General Motors Company (GM) Earnings Call Transcript & Summary

Hi, good morning. I'm Ryan Brinkman, the U.S. automotive equity research analyst here at JPMorgan. Thanks for joining us on day 2 of the 2021 JPMorgan Automotive Conference. Very excited to get going with our next presentation because it's General Motors, and also because we have Steve Carlisle, GM Executive Vice President and President of GM North America, with us. Steve, how are you doing?

I'm doing great, Ryan. How are you?

Great. Thanks so much for joing us. [Operator Instructions] So Steve, I want to launch here my first question here, which is on GM North America margin, huge bright spot this year, really, for the last year, last 12 months, right? So you shocked the market last year with 15% GM North America margin in 3Q versus your long-term target of 10%, or 10% plus, I guess it is, right? And I think that was explained then by the lingering austerity measures colliding with the sharper-than-expected industry volume recovery. We thought that 3Q last year would be the peak. But actually, in the quarter just concluded, I think it would have been in the mid-teens yet again if not for some of those one-time charges, right? So can you speak to the factors in the industry, or the macro environment that are contributing to the recent very strong trend in margin, such as, i don't know, new and used vehicle prices, for example, segment mix, inventory levels, raw materials, as well as any company-specific factors such as product launches or the investments you've been making. And then help us maybe understand how these different factors might track, going forward, in the back of '21 or in the next year and what the effect, you think, might be on GM North America margin.

Yes, sure. A great and timely question, obviously. And it then just allude to a combination of factors. So I would say particularly through the first half, demand has been strong, and you can attribute that to a number of things, notwithstanding current situation, opening up as we move through the latter stages of COVID. The consumer is in good shape in terms of savings, low interest rates, people wanting to get moving, so we did see strong demand, continue to see strong demand. And then we moved through the semiconductor situation. And what that's done is it's caused us to prioritize what we're producing and what we're selling, and the combination of all that has resulted in a favorable pricing basically across the business. And then -- and thanks to the full team here at GM between engineering and supply chain and purchasing, sales and marketing and our dealers, we have lost, really, a negligible production on our most in-demand and most profitable products like our full-size pickups and our SUVs. And in fact, where we have experienced some downtime, which we have, although minimal, we've deployed what we call -- we'll build a vehicle missing a few components. And then when we have the opportunity from a component point of view to retrofit and get those moving to the dealers, we've done exactly that. So what we've been able to do is where we've had downtime, we've been able to move into the repair and retrofit and distribution mode on those products. So we've been able to maintain a robust flow through the business over this time frame. So it's a combination of all those things that have resulted in the momentum that you're seeing. So we're -- I'd say pleased with that. I wouldn't say satisfied because we'd like to see more supply and we feel like as time goes on, we're moving into that mode, the problem solving that we've done, so to speak. I guess the other thing that we've done is we look at how our vehicles are configured. And can we reconfigure them to turn faster from a consumer point of view? And are there some substitutions that we can do from a component point of view to keep the flow moving? And again, that's worked very, very well for us so far this year. And we anticipate -- a dealer says to me -- fairly frequently said, you learn bad habits in good times and good habits in bad times. And I think that's exactly what we're doing. So I think we've all learned a lot, and you can see it in the numbers. And we're looking forward to carrying those things through here through the balance of the year and into the future.

Very helpful. And GM management has recently spoken of the growing opportunity in after sales services, for example, around Super Cruise connectivity and OnStar Insurance. Could you provide an overview of these or other opportunities which may be enabled by new technologies or capabilities, for example, in the area of over-the-air updating or your new electrical architecture? And what would you say is the right way for investors to think about this opportunity? Is it more about delighting customers as could help market share, et cetera? Or is it more about enhancing margin or reducing cyclicality with a recurring revenue stream or sort of all of the above, what do you think?

