General Motors Co (GM.N) and Ford Motor Co (F.N) are expected to post massive profits for 2022 next week, fueled by premium-priced pickup trucks and sports utility vehicles (SUVs).
Now, the Detroit rivals must assure investors that 2022’s profit formula can continue working when costs for EV batteries are surging, high interest rates are reducing consumer purchasing power, and Tesla Inc TSLA.O is cutting prices.
Already there are signs the Detroit automakers are cutting spending to offset competitive and economic pressure. GM has suspended for now plans to set up a fourth EV battery factory in North America.
Ford is holding talks with German unions to slash thousands of jobs in its European operations and potentially sell a German vehicle assembly factory. In October, it stopped funding autonomous vehicle affiliate Argo AI.
GM and Ford both depend on sales of SUVs and pickup trucks in the United States for most of their global profits. In 2023, both automakers plan to ratchet up sales of much less profitable electric vehicles in North America and other markets.
The risk to the Detroit automakers’ profitability would be an obstacle in the best of times. But now, GM and Ford must take account of forecasts for a downturn, or even a recession, in the U.S. economy.
EV battery raw material costs are surging, but U.S. EV market leader Tesla is slashing prices on its best-selling Model Y and Model 3 vehicles by as much as 20%. The Model Y SUV competes with GM’s Cadillac Lyriq EV, Ford’s Mustang Mach-E, and with combustion SUVs the Detroit automakers sell.
Morgan Stanley estimated surging prices added an average of $3 billion per year to Ford’s pre-tax bottom line and was equal to more than 200% of the improvement in the company’s pre-tax profits for 2022.
GM, the No. 1 U.S. automaker by sales in 2022, said increasing prices added $2.1 billion to pre-tax profits in the third quarter compared to the same quarter of the prior year – equivalent to about 50% of pre-tax profits for the period overall.
Buy Crypto NowThe company has told investors it will use $35 billion for electric and automated vehicles between 2020 and 2025. Ford has put its estimated EV investments at $50 billion through 2026.
“If we are entering a downturn,” Morgan Stanley analyst Adam Jonas said, “what steps can they take to keep investing and remain strong?”
