the guys in Detroit do. They've had this going for a long time. They have
tremendous brand loyalty. They spend a lot of money keeping the F-Series products up
to date. They have lots of thoughtful features that the other guys are traditionally scrambling
to catch up on. GM pickups have their loyalists. RAM pickups
have their loyalists. For a long time, the last generation RAM was, for a pickup,
an unusually smooth-riding vehicle. People would go on test drives and be like, "Oh, this is nice,"
because it had a different rear suspension design. So, RAM has its loyalists, too.
They all have something to offer. But Ford has been able to capture a dominant share in this market
for 40 years now or something like that. Maybe longer. Going back to the early 1970s,
they've been the big player here. And they will protect that. And that drives
a lot of their bottom line. Sciple: Yeah. It's a huge, huge model for them.
Let's talk about what we heard out of Ford in the past few weeks, whether it's in
the Auto Show in Detroit or otherwise. The big vehicle release, you mentioned the Explorer
going to a crossover model. We're hearing about the 2020 Explorer, it was just unveiled.
What are we seeing out of this vehicle? What's special about it? Why is it a big deal for the company?
Rosevear: The big deal for the company is
that they sold lots and lots and lots and lots of the last generation Explorers.
But, it got tired. It got old. This is what happens. Other rivals, who are also very good at this game,
bring out their new stuff. The Explorer was losing ground in the last year or two,
frankly, to the Toyota Highlander, which is a more recent, fresher product that Toyota
lavished with attention and features and brought out at Toyota's usual value price. It was
time for something new. It was maybe a little past time for something new.
But, something new they have come out with. At least on paper, it's a winner. It looks great.
It's a little bigger than the outgoing model. Not so big as to be cumbersome to park,
like it won't fit in your garage or anything. But, you can get a little more cargo in back,
the rear seat passengers have a little more leg room. The interior is a little nicer.
The whole thing is a little lighter, a little nimbler, gets better fuel economy. It's built
on a brand-new architecture that starts as rear wheel drive, although I predict that
most Explorers will be ordered in all-wheel drive configuration, just as they always have been.
That allows a little different packaging, a little different stance, a little less weight
up front, so a little more balance. They're promising that this new Explorer will be better
off-road, in part because of its rear wheel drive architecture, than the outgoing model was.
They're bringing you more of the brawny SUV-ness without giving up the car-like handling
and features of the old Explorer. It's another case where Ford does market research that's,
in some instances, deeper than just about anybody. It's another case where they
really got to know what the winning product would look like, and they've done something
that they think is going to be a very strong entry. I'm sure it's going to sell like hotcakes.
It looks good, it's everything people want on paper. They delivered.
There's also a hybrid, if you're concerned about fuel economy. The hybrid has an EPA-estimated
500-mile range, [laughs] which is amazing. There's also a high-performance Explorer,
as Ford delivers on its promise to bring out more performance vehicles because they can
ask higher prices and get fatter margins on them, and also because people want them.
It's 400 horsepower. I think it's the engine that's standard in the Explorer's upscale cousin,
the Lincoln Aviator, which is also coming out soon. It promises a top speed over
140 miles an hour. That'll be an interesting product. It'll be interesting to see how well that does.
They did this with the Edge not long ago, and that has been selling well in early days,
the Edge ST. So, we'll see how the Explorer does. It's an interesting idea.
Sciple: You have to give the people what they want. I mentioned the top three sellers last
year were trucks. The next three were SUVs and crossovers. It's what the people are buying,
let's give them what they want. Rosevear: One more note about that, I haven't
looked at the list from Car and Driver specifically, but I bet those top three crossovers were
all compact. Of note, Ford has a new Escape coming later this year. That's going to fight
with vehicles like the Honda CRV and Toyota RAV4 and the Nissan Rogue, which has sold
in huge numbers. It's been a big success for them. That's the white-hot category right there.
Almost replacing mid-sized sedans, the compact crossovers.
