EVs and profitability

Issue #168, Oct 10th, 2022

Electric vehicles (EVs) are not just about cool, green technologies. They need to be profitable for both their makers and users, to be successful in the long term. EVs were not profit-making for businesses and in the eyes of investors a few years back. There was significant investment required. There were supply chain disruptions with little control over critical parts like batteries and their price. But the tide is turning. The inherent advantages of EVs like their modularity and the falling prices of batteries are helping the industry become profitable earlier than expected. The International Energy Agency (IEA) believes EVs will become profitable in future, by looking at the high valuation of EV players.

Ford's plans for example for EVs to become profitable by 2026 are corporate restructuring, extended time for redesigning vehicle models by relying on software updates, and low inventory levels with online ordering. Volkswagen expects EVs to become as profitable as combustion engine-driven vehicles sooner than expected, due to the company's crisis management and resilience. BMW's plans are to use its cylindrical cell format in batteries for up to 30% cost savings. At the same time, for end users like Hertz, EVs are already profitable due to low maintenance cost. Here are some recent updates from a CFO's perspective on EVs and their profitability.

EV maker valuations

Current market valuations for pure-play EV makers are significantly higher than for traditional OEMs relative to the number of vehicles produced. However, most EV manufacturers lag behind in terms of profitability, with many reporting marginal or negative return on total assets. The high valuation of stocks could indicate that pure-play EV makers have comparatively easier access to capital. This allows EV companies to expand production and R&D facilities, thus increasing the overall capital expenditure on electrification. On these grounds, high valuations could reflect that investors believe that EV-focused automakers will capture significant market share, become profitable and provide high financial returns in the future. - International Energy Agency

Ford's restructuring

As EVs account for a growing share of the global car market, Ford in March announced that it would reorganize its business and separate its internal-combustion engine and electric vehicle efforts. By 2026, it expects to build more than 2 million EVs annually — about a third of its total global production — while expanding its operating profit margin. Ford typically redesigns its traditional vehicle models every five to seven years. If it can extend that time by relying on software updates to keep its vehicles fresh, rather than body redesigns, it could save fortunes. It is a part of how Ford expects to improve its operating margin to 10% by 2026.

CEO Farley estimates that the low dealer inventories and online ordering will make up roughly $1,200 to $1,300 of that $2,000 per-vehicle cost disadvantage, while ensuring that Ford’s dealers remain profitable.- CNBC

VW and EV profitability

Volkswagen previously expected to match its profit margins from combustion engine vehicles with EV sales in two to three years. But the carmaker was in a robust financial position to do so sooner, CEO Herbert Diess said, despite a challenging economic environment. Prices may need to increase further this year amid rising raw material costs, procurement chief Murat Aksel said.

"Through good crisis management, we are financially robust and have strengthened our resilience." - Volkswagen CEO Herbert Diess

BMW's cylindrical cell format

In 2022, BMW advised it would be taking its growth “to the next level” with the roll-out of its new BEV architecture, dubbed ‘Neue Klasse’, which will underpin all future models. CEO Oliver Zipse stated that the automaker is targeting 30 per cent cost savings due to the use of the Neue Klasse’s platform’s cylindrical cell format. It will also feature battery chemistry and new cell formats to increase power output. - Bloomberg

GM's - new EV launches instead of profits

General Motors said it will spend more than the $35 billion previously planned through 2025 to speed up launches of new EVs, and noted that investments in technology will take priority over richer profits next year. Later GM also said that it believes an EV inflection point is coming in the U.S. The company plans to get more than its fair share of the new business. - Reuters and Barron's

Profitable EVs for Hertz

On the user side, Hertz has placed some massive EV orders over the past year. The rental car company has ordered 100,000 EVs from Tesla, 65,000 from Polestar and, more recently, 175,000 from GM. Hertz's CEO pointed out that EVs have contributed to some substantial savings for the company in maintenance costs. That's something to be expected given that EVs have far fewer moving parts than their internal combustion engine counterparts and require fewer service visits.

"For Hertz, the maintenance is appreciably lower on electric vehicles. We're seeing it 40-50% lower, just given the nature of the car itself" - Stephen Scherr, Hertz CEO

For EVs to become every CEO and CFO's favourite, they need to become profitable and independent to stand on their own legs. Any support from ESG type of funds due to their 'green' nature will not take them very far. The falling price, coupled with investments in infrastructure and rising awareness among customers will help the EV boat sail in the troubled waters.