Yes. An emphatic yes to both of those things, Ryan, right? It's -- in an increasingly connected world, it becomes an expectation. Happily, it turns out these are value-added service products that consumers are willing to pay for. So we're starting from a strong base with our OnStar business. We're celebrating 25 years there. And we've built up a very sizable subscriber base and a very successful business and learned a lot. And now with the advent of some of the new technology or VIP or the electrical architecture that you referred to, which we recently launched with the CT4 and the CT5 and the -- for that, and then the full-size trucks, that allows us much more connectivity to the vehicle. So we can do things. Like we've had Super Cruise now for a few years, and we're now rolling that out over dozens of models here over the next few years. We can keep updating that Super Cruise capability over time on a charge forward basis and whatever basis we choose to do. So that's one example. So we can add roadways, we can add maneuvers, we can add -- we can do that on demand. You want to do it for a trip or you want to do it for a period of time, we can do that. So that's one example. Another one that's more recently, top of mind, I was just at a, we call it a fleet summit that's going across the country and kind of a stadium tour. So we bring our big fleet customers in. And so we have a use case on OnStar that's based on vehicle insights, so to help fleet operators manage their fleets and work with their drivers. So we have capabilities like driver monitoring so we can monitor driver behavior, and fleets are very interested in that. We can monitor condition of the vehicle from a maintenance point of view. In the fleet business, that uptime is very important. And so those are all things that we can do that a few others can do, and there's a lot of value there. So from a fleet operator and the consumer, in general, it makes our offering more attractive because we have that capability, but it also gives us a margin opportunity. The margins on the OnStar business, so it's a very low -- with very low investment and very low cost in relative terms, but very good from a revenue -- incremental revenue point of view. So we're super excited by all that, and we'll just continue to add that connectivity capability. And we have a fairly long list of items that we're looking into and intend to roll out over the next several years, the next few years, actually. The other topic that comes into the conversation here is the subject of over-the-air updates. And so these can be bringing new capabilities into the vehicles, or it could be addressing issues or small improvements that we need to make. And that's another area where we have very extensive experience with that, like millions and millions of transactions here, of updates that we've done to improve the vehicle through the life cycle for the consumer. So that's a very exciting area for us that we're very much looking forward to and looking forward to talking a lot more about. I'd say recently too, just to extend that, we've launched, we call it, the Guardian app, so -- from OnStar. And so it's a smartphone app. So you can have most of the capabilities of OnStar. So we're using an accelerometer in the locational capability in the smartphone versus how we would implement that in a car. So you can have that -- most of that OnStar experience with your smartphone, which means you can use it when you're riding your motorcycle or your bicycle or even in a non-GM branded product. So many, many examples of how we're extending our connectivity experience into other areas, which, as I said, would be, I think, very attractive from a consumer point of view but also additive to our overall margin structure.

That is an interesting area. One question I get a lot from investors is what will be the impact of vehicle electrification on automaker margin? And in your case, given that you're targeting 100% of your light-duty lineup being battery electric by 2035, in a way, this is really one of the most important questions, right? So what is likely to be the impact, do you think, of electrification on margin? And it would be great if in your answer, you could speak to both the variable margin that you expect to generate on battery electrics relative to ICE vehicles, as well as what impacts it might be on a more comprehensive sort of fully accounted for basis over time, given the sizable upfront investments that you're making also.

Yes. So also, very topical, right? And I start from the top, right? What's our big objective? We do -- we are headed for 100%, as you indicate. Our goal is to grow the company and not to shrink it. And that includes in terms of our -- the financial performance that we just started with here. So our targets for EVs are to be similar or higher than our ICE margins, our internal combustion engine margins, over time. We've talked a lot about Ultium, our battery system, and Ultifi, our software system. Those are big enablers to making that happen. So if I start with the -- so Ultium, you can think about, it's the propulsion system based on -- driven by the battery system, and Ultifi, the software part of it, the operating system or the layers that go on top of that, and that's what helps us generate these new revenue opportunities that we just talked about. So when it comes to the EV part of it and the cost part of it, it is all about the battery. It's about the cells. It's about the chemistry and the cost of those and energy density, charging times, all of those things. So the focus there is to continue to drive the cost down so that we can get to the margin structure that we talk about. So our initial Ultium chemistry, for instance, will cost, we think about 40% less than today's cells. And today's cells, meaning what we have in the Bolt and the Bolt EUV -- we've been in the battery business, as you know, for over 10 years now, if you think back to the Bolt and then in the middle of the last decade of the Bolt. We've seen tremendous cost reduction and performance improvement batteries already, and now we're about -- we're in the throes, actually, of seeing this next big step change in improvement. If you think about the HUMMER launch just around a corner, literally weeks away. And the BrightDrop coming very soon, and the LYRIQ in the spring basically. So Ultium is here. So we're seeing that big cost reduction. And then we have, in our cycle plans, further improvements to continue to drive down the cost curve on the batteries and the rest of the propulsion system. So it's one of those things where it's still a relatively new technology. As much as 10 years seems like a long time, in the fullness of time, it's not that long, but -- and we have a ways to go, but we are in a trajectory where we're confident we can get our margins on the core vehicles at or above what we see with ICE today. And I should add that ICE is getting more and more expensive as well, right, with the requirements that are coming our way and the direction of the industry in terms of greenhouse gas regulations and things like that. So you take all that, and then you add on to that all these other services that we just talked about, which, as I indicated, are relatively low from a resource intensity point of view, but really interesting from a revenue and a margin point of view. So that's what makes us really excited. And I should talk as well about the automated driving part of this. And as I said, we continue to see the receptivity to Super Cruise, especially as we start to extend the use cases. That's a whole new area that people are generally very excited about. And we're very proud of our system. It's been recognized as best in the industry, and we believe that. It's our intention to keep it that way.

