GM, Ford’s ambitious new electric vehicle program is underpinned by traditional finance methods: Cash

GM, Ford’s ambitious new electric vehicle program is underpinned by traditional finance methods: Cash

Detroit’s automakers have taken an unusually cautious financial approach to make electric vehicles the next car of choice for American buyers. They’re making a cash payment. GM and Ford are investing a total of $65 billion – $35 billion for GM as well as $30 billion for Ford – and have no plans to borrow any of it. Instead, the most significant change in vehicle goods in a century is now being paid for with operating cash flow, significantly lowering the risk to the corporations over the term and, for the time being, raising their stock values.

“The simple answer is that they’re doing something because they can,” said Nishit Madlani, bond rating firm Standard and Poor’s automotive sector lead. “Their confidence has grown as a result of the prominence of trucks [since the epidemic began] and strong pricing.”

Years of planning have gone into Detroit’s ambitious investment and careful finance. It has been assisted by GM borrowing $4 billion in May 2020 and Ford drawing down a $15 billion revolving credit line around the same time, both to cushion a projected sales crash from Covid-19. Cash flow remained robust as sales decreased more mildly than expected in 2020 and then started to rebound in 2021, propelling the firms’ stock values higher and allowing Ford to repay high-interest debt.

Both corporations hung on to cash by halting dividends and share repurchases at the same time. In addition, the firms have saved billions of dollars each year by eliminating entire lines of unproductive cars, retreating from unprofitable overseas markets, and focusing solely on trucks, that remains their most profitable segment. When you add it all together, the two largest native-born manufacturers in the United States have enough wealth to tackle the industry’s most significant technological transition since its foundation. Auto profits are at all-time highs, while automobile prices are at all-time highs.

“Once we get oversupply chain concerns and chip shortages, which we expect to extend the rest of the year,” Garrett Nelson, the CFRA Research analyst said. “The current market is booming, and the driver is record-high car prices.”

The Detroit 2’s financing plan contrasts sharply with how Tesla, at the time a start-up, funded its EV push during the last decade. The EV pioneer has raised funds from the bond and stock markets on several occasions to fund its objectives, most recently filing paperwork with federal authorities for a $10 billion stock offering in 2020. Tesla’s first EV facility in California was funded with a government-guaranteed loan in 2010, when the electric vehicle market was still in its infancy and before the firm went public or generated significant income.

GM and Ford are both willing to spend significantly more money. A Ford spokesperson added, “If anything, it is going to go up from there.” According to Nelson, the rebound in the US car market to over 15 million units’ sales in 2021 provided Detroit with the financial cushion it needed to move forward aggressively. The drop was not quite as severe as the one that occurred in the aftermath of the 2008 financial meltdown when the US passenger vehicle market plunged to just over 10 million vehicles. According to Madlani, the brief, shallow slump ensured that the two corporations’ war chests were large enough to fulfill the demand for tens of billions of dollars in additional investment.

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