Sciple: To follow through on that, No. 4 was the Toyota RAV4; No. 5 is the Nissan Rogue;
No. 6, the Honda CRV. You nailed it right on the head. Let's talk about the other big
news that we've heard out of Ford, and that's this alliance with Volkswagen. They're saying
that they're going to share manufacturing resources for medium-sized pickup trucks and
VW's city vans. They're going to share resources. What do you have to say about this deal? What's
interesting about it? Rosevear: It's an interesting deal. I think
VW did well out of this. They're getting Ford to basically build them a badge-engineered
version of the Ranger and some commercial vans that they can sell in markets where they're
strong and Ford is not in those things. That's a clear win for VW dealers in those regions, certainly.
It may be a win for Ford, as well. We don't know the numbers. We don't know how
much VW is paying for these privileges and how much the vehicles will sell for. VW is,
for now, returning the favor with their little City Vans.
I think what's more interesting is looking a couple of steps further down the road.
Automakers have done deals like this for years and years. You need a pickup to sell in South America,
we make tons of pickups, we'll make you some pickups, that kind of thing. Money changes hands.
This is not revolutionary. What's revolutionary is that VW and Ford are saying, "This isn't a merger.
There's going to be no equity ownership changing hands. Nobody's taking control of either.
But, we're exploring other areas to cooperate, as well." That may include self-driving
vehicles and electric vehicles. VW is very far along in developing a modular
architecture for electric vehicles. They're going to start rolling them out very soon, actually.
We may see one before the end of the year. We'll see more over the next few years.
They're ramping up a whole supply chain, which is why it takes time. Ford is at least
not visibly quite as far along in being ready to roll out a slew of electric vehicles
all over the world. VW has been very loud about developments. There are two ways that automakers
go when talking about the future. Either they tell you in great detail about their plans,
or they say nothing and it just shows up. [laughs] It's not clear where Ford fits in here.
But, it does appear that VW is substantially further along in rolling out mass-market electric
vehicles at scale. Ford, via a company called Argo AI, in which
it has a hefty stake -- Argo AI is essentially the software department of its self-driving
vehicle venture, outsourced sort of, because it has a hefty stake in Argo AI. But,
part of the premise with Argo AI is that it may have other automaker investors, clients,
in time. I think it's very possible that we could see Audi, which is a subsidiary of VW, investing
in Argo AI, for instance. It's possible that Ford is further along. A lot of the horse race
in autonomous vehicles is very opaque. People only tell you certain things.
Most people agree Waymo is in the lead, GM is not too far behind, and then there are a whole
bunch of other players who may or may not be close.
Argo AI has recently appeared to be fairly far along. VW, perhaps, less so.
That may be something where VW says, "We can gain 18, 24, 30 months in getting self-driving
Audis out there if we jump in with Ford here." I don't know the specifics, but I'm guessing
something like that has been discussed at high levels in VW, and that's part of their
motivation for being in this deal. Ford might be, "Hey, if we can borrow some of VW's architecture
or supply chain or battery packs or something, we might be able to get electric vehicles
out in places like China and Europe, where demand is likely to be strong for them in
the next few years, more quickly than we might otherwise." I think there's a lot of that
kind of thinking going on in here. In thinking about this deal, looking past
the pickup truck and commercial vans, which are straightforward and things that automakers
have done back and forth for a long time, to the deeper technology stuff that everybody
is spending a fortune on. I'm sure this is what Jim Hackett is thinking. Why do we all
have to spend a zillion dollars to develop self-driving technology from scratch?
Why can't we team up? And VW is receptive to those talks because, perhaps, that's where they
feel they're behind some folks. Sciple: Right. This isn't the first one of
these partnerships on EVs and AVs that we've seen. In the past year, Honda and GM tied up,
with Honda making a substantial investment in Cruise, I believe it was $2.75 billion.
Rosevear: Also, on EVs, Honda is going to buy battery packs from GM, they said. GM is
spending a lot of money to gear up to produce its own what they're calling the next generation
electric vehicles with a battery pack that is smaller, lighter, more energy-dense than
what they're using in, for instance, the Chevy Bolt. Honda has signed up to buy some of those,
which gives GM added scale to drive down costs with its suppliers and gives Honda one fewer
thing they have to engineer from scratch when they roll out electric vehicles. That kind
of partnership can work out well if the companies are on the same page and work well together.