Great. That's very encouraging. Maybe sticking with the topic of electrification. I ought to get your thoughts on the battery electric pickup truck market. This is a market where a few -- we're even discussing publicly, even just a couple of years ago, the potential here. But now it's just exploding with interest after the debut of the GMC HUMMER EV pickup, the Tesla Cybertruck and the F-150 Lightning, which Ford, the other week, said has 120,000 reservations now. So with the seeming delay in the Cybertruck in the -- sometime next year and Ford not targeting officially until spring of 2022, it looks like you will be first to market here. So congratulations on that with the HUMMER. On the other hand, the HUMMER, I think it really is a very high-tech, high ASP -- it's a super truck, right? So probably not going to sell in very high volumes. I did see your announcement in Hamtramck of a Silverado that -- with 400 miles of range versus the Lightning, 300 miles at most, but I think that it's also more not until maybe 2023. So what can you tell us about the battery electric pickup truck market? How the HUMMER truck is positioned? How the Silverado or Sierra might be positioned? What kind of reservations or volumes could we expect out of HUMMER? And then just, generally, how do you think you're positioned to compete in the more mass market bev pickup category when you do get those entrants out in '23?

Yes. Well, again, I would start at the top. So pickup, it's a very large segment in the industry. People love their pickups, whether it's for personal use or fleet and commercial use. So a very important core segment in the market. And we have to tie that back to when we say 0 emissions and fully electric, we mean that. 0 means 0. It doesn't mean close to 0. So it means the pickups need to come into the mix. And what you're seeing, I think, is a reflection of we're continuing to innovate, and we continue to figure out how to do what the consumer wants. And so we're -- we've figured out how to do pickup trucks, and we're super excited by that. And why start with HUMMER? Why not start with the HUMMER? Like it's generated a lot of excitement, and I think it makes a big statement in terms of the applicability of the technology to the category. And that's all good, right? But then we need to move on from that into the more poor segments like the Chevrolet, the Silverado bev that you just referenced. And we did -- we're going to -- we made that announcement in Factory ZERO, as you mentioned. We did some teasing yesterday on a 4-wheel steer capability. That's a reflection of we can make electric pickups even better than the pickups that people are accustomed to. So in terms of the response, we've been very pleased with the response to the HUMMER, to the pickup and then, later on, the SUV. So what I'll say about that is that we're sold out, sold out. So we can say that relatively small interest, but it's pretty large in proportion, right? But that doesn't take us away from moving into the Chevrolet, right? So -- and we've done a lot of consultations on that truck as we moved along with our fleet in commercial. We start with that because that's where the total cost of ownership argument exists today. We can demonstrate that it's -- you're way farther ahead of the game to have an electric pickup in your fleet anywhere with an ICE pickup in the long run. So that's generating a lot of interest at the same time that fleet operators are starting to see other imperatives that they need to be responsive to related to greenhouse gas. And BrightDrop is yet another example of that one. So again, we feel the approach that we're taking is a ground-up pickup to kind of reinvent the category. And we're going to be talking about that progressively in stages here. So we'll launch the HUMMER. Very excited about that, proud about it, I'm proud of it. And then we'll start to move into the Silverado and beyond. You referenced range. We feel very strongly about that, right, the 400 miles and beyond that we've talked about. Range is super important. And then there's just a threshold that you need to make, right? Like consumers don't want to compromise. They don't want to have to charge their truck, especially if it's slower than it takes to refuel their current vehicle. So we're -- part of this whole battery equation as we're in pursuit of ever-increasing range and improving charging times and all of that. So yes, we feel like we have a very comprehensive and ambitious EV strategy, which is why we made the big commitments in terms of when we see ourselves getting to 0 and the number of entries that we're going to launch across our brands and models, and at all price points and all use cases, whether that's a venture performance, family use. And we plan to be highly competitive. That's the franchise today, trucks are -- and we have no intention of ceding that position.

