With strong gains in car sales that spurred post-election optimism in the U.S., many investors have questioned whether auto companies would benefit from the shift away from combustion engines. New consumer research from 24/7 Wall St. shows that General Motors Co. has a more than 1 in 3 chance of outperforming either Tesla Inc. or Volkswagen AG, the two carmakers that stand to benefit most from accelerating sales of electric vehicles.
Traditional carmakers, who have lagged the growth of electric car sales over the past several years, may soon be catching up. Many governments around the world have announced ambitious goals to electrify transportation, from banning internal combustion engines to equipping cities with electric-powered ride-hailing services, increasingly relying on on-demand electric buses and trucks.
The shifting trends will certainly benefit traditional carmakers. But their success could be uneven, as GM and Toyota Motor Corp. would have to fight out against smaller, nimbler competitors that have little experience in building electric cars and moving toward autonomy.
Tesla is one such organization. The California-based company, which is valued at about $56 billion, is currently considered the most innovative carmaker in the world, thanks to its lithium-ion battery technology and its reputation for pioneering innovation in the auto industry. At the same time, it has significantly lost money and had to rely on loan guarantees from the government to keep its factories open. As electric car sales have boomed, Tesla has struggled to produce enough cars to satisfy its customers.
Tesla is expected to generate less than $5 billion in revenues this year. The company lost $1.7 billion last year and reported negative gross margins of 31 percent in the first quarter of this year. The Model 3, Tesla’s most affordable vehicle, went on sale in early 2017 at a cost of $35,000 before federal tax credits. That means the vehicle only generates cash flow for Tesla of about $500 million a year. For GM, on the other hand, the reality is much rosier. The U.S. automaker earned about $9 billion in operating income last year.
The company has been expanding rapidly, with plans to double its global production in the next decade. The Detroit-based automaker is opening four new factories and says that it will start production at a new factory in Shanghai next year. To better absorb more production, the company plans to invest heavily in artificial intelligence. GM announced this month that it will spend an additional $1 billion on autonomous vehicles over the next four years.
The company also invested $500 million in Cruise Automation, the San Francisco-based company that develops driverless cars.
Toyota Motor is another major player in the auto industry that is expanding in an attempt to reduce its dependence on the now-declining sales of cars with internal combustion engines. The company plans to double its sales in emerging markets, a move that will benefit from a massive upgrade to its line of Sai hybrid-electric cars. The company also plans to build three new factories in Indonesia, India and Brazil. Japan-based Toyota is on track to significantly reduce its 2017 emissions losses.
While the market can be volatile, some developments can have a cumulative effect. GM’s market capitalization has risen by more than $19 billion in the past year. Tesla is down by roughly $1 billion, yet its valuation has grown by more than $20 billion over the same period. Toyota, despite its recent foray into the autonomous vehicle market, has yet to record any market-value gains in the past year.
The growing share of electric cars could play a huge role in the industry, especially in high-growth markets. But electric cars might not be the only game in town. While nearly 30 percent of Americans polled said they intend to buy an electric car over the next few years, only 22 percent plan to buy one in the next 10 years. In this environment, the modern car industry is starting to look a lot like the PC industry of the 1980s and 1990s. When PC sales slowed, the companies that made PCs – PC makers – lost share to competitors such as Apple. And the old console and personal computer manufacturers – Nintendo and Sony – experienced similarly hard times as demand fell.
In the not-too-distant future, carmakers could face the same fate.