General Motors Company (GM) Earnings Call Transcript & Summary

And thank you for joining us for this session with General Motors as part of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner, and I'm the senior U.S. autos and technology analyst at Deutsche Bank. GM is one of the leading traditional U.S. automakers. It has also been accelerating its transition to an all-electric future, targeting 100% EV sales by 2035. Just this morning, GM announced it is accelerating its spending on EV and AV to $35 billion by 2025, up from $27 billion indicated back in November. And GM also considerably raised its outlook for the first half earnings to $8.5 billion to $9.5 billion, which means $4 billion to $5 billion approximately in the second quarter, up from $1.1 billion previously and in line with what was done in the first quarter. So I'm very pleased to be joined by Paul Jacobson, who is EVP and CFO of GM, for a Q&A session. The format for this session will be a fireside chat around some of my questions as well as questions from all of you on the call.

But to kick it off first, Paul, can you please share some of your thoughts on the various updates that GM is providing today and how things are going for the industry and for GM, please?

Well, thank you, Emmanuel, and it's a pleasure to be here with you today, and thanks, everyone, for joining us. It certainly has been an exciting 6 months for me since taking the helm in December. I've become a bit of a chip expert, in addition to learning the intricacies of the automotive industry, and really grateful for all of the support from the GM team, GM leadership as well as the investment community in welcoming me on board. So thrilled to be here with you today. As you saw, this is a very incredible day for us. We're continuing to demonstrate our commitment to leading into this EV/AV transformation that is occurring. And I think every opportunity we get, we're finding more ways to deploy more money faster into EVs and AVs. And what you saw today really is, I think, a sign of our confidence in the adoption, not only of the 30 EVs that we have coming based on the early demands for the multi-EV, EUV, the GMC HUMMER EV, the LYRIQ, et cetera, but also what we see in the commercialization opportunities for the LTM platform. We just announced a memorandum of understanding with Wabtec for locomotion and locomotives, which really, I think, highlights the versatility of it. So when we look at the opportunity to accelerate battery plants and increase our EV capacity, we really look at these as no regrets-types investments and positions us to make sure that we're staying ahead of the curve on EV adoption, which will allow us to continue to flex higher as we see passenger or customer demand improving. We also guided, as you mentioned, to put a range on the guidance we put out a couple of weeks ago, that we were going to significantly exceed our earlier targets. We saw significantly better production in May and into June than we expected. As we talked about a couple of weeks ago, we were able to pull forward some chips from the third quarter, which not only gives us an opportunity to complete some of the vehicles that were partially produced without the chips that were awaiting those chips, but also gives us time to solve the problems. And I really applaud the ingenuity and creativity of the engineering, manufacturing supply chain teams to be able to respond to this. What they've demonstrated is an incredible teamwork and being very -- really very nimble in the midst of all of this, which has allowed us to post these results. So we're still in the middle of it, as many have talked about, but certainly, really pleased with how it's gone so far.

Okay. Great. Thank you so much for this overview. So if you don't mind, I will actually be starting with the near-term conditions and then move on to the EV spending plan. Starting with the near term, so you raised the first half outlook by about $3 billion to $4 billion or so. Can you please go over the various pieces of what exactly is playing out better? And within that, how much is timing? How much is from less volume impact, then from the shortages that you have maybe anticipated? And how much is from continuing strength in vehicle pricing, mix, both new and used?

