General Motors Corp. will for the foreseeable future keep its cost-cutting knives sharp as it waits for its massive electric-vehicle investments to bear meaningful fruit later this decade.
A major reason? More price hikes look to be off the table as the U.S. economy cools, CFO Paul Jacobson told the Bank of America Global Auto Summit April 4.
“What you see now is probably a realization that the probability of going much higher in the pricing environment probably isn't there,” Jacobson said. “We need to be more urgent around cost-cutting […] I think we can take out a lot of structural costs.”
Jacobson and GM Chair and CEO Mary Barra two months ago said they plan to slash $2 billion in annual operating costs by the end of 2024. The first major step toward that has come in the form of voluntary buyouts: Jacobson told the BofA conference audience about 5,000 GM workers have accepted the company’s severance offer. Their departures will result in a charge to GM’s earnings of about $1 billion but also save the company about that much on an annual basis.
GM leaders are, along with their peers, balancing large investments in EVs and technology upgrades with needing to maintain their internal combustion engine businesses at a level where they can help fund plans for the future. (Also speaking April 4 at the BofA event was Dana Inc. Chairman and CEO Jim Kamsickas, who told attendees it will take until the end of the decade for the supplier's margins on EV work to reach those of today's ICE equipment.) Jacobson said GM is willing to tap the brakes on some investments should it be called for.
“If at the end of the day, we find ourselves where margins are tightening, some of those growth businesses that might have had a longer runway […], we’re going to have to prioritize down those to focus on those that are going to convert to revenues faster,” he said, later adding that, GM needs to “be in a little bit of a grinding mode” for a prolonged period.
Barra and Jacobson have said they expect GM’s EV business to reach low- to mid-single-digit profitability by 2025. Higher margins, they project, will come later in the decade as the company’s Cruise autonomous vehicles business, its BrightDrop electric delivery vans and suite of software begin to mature. Until then, though, the belt will remain pretty tight.
“What we’re going to need to do is […] drive margin stability until we get the margin expansion,” Jacobson said. “What you see is probably a little bit about heightened sense of urgency given the inflationary environment around us.”
Shares of GM (Ticker: GM) fell 1.5% to $35.73 on April 4. Over the past six months, they are essentially unchanged, leaving the company’s market capitalization around $50 billion.