Sciple: Yeah, I think this is definitely going to be a trend we're going to see continue
to play out because the R&D expense and the infrastructure expense to really scale up
on these new categories of vehicles is substantial. Let's talk about what else we've heard from Ford.
We got their preliminary 2018 results and we got some 2019 guidance out of them.
One thing that I noticed is, their adjusted operating profit margin is about half of GM's at 4.4%.
They had some sales declines in China that may have hurt their performance.
What are you seeing out of those preliminary results in 2018? What are we looking at going into
2019 based on their guidance? Rosevear: Ford has a lot of work to do.
2018 was the year where things snowballed on Ford. Rising commodity costs hurt them. This is
the tariffs on steel and aluminum. They rolled out a new model Fiesta, which is their best
seller in Europe. It sold well, but rivals were aggressive on pricing, and they weren't
quite able to get the margins on it that they'd hoped for, because they had to not push as
hard as they would have liked on pricing. Meanwhile, they're also spending a lot of
money in Europe in 2018 because they're now launching the new Focus, which is their other
big-selling model in Europe, very important. That's a cost.
Sales in China fell off a cliff. They've got a dramatic retooling ahead of them there.
Fortunately, they know that, and they've gotten started on it. The problem with Ford in China
seems to be that the people running the operation did not have the deep knowledge of the China
market that they should have. They were global executives who were rotated into this for
a few years and then rotated to something else. Ford has fixed that. They hired Anning Chen,
who was the CEO of Chinese automaker Chery. He's come in and brought a senior team,
many of whom are Chinese, and some of whom are not Chinese but have spent many years
in the country, are fluent in the language, and more importantly, in the nuances of consumer
tastes in the auto market. It seems to be a much more sensitively-tuned operation emerging
now than Ford has ever had in China. They've promised a slew of new products between
now and 2025. They've got a couple of them out already. The new Focus is arriving in China.
The last generation Focus did very well for Ford in China several years ago,
but it became old news in China. One of the problems in China is, because there are so
many competitors there, every automaker you've ever heard of does business in China,
and then there are a slew of domestic Chinese automakers. For a consumer, that means there's
always something new. It means, if you let the Focus hang around for six or seven years,
it's old news. [laughs] It's ancient history. Why'd you buy that old car when you could have
had something much newer and nicer with the latest technology that's a little lighter
or is styled differently? Ford has to be able to play at that pace. GM has been able to
play at that pace for a while. They need to tailor their products better for China and
have more of them and freshen them more frequently. There were deeper problems with distribution
and their dealer network that they've worked through. A lot of the pain in 2018 in China
was due to those problems. Ford's wholesale shipments in China were way down because dealers
were selling off the excess inventory they'd built up. They were selling it cheap, which
hurt them, and Ford was helping them out there some, I think. So, China was a big mess.
In the U.S., the F-Series continues to do very well and deliver good results.
They're getting good prices for it, they're getting good margins for it. Of course sedan sales
have fallen way off. Because the Explorer and Escape were at end-of-life, they weren't
getting the premium pricing and margins and sales numbers relative to things like,
as you mentioned, the Toyota Highlander, it wasn't quite eating the Explorer's lunch, but it
was nibbling at the salad. [laughs] So, it's time for a new Explorer and a new Escape.
When they get those things in place and launched and are past the launch costs later this year
into next year, assuming the market holds up, you'll see noticeable improvement just
from that alone. And then they're bringing more SUVs to market
to feel things out here and in China, and to some extent, in Europe. There are a whole
bunch of new SUVs coming. It's almost like they split the Escape in half for the next generation.
There will be a new Escape, which will be sleeker and more tailored to urban sensibilities.
