These are troubling times for legacy automakers trying to make the transition to building electric cars. In the US, Ford and General Motors have both pulled back on their plans to manufacture electric pickup trucks. Now, Mercedes Benz said during its Q3 earnings call this week it is finding the market for electric cars to be “brutal,” as a flood of inexpensive Chinese EVs has come ashore in Europe. Price cuts from Tesla have also roiled the market further, putting additional financial pressure on automakers.
Reuters reports Mercedes remains committed to its EV targets, but is looking longingly at the substantial profits it makes on its combustion engine vehicles. Harold Wilhelm, CFO at Mercedes, suggested the company may lean more heavily on sales of conventional cars to improve its earnings, at least until some of the uncertainty in the electric cars marketplace is resolved. With some legacy manufacturers selling electric cars at or below the price of conventional cars despite their higher production costs, “this is a pretty brutal space,” he said.
Mercedes described the market environment today as “subdued,” but Wilhelm said “we are beyond the worst” when it comes to inflation and energy pricing. Despite that happy talk, he added, “I can hardly imagine the current status quo is fully sustainable for everybody.”
Mercedes shares have sunk to their lowest level in almost a year, but the pain is being felt in many boardrooms as well. Carmakers from Ford to Tesla have been slashing prices throughout the year in markets from the United States to China to stoke demand, but Mercedes has resisted following suit.
The company on Thursday reported a 12.4% adjusted return on sales in its cars division in the third quarter. Also this week, shares in Porsche, which surged after the company went public recently, have fallen back to earth and are hovering at or near their lowest price ever.
CFO Lutz Meschke told the press the company has largely overcome the supply chain issues that plagued the industry during Covid and has trimmed inventories. He attributed the company’s financial woes to higher interest rates and the drain on resources at the transition to electric cars moves forward. “Governments increased interest rates heavily. That creates a situation where customers are quite reluctant (to invest in) a new product,” Meschke said.
What Meschke didn’t say but everyone understands is that the Chinese government heavily subsidizes domestic manufacturers of electric vehicles. The European Union has recently taken note of this and begun examining ways of leveling the playing field for its manufacturers. It could impose new tariffs on electric cars imported from China, but that tactic comes with its own set of issues.
The truth is China has at least a ten-year lead on the supply chains needed to manufacture electric cars. The world looked the other way while China focused on electric cars and now everyone else is struggling to catch up. Some are bound to drop out of the race.
Volvo Loves Electric Cars
One company that isn’t worried is Volvo, which plans to sell only electric cars by 2030. CEO Jim Rowan, who previously worked for Dyson, told The Guardian this week his company had not “got involved in price discounting. Most of that indiscipline has been in the mass market sector.” Volvo reported operating profits of 4.5 billion Swedish krona (£330m) between July and September, more than double its profit during the same period last year.
Rowan said the newly introduced EX30 would be as profitable as the company’s gasoline- and diesel-powered cars. Volvo said in September it will stop making diesel cars early next year. Volvo had a 9% profit margin on its electric cars in the period, and the EX30 will increase that to between 15% and 20%, Rowan said. “The EX30 gets us to price parity,” Rowan said. “That’s really a big pivot point for us. We’ll be one of the first that gets to BEV/ICE parity.”
Of course, the EX30 is one of those electric cars manufactured exclusively in China — so far — which makes it part of the flood of Chinese EVs headed to Europe, except it has a name that people recognize. Such is the power of branding.
Ford Trims Its Electric Cars Initiative
Ford also had a Q3 earnings call this week. According to CNBC, the company acknowledged the price premium for electric cars and trucks is resulting in lower sales of EVs than anticipated. As a result, the company said it is postponing about $12 billion in planned spending on new EV manufacturing capacity. While sales of EVs are growing, they aren’t growing as quickly as Ford hoped.
Ford executives emphasized that the company isn’t cutting back its spending on future electric vehicle models. But it now plans to ramp up its EV manufacturing capacity, and the spending needed to grow that capacity, more gradually than previously planned. “We’re not moving away from our second generation [EV] products,” CFO John Lawler said in a media briefing Thursday. “We are, though, looking at the pace of capacity that we’re putting in place. We are going to push out some of that investment.”
Lawler said that Ford will postpone about $12 billion in planned spending on manufacturing capacity for electric cars, including a planned second battery plant at a new campus in Kentucky. Despite that pullback, construction of Blue Oval City — Ford’s new EV manufacturing campus in Tennessee — will continue as originally planned.
“The customer is going to decide what the volumes are,” Lawler said. “Ford is able to balance production of gas, hybrid and electric vehicles to match the speed of EV adoption in a way that others can’t.” Translation — Ford will build more gasoline-and diesel-powered behemoths to beef up profits while it tiptoes toward the future of electric cars.
As part of its third quarter earnings report, Ford said on Thursday that its EV business unit — called Ford Model e — lost $1.3 billion on an operating basis in the period. That’s roughly double its loss last year during the same period despite a 26% increase in revenue. Through the first three quarters of 2023, Model e posted an operating loss of about $3.1 billion, on track with Ford’s previous guidance calling for a full-year operating loss of $4.5 billion for the Model e business unit.
High interest rates are causing pain throughout the economies of most countries. Elon Musk said during the Tesla Q3 earnings call that plans to build a new factory in Mexico — which might be where Tesla plans to manufacture its much anticipated lower priced Model 2/Model C — are now in the slow lane as the cost of capital has increased substantially.
It may surprise some that the captains of industry all failed to anticipate the era of almost zero interest rates wouldn’t last forever. And so, the answer seems to be that the world will continue to build and consume conventional cars longer than expected — and longer than is sustainable for the environment.
In the US, the Inflation Reduction Act is a boon for people who buy electric cars, but it is also an indirect subsidy for manufacturers. If they can’t make a profit on their electric cars with that much assistance from Uncle
Joe Sam, the EV revolution may be in for real trouble.
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