General Motors Company (GM) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, back to the continuation of our Global Automotive and Mobility Tech Conference. I'm very pleased to have with us fresh from a visit with the President, Mark Reuss, President; the other POTUS here. So President, GM, POTGM, Mark Reuss, here to talk about GM.

I have some very specific questions on EVs. But I just want to start with what you put out on our joint social media feed here about this being the most exciting time in your career. Can you just maybe elaborate on why you say that? And the 2 or 3 things you're most excited about.

Sure. Yes, I did say that. I've said it a couple of times, and I've been in the company for a while in -- since '86. And I've worked on everything from valve trains when I started to [indiscernible], especially calibration -- engine calibrations. And there really hasn't been a time or an opportunity that we've seen in the automobile industry of change. And the change piece of it as an engineer is incredibly exciting because it changes everything. It's just not one thing. It's sort of everything. It's the way we manufacture. It's the way we go to market as a software component of this, which is massive. And then it's the consumer side, how to offer something that still provides the freedom that an automobile does, but also the desirability becomes very different. When we look at different proportions off of EV-dedicated platforms and like we've got -- like we're launching right now. And then also from a factory standpoint, I worked a lot in different plants that had relatively traditional single-line-type assembly processes. And now we've got things like cell plants. And if you've ever been in one of the cell plants, I was just down in our Lordstown plant, it's -- the scale is off the charts in terms of the space, but also the capability to make millions of things in a single facility is just stunning. So the industrial might that we see happening, Brian, is just incredible. And I think what we're going to be able to offer people who maybe haven't seen or been in an electric car is something that I just -- I love -- one of the reasons why I love the industry is working on something and then showing it to people and then having them buy it. And having them realize that this is a part of their life that is second only to a home, but a part of their life that just makes everything easier. But also makes it incredibly enjoyable to open the door and drive or ride in a vehicle that is all electric with zero emissions. It changes the planet. It changes the future for my kids, which is really important. And I think that's -- those are the big reasons why it's so exciting.

Okay. So let's go through a lot of parts of your strategy, and then I want to move back to kind of the base business as well. So maybe start with battery technology. We know all about the LTM platform's advantages, capabilities. But I guess some of the things at the fringes, we'd like some color on. The first and it's the elephant in the room is, obviously, after the Bolt recall, which at least financially, LG is picking up most of the tap for. But the question that comes up is what steps are you taking to assure that the next gen of LTM platforms that won't -- you won't face the same recall risk?

Right. Well, first of all, it's not the next gen of LTM. It's really -- we source the pack and cells on the Bolt with our partner, LG. And so we've sold almost 300,000 units of electric vehicles around the world this last year and people sometimes forget that. So when we get into the volume production piece of that -- and I have a deep -- I spent a lot of time with the Bolt and then on the Bolt recall as well. And you look at the assembly process and the manufacturing process and the handling of cells. And if you remember, you probably read that the separator and torn and [indiscernible] cathode areas as a result of some of the assembly processing that we've seen were really the Red X that we had. And so when we're bringing up the LTM platforms, which are different, we took a lot of the learnings. And in fact, I was in our Brownstown facility where our cells and packs are being assembled for the HUMMER launch. We went into that and looked at the separator design, the anode and cathode designs, and we looked at how they're handled. And so we have taken those learnings across the world, whether it's our new JVs with our brand partnerships, with manufacturing with LG, all the way into the design of what we're actually doing. So very rapidly, that's the great thing about GM is we have a really good scale but also a really good manufacturing prowess of millions of anything over a long period of time. So we brought that to bear. And we learned a ton. And I would say that, that was a very nice lining to a tough situation where -- but we did -- we took our time doing that. We did not rush fixes or changes into production. We methodically did that from an engineering standpoint, and we know what we have going into LTM in large scale for both our battery electric trucks and our battery electric vehicles with things like LYRIQ, we'll have all of that learning. So it's a very -- we took a tough situation, took care of our customers, did the right things and took all those learnings and put them back into the cell design. But also more importantly, the -- in this case, the manufacturing and handling of those cells as they go into packs. Hopefully, that helps.

Yes. Now a couple of things, again, kind of a little bit more on the fringes of the LTM battery strategy. First, can you provide some color on the SES announcement you made, what is it? Why is it important? And is this part of your goal to getting under 80 per kilowatt hour? Or is that you kind of get to 80 without solid state and this -- I mean, lithium-metal and this could come in later?