Well, thanks, Emmanuel. It's really all of that, plus GM Financial, as we've seen. That's been an integral part of the story. But as we mentioned a couple of weeks ago, we've been able to pull forward about 30,000 vehicles worth of chips that we saw that allows us to really kind of clean out some of the lots that we had, and we've responded very, very well to that. I would say the bulk of it has been on the production and on the sales side. We continue to see a very, very strong consumer, really record low inventory levels that are presenting a challenge to our dealership network, but they have really risen to the occasion. We're finding new ways to interact with them. They're finding new ways to be more efficient, to make sure that we can deliver vehicles to customers, which I think is helpful in this pricing environment. It's not just the demand being there. It's also the ability to fulfill it because the last thing you want is customers that are eager to purchase your product and you just can't get it to them, and they end up paying a premium for someone else's product. So really hats off to the resiliency of the entire team for that. And we expect that environment to continue, at least probably into the fourth quarter. But likely, I would say the low inventory environment is probably going to be here in -- well into 2022 if the demand stays high. We expect that the semiconductor challenges are going to continue into the second half. I would say that third quarter is probably a little bit more of an impact than we were expecting it to be a couple of months ago. But what I would say is, as we've seen from both our first quarter results as well as our second quarter results, the team's ability to manage through the short term, time and again, has really borne itself out. So I'm actually comfortable with where we are right now as we're thinking about the second half of the year, even if there might be some continued supply challenges in our ability to work through a lot of them. So we do expect the second half in terms of chip availability to be slightly better. But there are some fundamental pressures in the second half that I think are unique versus the run rate that we've seen in the first half that starts probably with commodity inflation. We've seen that continue to rise about $1.5 billion to $2 billion, is our best estimate right now for the second half versus the first half. The first half contains some mark-to-market gains, about $0.5 billion, and some of the securities that are held in there, we don't assume that those will repeat, but it's a pretty healthy, robust environment for stock. So we'll see what that is, but we don't build it into our expectations. And then third, I would say, GM Financial kind of rounds out both the success that we've had in the first half with used car prices and really, really strong consumer credit performance that we've seen. What that does is there was some reversing of credit loss accruals. As we saw trends improve, you would expect those won't repeat themselves, even if the consumer credit remains strong. So we've got probably $2 billion to $3 billion of headwinds in the second half of the year. But other than that, we're looking for what hopefully is going to be pretty robust performance and starting to maybe put this chip issue behind us as we get into 2022.

That's really helpful. I'm just going to follow up on one -- some of the things you said on the second half. And then questions are pouring in from some investors trying to get further clarity on some of the chip dynamic. So we're just going to jump back to that after. But -- so basically, $2 billion to $3 billion of sort of like sequential headwinds versus sort of like the first half, that would still put you comfortably at or above your sort of like initial view for the second half of $5 billion and -- $5.5 billion in the second half. I think, in this morning, is really I think you were qualifying the second half as complex and fluid. Is it still fair to say that the variability versus your previous implied second half outlook is mostly to the upside? Or are you seeing reasons why that could also be to the downside?

Well, I think we're certainly bullish as it relates to our prior guidance, what we had put out there at $10 billion to $11 billion. And a couple of weeks ago, we said that we're very optimistic that we'll exceed that. And I think that's reinforced by obviously the results that you see here for the first half. We're intentionally not giving a full year guide yet. We want to do that on our earnings call as we start to get into the third quarter and understand what the chip dynamics look like. But the reason I think that we continue to urge caution and highlight the complexities of what we're facing, for instance, we're seeing chip foundries and raw materials start to be impacted again by the COVID outbreak in Malaysia, right? So as long as that continues, we're losing some production there from some key chip providers. And it's things like that, that really make this a week-to-week phenomenon. Now what I have a lot of confidence in is the skills and the capabilities of our team. We've demonstrated that. But it doesn't undercut what risk is out there when you're operating really with no slack in the system at all. I mean we're airfreighting chips around, and this is all happening very real time. So sometimes -- some weeks, it gets better. Some weeks, it gets worse. But the team continues to grind away. So that's why we're exercising some caution about the second half of the year as it is subject to change quite a few times between now and when we get to August.

Okay. And so then bringing in a series of questions, combining them from investors, I think it's -- they're all about trying to understand, I guess, further clarity around the pull-forward of chips. Can you explain what a pull-forward of chips exactly means? Like if the issue hurting the industry is, I guess, the lack of supply of chips, does this signal that supply will be better in the third quarter as well? Or I guess what does pull-forward actually mean?

Well, I think what it means is the producers are obviously making chips as fast as they can, but they're also doing it in batches. And as they look through their sort of fair share allocations of how they're thinking about it, they might have some chips available a little bit sooner than when it's sort of due to you, just due to the irregularities of production. So while in constant contact with the supply chain, we found some chips that allowed us to just go ahead and take delivery of those in June time frame and allow us to clear out some of the vehicles that had been parked. And we thought we would take advantage of that for a couple of reasons. Number one, we want to get the vehicles that are mostly complete. We want to get them complete. We want to get them in customers' hands. We don't want them sitting around. And number two, if we can solve a problem now and buy ourselves time for a problem later, that's where I say that I have seen that our -- the skills and capabilities of our team have really come through and solved some of those problems. So while it may have created a hole, say, in the month of July, it does give them a few weeks to work on that issue to try to find alternative means, alternative chip availability, et cetera. So those types of things are happening really week in and week out. The importance of this one, I think, was just the volume, that's why we called it out, as well as the fact that it was crossing over a quarter. But this type of thing is happening pretty regularly as we manage through this on a week-to-week basis.