Great. And next up, I'd like to ask about your strategy when it comes to sourcing the components needed to manufacture all these battery electric countries and all these categories for all these use cases. For example, could you discuss the progress toward battery cell manufacturing with LG Energy Solutions in Ohio and Tennessee? And then with regard to the Ultium Drive, can you talk about how you go about deciding whether to in-source or to outsource different components such as electric motors, inverters, converters, gearboxes, et cetera, for your battery electric vehicles? Are you motivated to in-source more relative to ICE vehicles because you want to ensure a competitive edge or ensure you get the best cost or ensure continuity of supply? Or is it to still gainfully employ team members currently building internal combustion engines? What's your overall strategy in this area?

Yes. Well, I think you very -- you captured all of the variables in a multi-varied equation that we need a software, right? So let's start with the batteries. And as you referenced, we've announced 2 plants for batteries and then the intention to go beyond that because, again, if we're not shrinking the business, the volume will be where it is today. It will need to be repowered in terms of electric. So we need to be able to do that from a battery point of view. So -- and then you have to do the analysis on what's the best way to do that. And I think you can make an argument that in the early days of some new technology, that vertical integration is the way to go, right? So that we can get started and build scale, and then we'll see what comes in steps after that. The same for drive units. And the other thing we need to be mindful of is that labor is very much our partner in all this. And they've been with us through thick and thin, and we need to -- we're grateful for that. We need to respect them. So we need to take those considerations into account as well, while at the same time maintaining competitiveness. So those are all -- which is why we have UAW working with us on the battery side of the equation here. So that's a live dialogue. And as you go beyond that, it's a case of -- you look at all the other componentry that is required. And we need to do a case-by-case analysis of, is it better to make it or can we buy it? Can we buy it at scale with the level of technology that we feel is required? And in that case, our suppliers are very interested in the conversation because they have to adapt to the future and innovate. So we're seeing a lot of tremendous innovation from our suppliers who, again, have been long-term partners with us. So it's super exciting, Ryan, right? The decade that we're in. We haven't seen anything like it in 100 years because we're going through this huge shift that's causing everyone to think in a fundamentally different and exciting way about how do we get from where we are to where we need to be. So we're going to do what it takes. I think it's the bottom line. So if it requires us to make an investment to vertically integrate something and do it on our own, if it requires that we partner it, if it makes sense that we partner it, if we work through a supplier, that's what we're going to do. I think the other thing that's important in this conversation and is getting a lot of airtime is the -- more of the raw materials and the total supply chain. So we talked a bit about semiconductors. We need to be concerned because -- where those semiconductors come from in the future, right? So in recognition of what's got us to the situation that we're in, how do we mitigate those risks in the future, whether it's future pandemics or trade or whatever it is. So that applies to semiconductors. It applies to rare earth materials that are used to make batteries and magnets and drive motors and everything like that. So it really is an end-to-end total value chain look that we're taking to position ourselves for the future.

It would be great to get an overview of your growing cooperation with Honda on a number of different fronts. For example, when it comes to component sourcing, platform sharing, contract assembly, with regard to the effort with hydrogen, with regard to crews. A lot of this cooperation does seem centered on, or is even explicitly exclusive to North America, making you maybe a good person to ask. Is this any significant consideration for investors? How material would you rate the opportunity? And could we see a positive impact on GM North America margin or competitiveness, and over what time frame?