Then, there will be a similarly-sized, perhaps sharing the architecture, small, rowdy
off-roader. This is not the Bronco, it's one size down from the Bronco. They name they've
thrown around for it is Maverick, though I understand that's not definite. There's also
the Bronco itself coming, which is more Explorer-sized as I've heard it, although I don't know any
more details on the Bronco than anybody else does. It's one of the most asked about upcoming
Fords that I've seen in quite a while. There's a lot of interest in it.
The Ranger is now out and has begun shipping, the mid-size pickup. There's another SUV coming
that's a high-performance electric SUV. That's coming next year. Ford promises 300-mile range
and acceleration that will most certainly get your attention. It sounds almost like
they're aiming to sell you Ludicrous mode for a lot less than Tesla sells it. It's clearly
on their minds. Here's the $40,000 Model X that zooms like crazy, something like that.
That would be classic Ford, really. You introduce something new and cutting edge, we're going
to bring it to everybody. That's the ancient Ford playbook and it still works.
Sciple: You mentioned Tesla. One thing I want to call out is that Ford is signaling they're
going to release an electric and hybrid F-Series truck and the Transit van, which you might
see if a contractor comes to work on your home, that will be what they bring all their
equipment in. We've heard Tesla talking about doing a pickup truck. Ford's coming out with
the F-Series, which is the standard when it comes to pickup trucks in the U.S. and electric
model in the near future. Rosevear: Well, let's back up a little bit.
This was a passing comment from Jim Farley, Ford's Global Markets Chief, more or less
second in command at Ford. In a presentation to analysts yesterday, he said, "We've got
hybrid and full battery electric F-150 and Transit coming." That was pretty much all
he said. We know Ford has a hybrid F-150 coming. It's coming next year. It's a no-brainer that
they would do a hybrid Transit. The Transit is the world's best-selling commercial van.
It's not just the thing your plumber drives in the United States. They sell tons of these
in Europe in several different sizes. They sell them in China. It's one thing that has
done well for them in China. These things get sold all over the world. It's the world's
best-selling commercial van. That's something else where Ford makes a lot
of money and they're going to defend it. One way they're going to defend it is by having
hybrid and, in time, full battery electric. What they've said about the idea of a full
electric F-150 is really not much more than "We'll have it when we think our customers
are ready to buy it." Former Ford CEO Mark Fields said to me in an aside a few years ago
when I was talking to him, he said, "We've got to lead our customers, especially our
truck customers, to electrification. It's going to be a process. We have this whole
roadmap sketched out to get there, but these are not people who are going to be Tesla early adopters.
These are folks who buy their trucks, they like their trucks, they get the newest
and most up to date truck. We had to do some education around the aluminum body panels,
because that was a big change. It worked for us, we did well. We're confident that we can
get them to accept and even prefer electric trucks once we show them there are clear advantages.
But we have to do that incrementally over time."
What they're doing with electrification generally, now, the hybrid F-150 will have a bunch of
stuff that goes way beyond fuel efficiency. One of the things they've already talked up is,
you'll have the ability to use it as a generator. So, when you're going to the job site,
you don't have to throw the generator in the back anymore because you can just plug
into the hybrid's battery and use that to power your tools or whatever for a few hours.
They're talking up advantages like that. What I've said for a while is, when you can,
in your head, hear one of those Ford ads with Denis Leary giving the snarky talk about an
electric F-150 and how it'll pull your stumps out, haul more of your junk and that stuff,
that's what's coming. When you hear that on Sunday afternoon during a football game,
you'll know that electric vehicles are now mass-market. [laughs] That's going to be it. Ford will
only do it when they think they have the right product and when they think people are ready
to buy it at quantity. And when they do it, it'll be like, OK, America is going electric now.
I don't know that it's going to be next year
or the year after. It's not going to be on the timeline that the Tesla fans might like.
I can say with high confidence based on Ford's track record and what I know about the extensive
research they do on trucks, when it arrives, it'll be good. But I couldn't tell you whether
that's 2021 or 2026 at this point. They may not know for sure, either.
Sciple: I want to call out, before we move on to GM, Ford is really turning over their
lineup, they have some good vehicles that are coming down the line. But they're undergoing
some restructuring in Europe. That's going to include some plant closures and layoffs.