And then when you mentioned the 3 factors of, I guess, sequential earnings decline between first half and second half, you didn't specifically mention this pull-forward versus your, I guess, your previous expectation. Is that not -- just to make sure we fully understand, is that taking away from what you would have expected in terms of earnings power in the second half, or in the end, there will be enough chips that you would have the right run rate of production? I guess are you taking away some earnings from the second half through this pull-forward?

Yes. I think in all honesty, Emmanuel, I think you're operating at a level of precision that just doesn't exist in this. So I didn't mean to imply that it was -- we certainly took the chips out of there. But in the grand scheme of things, those [ vehicle goals happening anytime ]. So I don't think we can just necessarily extrapolate that, minus 30,000 vehicles from the second half, because probably a dozen things are going to change between now and then, which is why we continue to urge caution around that. So it certainly was vehicles that moved from the second half into the first half, the way the math works. But I can't yet tell you if those vehicles are going to be permanently lost because we won't know until we get further into the year in terms of how we address the supply challenges.

Great. And then maybe a final one on semis and obviously, taking full advantage of your earlier comments that you've become a semi expert very rapidly since taking on the job, how do you -- can headwinds remain into 2022? We've seen both the industry and investors get quite bullish about the environment for next year and obviously, deservedly so because of strong market demand as well as the need to rebuild inventories. Could shortages or sort of lack of availability still moderate that growth as we move into next year?

Yes. Well, I forgot to put air quotes around expert when I said that, but I certainly learned a lot through this. I think, really, there's 3 dimensions, Emmanuel. One is the short term. We spend a lot of time talking about that, engineering solutions, manufacturing solutions and just deep, deep integration in the supply chain. Then there's the intermediate term, which is how do we think about the way this is going to shape up into '22. And I think unlike where we were back in February, when everybody was just sort of talking about this and introducing this, I think a lot of the perspective was that this was a first half of '21 issue and it would be over. It's clearly longer than that. We actually have a list that shows a time line of all the events that have occurred this year, weather in Texas, fires, earthquakes, COVID, you name it. We're seeing all those impacts, and that has certainly prolonged and stretched out the impact of what we're seeing. And I think that will carry into '22. Whether or not it's material in light of what we're seeing in the first half or into the early second half, I think it's too soon to tell. But we've got to expect that, for the foreseeable future, it's going to be difficult for us to build inventory based on where we are in terms of supply and demand for ourselves. So that's actually, I think, given where we've been, a pretty exciting opportunity even if it's not an extension of that challenge if the environment remains where we are right now. And then the third element is the long term. And this is not the first semiconductor supply shortage that we had in the past. And I think what we have to realize and grasp is the fact that there is a lot of demand beyond automotive, so we may not be the biggest customer out there the way we had been historically in the past. And I think that means longer-term solutions. And as we've talked about, whether we work with foundries to give longer-term commitments, or we look to figuring partnering with folks, we're looking at all aspects of the supply chain to really ensure that something of this magnitude as it relates to chips doesn't happen again.

That's very clear. And then one final one on the environment, and then I promise we will turn to the EV updates. What's your view in respect to the higher commodity and inflated component and logistics cost? Can this remain a headwind into 2022?

I think based on where levels are right now, I would expect this to probably be a headwind into the first half of '22. I actually believe that there will be some abatement in this. I've been saying that for months, and I've been wrong everyday. But I think what we see here, especially around the logistics side of the business, is the global supply chain for moving things around and commodities was never really meant to stop. And I'm not just talking about us, I'm talking about industry in the aggregate. And we see a lot of growing pains with the restart. The fact is as comfortable as we may be growing in a post-vaccinated U.S., we have to acknowledge that the world isn't there yet, and you see that playing out in Malaysia. So I think this is a little bit of a slower recovery in the supply chain, but certainly one that we have adapted to. And I think all credit really goes to our global supply chain and engineering and manufacturing teams for doing that. So it's hard to tell right now, but I certainly think that, over the medium term, we should see a little bit of abatement. In the meantime, it's up to us to make sure that we're in a position where we're producing the vehicles efficiently and we're pricing for the content, we're pricing for the cost of the vehicles. And I think that's led to a little bit of inflationary pressure. Certainly, you see it in vehicle prices, where they are right now. But overall, the consumer has borne that, and that really goes back to the quality of vehicles that we're producing. And we feel good about that value proposition for them.

