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As the automobile industry evolves toward an electric future, incentives will be a big driver of the transition — not just potential tax credits to accelerate demand, but investor behaviour that helps shift automakers’ priorities.
Manufacturers are going to try to ramp up spending on future electric models while maintaining profit at a level acceptable to their shareholders. That will inevitably lead to fewer dollars spent on their gasoline-powered models, and eventually product stagnation in that segment. Businesses can have a dominant market share but still be starved of capital when they’re seen to be in secular decline.
Just look at the list of brick-and-mortar retailers that have traded at distressed valuations despite sizable revenue bases.
Retailer Toys ‘R’ Us Inc is a good example of how secular decline affects investor behaviour. Revenues stagnated as competition grew from e-commerce companies such as Amazon.com Inc. and larger, more diversified stores such as Walmart Inc and Target Corp. Toys ‘R’ Us’s valuation declined, making the stock compelling to opportunistic investors like private-equity firms. But after one of
those investors took control, the focus shifted to cost cutting and taking on debt to milk the company for whatever profit could be harvested before its decline accelerated.
By failing to invest in the future of the business, the decline happened faster than it might have otherwise. The ending might have been the same either way, but profit generation in a declining industry tends to bring about a different kind of investor behaviour than when there’s more hope for the future. We’ve seen this recently with activist investors pushing oil and natural gas companies to focus on near-term profits rather than invest in developing new wells.
That brings us to Ford Motor Co, which reported earnings last week and gave an update on its Ford+ plan that aims to usher the company into its electric future. Out of $40 to $45 billion in capital spending planned between 2020 and 2025, one third is earmarked for electric vehicles [EV’s], a percentage that probably will continue to grow.
Meanwhile, Ford has a company goal of achieving an 8% adjusted EBIT [earnings before interest and taxes] margin in 2023. In other words, they believe they can walk and chew gum at the same time, boosting investment in an electric future while delivering acceptable profit margins to investors. But how?
It starts by shifting production of gasoline-powered vehicles from lower-margin sedans to higher-margin trucks and SUV’s like the revamped Ford Bronco, a shift that’s been underway for some time. That sounds great for now — the billions of dollars needed to develop and produce current models was already spent over the past several years.
—Bloomberg