Sure. We're not giving away everything but [indiscernible]. I'll tell you, we haven't made any new announcements on SES, but rather it's really the acceleration of the lithium metal battery commercialization. So look, we're working -- we have a section of the company called GM Ventures, and this actually came out of that area of the company. We're also looking at lithium metal, electrolytes, anodes, cathodes, and binders. So we are pursuing all those technologies in addition to pure solid state. So -- but we want to be clear that either lithium metal or solid state can also be incorporated independently with other technologies like silicon or dry cathode processing. And we're working to maintain the ability to flex in the technologies that work for our portfolio. But the LTM platform is backward-compatible, which is really important. So we also are finishing and you might -- it's maybe a little bit too light, but I'm here at the tech center in Warren where we're finishing our Wallace Battery Cell Innovation Center, which as you might know, is a complement to our ability that we have in R&D on the tech center to actually fabricate small cells with different chemistries very rapidly. And then across some railroad tracks is one of the biggest and most advanced validation centers for those smaller cells to validate the charge capability and long life of each one of those chemistries. So the battery -- the Wallace Battery Center will then enable us to take those from development into production and learn how to make those very rapidly. So we're going to have everything on one site, and we're almost done with that innovation center. So I think in addition to that, the materials for the next-gen LTM will obviously be less expensive cathodes and reduce active material and new electrolytes from that. And the cell design will enable a higher energy density and using less nonactive material. And I guess that reduces the footprint, if you will, and more room for the part of the battery that actually produces the energy. So that efficiency at all, in partnership with LG then, is a more efficient -- even more efficient way to bring those into the capitalization of our cell plants. So we've got sort of the whole chain there and the integration between the vehicles and the battery packs and the control systems, we have one of the -- well, we do have the world's only wireless control -- power control systems for our battery packs, which takes out all of the wires and the big cables that we used to have. And the industry used to have and still has, in all cases, except ours, large challenges with actually connecting those cables, making sure that they work and the mass and the cost that goes with those. So pure cells and modules, higher energy density, less active materials, and that's a very progressive equation for us.

And also, could you talk about the role of LFP currently in the GM lineup including SAIC, GM or [indiscernible]. And then why are you not thinking about taking that to North America?

Which part of that, Brian, I'm...

LFP battery cells, which I assume you're using it in a top-selling car in China, we'll plug for you there.

Yes.

And then the question comes up is, since there are other automakers talking about using that technology outside of China, where you are both in China where you should have some experience with that and how you're thinking about the LFP technology more broadly?

Well, more broadly, obviously, we're using it. But I think if we have the ability to do comparisons of what I just described, what some of our next generations of our packs for North America, we'll do it, and we can do it. And again, the way the LTM platform is structured that we can be backwardly compatible with that. As you know, we have to make and sell within China or the Chinese market, batteries and cells that are made in China. So we have everything from CATL on a prismatic cell to the pouch cell that we're developing for LTM. We've got all of those capabilities and those different form factors all are, again, backwardly compatible as well as the cell chemistry. So we have the ability to do all of that. Where we are in doing that, I can't really talk about today, but we do have the ability to do all of that.

And then finally, to close out the battery. In addition to just getting cells, there's a kind of increased focus on building a supply chain for rarer lithium, some of the other key battery EV components. So -- and particularly from the point of view of your guest yesterday, building it in North America or at least in outside of kind of China. So where are you on that? And how do you make sure you have enough access to the components that go into the battery cells?

Yes. Well, first of all, we're focused on a secure and sustainable and scalable partnership with those supply chains. So we have strategic supply agreements for lithium, nickel and cobalt, and we'll be able to reduce the amount of cobalt for instance, in our LTM batteries and packs by 70% from the Bolt EV, for instance, which was sourced from LG. We've also announced some really great things over the last few months like the GE Renewable Energy for rare earth materials and other materials. And we support that renewable energy growth with the North America and Europe-based supply chain. And we're in an early stage of investment to develop a U.S.-based low-cost lithium chain for the next-gen batteries from CTR in California. In which case, CTR will utilize a direct extraction process that results in a smaller physical footprint and no production tailing and lower carbon dioxide emissions when compared to some of the traditional processes like pit mining or evaporation ponds. So these are some pretty big moves. This will all contribute to a much greater supply chain control and, of course, more locally-sourced materials and more in vertical integration with our manufacturing resources. So again, more product control from a quality standpoint, lower cost and production capability, we believe, second to none. So we have that -- the chip piece of it, I would say we are doing some pretty innovative things on the chip piece of it, too. If you're interested in that, I can go into that.

Okay. Yes. Well, why don't you talk a little bit about the chip basis, and then we'll get to some of the EV portfolio.

Okay. We see the semiconductor requirements more than doubling over the next several years as the vehicles that we produce become more of a technology platforms. And as a platform maker, that's very important to us. So what we're looking at doing and what we're going to do is a new strategy that will actually reduce the number of unique microcontroller units, or MCUs, required by 95% to the industry-leading levels. So we're going to lead the industry with this. And this will drive quality and predictability. And this -- even one of those families of the 3 could alone account for more than 10 million units annually. And the company -- we really expect much of that investment will flow to the United States and Canada. So those 3 core micro-controllers are really designed to provide more than 7 years of platform stability. So that really unlocks software developers to focus on the accretion of high-value customer facing future content within the company. So to do this, we're really going after strategic supply agreements and the joint R&D programs and manufacturing collaborations I'm going to mention, will really help us get the full potential of LTM and Ultifi dual platforms and deliver a high volume, very focused units. So the companies we're working with and involved with in helping us execute the strategy that I outlined are Qualcomm, STM, TSMC, which is the world's leading dedicated semiconductor foundry. Renaissance, onsemi, NXP, and Infineon. That's quite a list. And this will drive our margins higher as we discussed at our Investor Day, but this is a very unique and very integrated approach getting to 3 families, really high volume, and we've got a pretty broad platform of companies that will help us execute that strategy. So that's a big deal for us, a huge deal.