Great. So now the other exciting update today is that GM is boosting spending on EV and AV to $35 billion by 2025. A few areas of focus you highlighted in your press release, 2 additional battery plants, accelerated rollout of EV models. There was mention of a Hydrotec fuel cell and then Cruise Autonomous Vehicle. Can you please unpack this a little bit for us and explain what you will be able to achieve with this larger budget in each category?

So thanks for that, Emmanuel. As you said, we are very excited about this. And I go back to the comments that we made at the very beginning of the semiconductor crisis, that whatever this turned out, it wasn't going to deter us from our vision and we were going to be able to get through this. Now the environment has changed quite a bit since then. It's a much, much stronger environment than we thought going into the year. And in part, but not exclusively, that has enabled us to continue to lean in more to this EV/AV journey. So what I would say, it's all built on the foundation of what we're seeing in terms of customer response for the vehicles that we've rolled out so far. When you look at the GMC HUMMER EV and the Cadillac LYRIQ, I mean, these are vehicles that are [ clicking ] higher than we've ever seen before. Vehicles in sort of preproduction or in early stages of production are selling out in minutes. And that really, I think, is a strong endorsement of what we can deliver with Ultium. And when you think about the excitement of 30 EVs by 2025, with about 2/3 of those available in the U.S., you start to get really excited about what the forward calendar is rolling out. So while we're staying true to our goal of 1 million-plus EVs in 2025, certainly, this is giving us the capacity and the capability to exceed that. So when I look at big capital commitments like this, it's really return on invested capital and then, ultimately, what's the risk associated with it. I would characterize these investments as low risk. The only thing that we might get wrong is we might build them sooner than we need. But there's no doubt we're going to need these on our journey as we're going forward. And we want to make sure that we're on the right side of EV adoption, so that if consumer sentiment continues to inflect at the rates that it is, we're not left behind because we don't have the production capability either in our batteries or the vehicles themselves to be able to deliver them to consumers. So we want to be right in line with the excitement that we're generating for customers. And these 2 battery plants, I think, are a big step forward. It's somewhat informed also by the versatility of the Ultium platform, both with what you've seen with Wabtec as well as what we're doing with BrightDrop and the demand that we've seen there. We want to be in a position to make sure that we don't fall behind in cell plants. And this will -- a good sort of rule of thumb is [ this little -- about ] double the capacity for cells of where we thought we were going to be with cell plants 1 and 2 in terms of pulling those forward and announcing those. So overall, we feel very good about where we are. Same thing goes for EV manufacturing capabilities. As we roll that out, there will be much more detail to follow as we talk about that going forward. And then, lastly, on the Cruise side, they continue to make really, really good progress towards commercialization. They just got the California Public Utilities Commission approval to be able to take nonemployees and members of the public in a driverless vehicle, the first company to be able to do that. And it comes after 7 months of driverless testing on the streets of San Francisco. And we continue to see great strides. As we've talked about before, we're positioning to get production of the Cruise Origin in early '23. We're already sort of producing and test run the vehicle. And we want to be in a position to be able to do that and roll that out as we can commercialize that. And we feel very excited about the pace that that's going on. So when you think about this, it's all really, right away, risk-oriented on our journey, and we felt like it was prudent to do. One last point I'll make, Emmanuel, is we've alluded a couple of times on our earnings calls that we have gone through this long-term planning exercise, which is something that has really helped me get sort of visibility to the longer term versus the here and now by business unit, by initiative. That includes some of the kind of connected businesses as well as BrightDrop as well as Cruise, Defense, et cetera, we've really gone through. And when we look at that and the cash generation capabilities of the company, this extra $8 billion was very, very easy for us to do. So we'll have more details on that. As we've promised before, we're going to have an investor event in the fall. I'm proud to announce that that's going to be in Detroit on October 6 and 7. And we'll have a lot more clarity around how we think about battery costs, how we think about the connected business and really giving investors and prospective investors a road map for the journey that we're on. So I'm very, very excited about that coming in the fall. And don't miss an opportunity to test and to see some of our new products live, pretty exciting stuff.