GM abandoned their European operations back in 2017. Ford is having some issues in Europe, as well,
retiring some vehicles. We're expecting that we're going to see a reorg in South America, as well.
Something to keep in mind when we're paying attention to that business.
Let's move on to GM and talk about what they're doing.
Rosevear: I actually want to hit Ford, one more thing we didn't talk about. Their 2019
guidance is, "We think everything's going to improve. We don't know how much of it's
going to improve in 2019." Usually, when a company comes out with guidance, they say,
"We expect adjusted earnings per share to be between x and y." They didn't do any of that.
They didn't give any numbers. They said, "We have a lot of things in motion, but Brexit
could knock us off track, more tariffs could knock us off track, or they could work out
in ways that help us. We don't know that yet, so we're not telling you anything right now
in terms of specific numbers. We're telling you what we're doing and that we're confident
it's going to yield improvements." On the one hand, that's very frustrating.
But on the other hand, that's fair. They're giving you the real story.
Sciple: Right. You've got geopolitical events with Brexit. Sales declined in China for the
first time since 1990, so we're seeing some macroeconomic turnover, as well. Something
to keep in mind with these guys. I do think Ford has some interesting things coming down
the pipeline to open up some opportunities for them.
Now, let's talk about what's going on with GM. GM is, just like Ford, coming out with
a new SUV, the Cadillac XT6. It's a three-row crossover on the same platform as the Chevy Traverse
and the Buick Enclave. What I thought was interesting about this car is, it doesn't
have GM's Super Cruise included. I think we've only seen that in one vehicle so far.
You'd think, with these new models coming out, they're really going to push out the Super Cruise.
What's your takeaway on Super Cruise not being in this vehicle?
Rosevear: Give them six months. [laughs] They've promised that it's going to roll out across
the Cadillac lineup over the next 18 months or something, and eventually will be available
on lots of different GM vehicles around the world. I think they just weren't ready to
talk it up yet. It will not surprise me if there's a press event in September and they
show you the Super Cruise XT6. Interestingly, this is going to compete, not really so much
with the Explorer, but with the Lincoln Aviator, which is the Explorer's upscale sibling.
Ford showed that last year. Interesting comparison. The Aviator has a lot more power and more
dramatically different styling. It'll be interesting to see how they fare against one another.
Sciple: It's going after that crossover SUV market that people are eating up right now.
The other thing we saw released from Cadillac that was really interesting to me is some
renderings for a new electric crossover. We don't know the name of it yet but it's really
a sleek-looking vehicle. It looks like it would fit in that Tesla model. Do we have
any idea about a timeline for that? Or anything about that car beyond these renderings that
we've seen so far? Rosevear: We've known for a while that
GM is working on a brand-new electric vehicle architecture that promises more range at lower
cost than what they used for the Bolt, which at this point is a few years old, if you go
back to where they first started developing it in conjunction with their partner, LG Chem.
This next generation, the battery pack has many improvements. It's lower, it's smaller,
it's more energy-dense. It will be more amenable to fast recharging. There are other improvements
to the architecture and so forth that will allow a wide variety of vehicles to be built
off this. They're ramping up, as VW is doing, as all of the big automakers are doing,
they're ramping up their supply line and so forth. They have promised a whole bunch by 2023.
We don't know for sure when the first one will arrive.
What we've learned here is that the first one is going to be a Cadillac crossover.
2021-ish is what Steve Carlisle, Cadillac president, said the other day. They don't want to be
pinned to that because there are a lot of balls in the air that are about just ramping
the supply line. People talk about, "We need electric vehicles now!" For instance,
there has not been enough lithium coming out of the ground to make the batteries for electric
vehicles in the quantities people are hoping for. All of this has to ramp. Mining operations
have to ramp. Cell factories have to ramp. And the suppliers themselves. We have to
make more electric motors. We have to set up facilities to assemble cells into battery packs.
We have to decide which kinds of cells work best in vehicles long-term. That kind
of testing has been happening. We can't just flip a switch and build five million a year.