Yes. That sounds great. Let me -- we have then a few investor questions on the battery plants, if that's okay. So first of all, are the 2 new plants also in partnership with LG? And then some investors are looking to run the math on this. So were your 2 initial plants able to supply enough for your 1 million units or so? And then as we move to [ 4 ], does that mean that you could -- would be enough for 1.5 million or 2 million units of EVs? I guess anything can help on the math of how much capacity you're adding.

Yes. So we don't have any details today on exactly how those plants are going to be structured or where they're going to be other than we know they're going to be located in the U.S. We're committing to that today. But as we start to kind of map out where production is going to occur, we'll optimize where the batteries need to be and where the cell plant capacity needs to be optimized within the production stream. So I would say, look, for now, for modeling purposes, as a general rule of thumb, kind of doubling the cell capacity from where we are is a good way to think about it. But whether it's a partnership, whether it's a little bit smaller or a little bit bigger, we haven't made those decisions yet other than to put placeholders of capital spend in before 2025 to make sure that we've got 4 plants' worth of capacity.

Okay. And then, I guess, as a corollary, does a more rapid increase in EV production increase the risk of underutilization of the ICE footprint for you?

Well, I think, number one, what we've seen is demand is robust, right? And we feel good about that. I think we haven't even really begun yet to roll out the full variety of EVs that we have to offer in the U.S. We're just getting started on that. So I think you're going to see a steady stream of that. We certainly want to produce an EV for everyone. And I think one of the things that we have to get right is understanding the economic trade-offs of somebody purchasing an EV versus an ICE vehicle. We are committed over time to get EVs to parity on a cost basis with an ICE vehicle. And I think we've given the road map for the major part of that because we know the first variable that you've got to go solve is battery costs, right? And with the first-generation Ultium, we're delivering battery savings of 40% versus where the Bolt and the Bolt EUV are. With the second-generation Ultium, which we think by mid-decade, that's a 60% reduction. So we'll have more detail on Investor Day as to how we think about that in battery costs, but that certainly is a big important piece of this journey going forward as we start to map the transition into EVs and out of ICE over the next 15 years as we've set our aspirational goal to. So I'm not worried about that. I don't think, in the short run, it's necessarily 100% displacement, but certainly, we have to be ready for that, and that's what we are really driving aggressively towards. And all that doesn't even really include the connected services business and subscriptions that come with the new vehicle platforms as well.

Understood. Then maybe a final one on this new plan. Can all these be done within your existing CapEx and R&D spending framework? Is this effectively a faster shift away from ICE spending? Or is some of this incremental?

I would say that the bulk of this is incremental as informed by our long-term plan, both in capital and operating. And that's consistent with the way we've measured the $20 billion to $27 billion to $35 billion. And we just want to make sure that we're maintaining transparency across how we think about that. But overall, you kind of -- as we alluded to or guided to really, this is the first year that EV and AV investments will exceed ICE investments. It's hard to imagine that trend reversing. In fact, as we see through the passage of time, certainly more capital and operating investment across the programs are going to be going into EVs pretty much from here on out. So that's a little bit of incremental, a little bit of shift across the board, but certainly in line with the trend line that we need to be on to achieve our goals by 2035.

So the overall automotive R&D and CapEx dollars, should we expect those to trend higher?

I think it doesn't -- it's certainly going to trend higher off where we were in November as we talked about a little bit of a peak and then sort of normalizing at lower levels. But I would say that as long as the environment remains where it is, a $9 billion to $10 billion level of CapEx is certainly achievable for us and affordable within the confines of our internally generated cash flow.

Okay. Great. Then -- so recently, Ford unveiled the F-150 Lightning at, I guess, what was probably perceived by investors as surprisingly low price points. And so I wanted to get some of your impression on this. I think the -- so far, the EV rollout by GM seems to have prioritized high-priced vehicles first, presumably in an effort to be profitable even at that lower initial volume and then to bring high-volume vehicles later on when you are further along the cost curve. First, is this an accurate understanding of your strategy? And second, are you rethinking that in light of the risk of a large competitor essentially coming in at a lower price point, even potentially at the expense of profitability?

Well, first of all, I think if there's one thing I've learned in my first 6 months is this is an intensely competitive business. But I do want to throw out a congratulations to them on that announcement. It was really well received and really, really, really strong announcement for them. So congratulations to them. And I think the reality is we need OEMs to step up and make sure that the EV volume is out there for the journey that the country and really the world is on right now. So congratulations to them for that. I don't know that we're intimidated by that. We certainly have a suite of vehicles coming as we've foreshadowed with the 30 EVs by 2025 that we're incredibly proud of, including low-volume entries, low-cost entries, all the way up to premium entries with the HUMMER EV and the Cadillac CELESTIQ and things like that. So our goal here, as we've articulated, is an EV for everyone. And I think we remain very systematic about how we do that. I think we're in the early stages. But to say that we've only rolled out high-priced vehicles, I think, ignores the Bolt EV and the Bolt EUV, what we've done in the Bolt EUV, coming with Super Cruise, which is a great amenity for people, especially at that price point for that vehicle. And then we've also teased the Silverado EV, and there's more to come on that, which we're really excited about. And the things that we said about the Silverado EV, it's going to have at least 400 miles of range. So as we've gone out to our customer base, we've got a very large customer base as the larger -- largest seller of trucks in the world. And they've been very receptive, and the responses to the Silverado have been very, very strong, part of what is informing our views on EV inflection. So I'm actually very comfortable with where we sit and what our strategy is on the vehicle programs. And as far as the competitive things go, I would just say, bring it on. We're excited about that, and we're very proud of it. And it's really all driven by the Ultium platform because we're 1 of only 2 OEMs on the planet that has a platform. And what that platform is going to do is drive more versatility and more resourcefulness in the vehicles that we can produce as consumer preferences are going to certainly change over the next 15 years. And we think we've got the model to win in that space. So we're really excited. But like I said, congratulations to them for that announcement.

So I guess asking differently around your strategy. I think the GM goal is to be as or more profitable with BEV vehicles as with ICE. When you look at your upcoming EVs, how much higher is the bill of material relative to comparable ICE vehicles right now? And when can this profit parity be achieved? What needs to happen for you to get there?

Well, I think this is always the $100 billion question that's out there. And I think there are many dimensions around it, right, because the first thing we'll start with is the baseline. We know ICE vehicle costs aren't going to remain flat, right? The regulatory requirements as well as the modifications and engineering that need to happen is making ICE vehicles more expensive, especially at the powertrain level, where continued engineering needs to be done to meet CAFE and GHG standards. So that's not a static baseline for us, and that's important to remember. But for the EVs, it really is going to come down to: a, the battery; and b, production and scale. And that's where we think we've got an advantage over many of the sort of new entrants, is once we scale this business with the variety that we can produce and the volumes that we can produce, it's really going to be hard to beat those scale efficiencies that we can drive. And I know some of the arguments around dealerships and go-to-market models, et cetera, but we feel very, very good about the road map that we've got. As it relates to batteries, it's all about cell chemistry, it's about cell design, and it's about scale. And we think that we're going to be in a really good position by the middle part of the decade. Can we achieve parity by then? It's improving everyday. I don't know if we can get all the way there, but we're certainly going to be making a ton of progress in overall costs. And then as we build the connectivity business, that really is where we start to get to parity and go over the top, I think, and really think about the company as a growth company going forward. So while it's easy to sit back and look at the past cyclicality of the industry, particularly with the type of pricing environment that we're in right now, I can't help but think about this as the emerging revenue-generating capabilities of the vehicle and what that means for us in the future. And certainly, we're building our long-term plans around the growth business coming out of what is historically different than what we've known.

Okay. I guess in the interest of time, we're going to move on to maybe 3 additional quick topics, maybe one question each. So on the U.S. inventory and pricing situation, with the inventory still very low, when do you expect you could start rebuilding some inventories getting back to acceptable levels? And can inventories be -- can there be a new normal for inventory levels now that you saw dealers and the whole system being able to operate at lower levels?