This is all ramping up slowly. The reason GM can't pin themselves to a date
on this thing yet is probably because there are moving parts out of their control.
They anticipate that things are going to happen by a certain deadline. When they say,
"We'll have a bunch by 2023," they may have most of them out by 2022, or they may scrape to
get the last couple out in December so that they can meet what they promised.
There has to be, at this point, with a lot of the automakers, vagueness around high-volume
electric vehicle plans. That will start to change a lot over the next year when we have
more visibility into when things will arrive. I think we're going to hear a lot more specifics
at next year's auto shows. Sciple: A plug for our show next week,
I'm going to have Tim Beyers on, we're going to be talking about the battery market, all those
things you mentioned. Lithium has to come out of the ground, all those sorts of things.
Let's talk about the numbers GM released. They recently raised their guidance for 2018 up
above the high end of their range. They gave surprisingly upbeat EPS guidance for
2019 in the range of $6.50 to $7.00. The average analyst estimate was below $6.00.
Looking back to 2018 and looking forward to 2019, we're really seeing that GM is very bullish
on their operations. What are you seeing in those releases GM has sent out?
Rosevear: GM feels that it's done a lot of the work that some other companies are now doing.
They do want to reduce their manufacturing footprint a little bit in the United States.
We know about that. They announced plant closures and so forth in November. Some of that can
best be understood as, they're opening negotiations with the UAW. Every four years, the UAW renews
its contracts with the three Detroit automakers. That's coming up this summer. So, there's a lot of
dancing going around that. We don't know exactly what's going to happen there.
The reasonable assumption is that the union folks will get some of what they want and
GM will get some plants closed. That's how the negotiations generally shake out.
They did do well. They're coming in at the top end of their guidance range for 2018,
they've said, or maybe a bit above the top end of their guidance range. They give this
nice range, $6.50 to $7.00 per share for 2019. A few things are happening there.
They were spending a lot of money to revamp their whole line of crossovers up and down. Most of those
vehicles are out now. The XT6 will be one of the last of that cycle. The Chevys and
the Buicks are selling, and they're selling around the world -- well, they're selling
in the U.S. and China, anyway, and they're selling well. They're delivering good profits.
GM has been riding on those. GM has new pickups out that'll deliver better profits.
Next step is big truck-based SUVs. This is things like the Suburban and the Escalade,
the GMC Yukon, Chevy Tahoe. Those are not the ginormous sellers that they were 20 years ago,
but they still sell in big numbers. GM owns that market. They have something like
a 70% share of big truck-based SUVs in the United States. They're very profitable.
They have all-new versions coming built on their all-new truck architecture. After that,
there will be, presumably, all-new midsize pickups as well. They have more products coming out
that will come in higher prices and deliver better margins once they're fully launched
than the vehicles they replaced. They've also got a slew of new products,
I don't know what they all are yet, coming to China this year. They promised something like
20 new or revamped products in China in 2019. Whatever happens to the Chinese new car market
as a whole, GM will be relatively well-positioned. If sales go down 30%, sales go down 30%.
But of the remaining sales, GM will be well positioned to get their share and then some.
I want to say one last thing about GM. In terms of earnings per share guidance, we also
have to remember, GM has been buying back a lot of shares, so there are fewer shares
to divide the earnings among. Sciple: One thing I want to call out about
GM from a profit point of view is what's going on with GM Financial. It seems like it's really
starting to turn a corner and start pumping some cash into GM as opposed to reinvesting
their cash into that arm of the business. Can you explain to our listeners what GM Financial
does and what opportunities it gets for the business from a profit point of view?
Rosevear: It's a bank. When you hear on TV those ads where an automaker is offering you
low-cost financing as an alternative to cash-back, that's usually coming from what we call their
captive finance arms. These are banks, wholly owned by the automakers, that both provide
consumer loans and leasing contracts as well as financing to dealers, what we call floor
plan financing, which is, they buy 300 cars from GM and they can finance them for the
three or four months it might take to turn them over, or something like that.
Ford Credit has been a substantial source of cash for Ford over the last several years.
GM, as part of its breakdown in the last decade, sold off its longtime captive financing unit.
It spun it off, General Motors Acceptance Corporation, which is now Ally Financial.
What they did after their bankruptcy was they bought basically a subprime lender, a subprime
auto lender and retooled it. The infrastructure and the people and so forth -- they've moved
away from subprime. The loan portfolio is now pretty high quality, thankfully. [laughs]
We worry about some of that stuff, but it's fine. They've greatly expanded operations in China.
Now, when you expand a bank, you have to put up capital because they lend against some
multiple of the actual capital they have. Like Ford, they've been putting GM Financial's
profits more or less back into the business to expand the lending base. Now, they're at
the point where they think they can take out cash, which means more cash flow goes into
GM proper and can be used for things like developing electric vehicles. Or, alternatively,
for paying dividends and buying back stock. Sciple: Right. In the fourth quarter of 2018,
they instituted the first annual dividend at GM. We mentioned in the first half of the show,
talking about Ford, about how it takes a lot of cash to develop these new emerging
technologies like EVs and autonomous vehicles. So, having that switch they can flip to bring
some more cash into the business is really valuable from that point of view.
Before we go away, let's talk about what's going on with Cruise. We're still expecting
Cruise to roll out in 2019? We don't know where it's going to be. Do we have any ideas
about when it might launch this year and what geographies that might be launched in?
Rosevear: The smart money is betting that San Francisco will be the first city. I mean,
they're already all over the place in San Francisco doing their testing. They might
as well just start there. They have tried to institute a presence in New York.
They actually have a facility not far from where GM's New York Cadillac headquarters was,
it's down toward Tribeca at the lower end of the West Village. They've been going around and
around with politicians over whether they can actually operate these things.
Of course, in New York, you get a whole lot of the "We don't need killer robot cars on the roads, etc, etc."
So, there's going to have to be some education there. Whereas in San Francisco,
they're used to these things at this point, so it makes sense to just roll it out there.
That said, I don't know for sure what GM's plans are. I also wouldn't be surprised to
see them in Detroit, frankly, start operating in Detroit. It's GM's home. If we're going
to have the auto business here, and self-driving cars are the latest thing, let's make sure
that visitors to Detroit can experience this. It would make a lot of sense.
As for whether it'll happen in 2019, what I know is that they made a lot of improvements in 2018.
They released an in-car video and invited us to compare it to the one they did
a year earlier. Sure enough, the car drives a whole lot better and handles a lot of situations better.
Is it 100% ready? No, not quite. They're honest about that. Dan Ammann, who was GM's president,
has moved to take over Cruise. He's saying they're on track, but the gating
factor is safety, and they'll release it when it's ready. They think it's 2019, they hope
it's 2019, they're not going to rush it. If it turns out to be 2020, that's fine,
they want it to be safe. Sciple: It's going to be an interesting thing
to follow. As you said earlier in the show, Cruise is viewed to be No. 2 behind Waymo
when it comes to autonomous vehicle development. GM is really putting a lot of chips on the
board when it comes to EVs and autonomous vehicles. They totally got rid of their hybrids
this year, they're really pushing hard into EVs. It'll be interesting to see how things
play out. Cruise is already a significant part of GM's business. It's valued at $15 billion.
That's about a third of the market cap of the whole company, so it's a significant
portion of the company. Definitely something to watch and definitely something we'll keep
following when we have you on, John.
Rosevear: Alright.
Sciple: Thanks so much for coming on! For folks that have any questions or want to
reach out to us on Twitter, you can find out information in the description. Also, check out Stock Up,
it's our weekly newsletter where we share some of the best stuff from around fool.com.
I'll also drop a link to that in the description of the show.
As always, people on the program may own companies discussed on the show, and The Motley Fool
may have formal recommendations for or against the stocks discussed, so don't buy or sell
anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass.
For John Rosevear, I'm Nick Sciple. Thanks for listening and Fool on!
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