Yes. I'll try to answer this in rapid fire mode, Emmanuel, so we can get through all 3 questions in the time. But overall, I think the inventory levels are going to be a function of production, which is chip availability and demand, which is expected to remain strong, at least in the short to intermediate term. So I think as we continue to see the chip issues, while they're declining, still being there into '22, in all likelihood, I think we're certainly looking at late -- probably mid- to late '22 before we would be in a position to start building inventory. So that's the short-term answer. Longer-term answer that we've said is I think there are a lot of lessons learned here and I'm sure that are happening inside the walls of other OEMs as well about what inventory management has led in terms of efficiencies, both to the consumer and to the dealerships, et cetera. And as we've said, we think the right amount of inventory is absolutely more than we have right now. We have too many dealers who have empty lots. And we still have customers that want to go onto a lot and drive off in a new car. And we've got to make sure that we have that for them. But we've also driven a number of efficiencies that have allowed dealers to sell into the delivery stream. So they know where vehicles are coming and where they are and can make sure that they're selling them proactively. And most vehicles right now, especially some of our larger SUVs with challenged inventories, are selling right off the [ drop ]. So we need more than we have. But in all likelihood, I think it's very safe to say that we don't need nearly as much as we've carried historically.

Great. I like the rapid fire format. It's great. So let's -- next question would be on Cruise. So that was, I guess, one of the reasons mentioned for the increased spending through 2025. And then in -- there was also obviously the announcement around securing some financing from GM Financial to buy some Origin. So can you go over what important milestones Cruise is expected to achieve over the next couple of years? I believe production of the Origin is scheduled for 2023. So does that mean commercialization will not begin until after that?

Well, I think we haven't disclosed any absolute time line for commercialization other than the team is making tremendous progress, and we want to make sure that we're ready for that. So as we've talked about, some of the capital here is for scaling production into the future to make sure that we're ready to inflect as rapidly as the customer needs, whether that's the Origin or Cruise or it's the BrightDrop vehicles and the eLCVs, or it's the retail side of the business as well. So all of that goes into that bucket. I think that the next big milestone for Cruise is really to get to carrying nonemployees in the vehicle, and we've got to go through our rigorous safety standards and continue to look at the testing. But the California Public Utility Commission permit is absolutely a great step in that direction. So I think the GMF announcement puts us in a -- really highlights the value that Cruise and GM bring together on this journey [Audio Gap] while we've raised the external capital [Technical Difficulty]

I think we lost you here for a minute. Are you back on, Paul?

Yes, can you hear me?

Yes. I think -- we can hear you. Maybe we missed out on the last few seconds of your answer on Cruise.

Well, it's just [Audio Gap] and the depth of the relationship that we have between us in terms of production as well as the technical capabilities. And we love our strategic partners there, but really, really enjoy the benefits of an integrated development process.

Great. And then final one, if the connection holds up, the -- around free cash flow. So first of all, all the additional FinCo profit, which seems to be part of the better outlook, will that be paid as a dividend to the industrial business? And then going forward in terms of your higher spending on EV and AV, will the operating cash flow dictate the pace of spending? Like would you be willing to go to -- temporarily to negative free cash flow to support the spending plan?

2 great questions, Emmanuel. Number one, we've certainly hinted that the dividends from GM Financial, we're going to pass those through as best we can for the outperformance. We've got to make sure that we continue the capital ratios and they're positioned for growth. But largely, we see that as what has emerged as a real sort of rational hedge against some of the lost production capacity that we've had. And then the second question, I think that would be on a case-by-case basis. Certainly, we have a lot of investment that we have to make between now and 2035 to achieve those goals. But I think it's all just a function of where we end up. In a world where EV adoptions are happening fast and we need to scale up, I would have absolutely no problem going into a short-term negative free cash flow situation to maintain that level of investment. It's certainly better than hitting the pause button or slowing developments for something which might be a short-term anomaly. Now if we were to go into a prolonged recession, that might be a different story. But on a case-by-case basis, I would not rule out the possibility of going into negative free cash flow if we needed to, to keep up the momentum.

Great. Well, Paul, thank you so much for the -- your time today, all the insights. Thank you for the exciting announcement made this morning. Definitely looking forward to keep following GM's progress in that transformation. Thanks, everyone, for being on the line and for submitting all your questions. Sorry if I'm not getting through absolutely all of them, but we really appreciate all of your interest. So Paul, thanks again.

Thank you, Emmanuel. Appreciate you having us today, and good luck with the rest of your conference.

Thanks a lot.

Bye.

Bye.