Yes. And speaking of that, so is that part of the Ultifi move that what others called domain controllers and moving the compute out of legacy chips into something where it's more centralized. You can do better software-defined features and so forth?

Exactly. And we will co-develop that focused approach with these companies so that we get the manufacturing scale that goes with that focused approach, Brian.

And kind of related to that, just kind of came in on the Internet. What does that lead to the Tier 1s? Because Tier 1s often work with many of those chip suppliers that you've talked about, they will write software, they will bundle it. But if you're providing the value-add on the integration and the software, where does that leave the traditional electronic Tier 1s?

Well, we still work with them extensively on things that are more customer-facing on a Tier 1 basis, obviously. And so I don't think that changes from an integration standpoint, we still are going to leverage the value that they bring on unique and innovative new technologies that fit into that micro process or footprint. It's up to us and the Tier 1s to integrate it. And so things like Super Cruise, Ultra Cruise, those things, we're still going to lead the development from a sensor standpoint, from a cloud standpoint, from a performance standpoint, and they'll help us do that.

Okay. Let's go back to the EV portfolio and some of these questions did come in from investors. So maybe a little more standard. The assumption when you laid out at the Capital Markets Day of your 2030 targets imply fairly significant EV sales, but only about $10 billion to $15 billion -- of about $90 billion, only about $10 billion to $15 billion loss from existing ICE revenues. This question points out that GM has been losing share based on 1990, I would probably say 1960-something, because you were at 50% at one point. What gives you the confidence...

Yes. Right, right.

Yes. What gives you confidence that GM can gain that kind of share?

I think -- well, first of all, I'm not sure it's been every year, but I get the comment.

This goes back to the 25 hands and all of those relics.

Yes. Oh, yes, I do remember that. I just -- flashed in my head. I was a little younger then. But in any case, if you look at our portfolio and you look at our promise to bring 30 EVs by 2025. And you look at what we're beginning to offer, it's very different from putting batteries into existing vehicle platforms as substitution. For instance, the Silverado E, which we'll show in about 45 days in CES, will be additive to the ICE Silverado portfolio. It will be a vehicle that we positioned quite differently. It will have all the capability and more of what our ICE variant offers, but it will be a very different architecture purposely designed for electric vehicles. So that will be a battery electric truck platform. Those and things like the HUMMERs that we're introducing, we don't have HUMMERs today. We don't have those. We don't have LYRIQs today or Cadillac. And so you look at those and you look at the size and the price point, and you look at what they're going to deliver from an EV standpoint, we see an additive portfolio that gradually transitions over time in some cases where we'll have dual entries in the showroom. And so we've got -- we're the only ones that can actually do that because we've done this from the ground up. It is not something where we're going to have to substitute things or recapacitize things in existing plants with volume drops off of those portfolio entries that we already have. And so if you look at our footprint, things like Detroit-Hamtramck, where we are making very low volume in CT6s. And in some cases, relatively low volume in Volt, we've taken a vehicle assembly site that used to make 230,000 units from a capacity standpoint, and we're going to make things that have additive volume and entries to our portfolio, things like, again, the Hummer SUT -- SUV will move to the Silverado E, will move to the Sierra E. And then from then, we go into production of things that are more crossover, lower-priced, higher volume. And those things that we talked about at our Investor Day, like the Equinox right around $30,000 and the biggest segment in the world are things that we're not going to stop making the ICE version of that right away. But as the market demands, we have agility there to sell both or one or the other, depending on the volume flexes. That agility, but also using a footprint and filling a footprint rather than having to go out and capitalize a new plant for a new set of tools, somewhere where we don't have it, is a huge strength of ours. So our capital costs for doing an additive portfolio in EVs is much lower than some of our competition. So hopefully, that makes sense.

Well, and it gets to the next set of questions, which is what do you expect about the profitability of EVs versus ICE? And how does that compare with the early EVs kind of like HUMMER, which are clearly targeted at higher price points versus when you get it into the core of the -- you mentioned the Equinox. And it kind of got some issues there. Do Tesla's high gross margin tells that EVs are profitable? Or is it just Tesla-specific? Can you get to 25% gross margins in your EV business? And then do you have to change things in the non-EV part -- the nonpower trade part of the factory? For example, Tesla is making noises about large body casting and other factory optimizations.

Okay. I'll go to the first part of the question first, which is profitability. And I can say that during this time frame, when we begin production of things like the Equinox-sized vehicle, don't forget that the second gen of the ICE Equinox will be a lot more profitable than the first gen. And the reason why that is, is because we're into the second set of tools, the second round on use of the tool set off of what we call Delta and the Delta SUV. That is a big profitability improvement for us in a high-volume way for the ICE vehicle. As we do that, we get into the beginning of the second gen of our battery technologies. And as I said, we'll have, on the second gen of those LTM batteries chemistries, 60% reduction on the battery costs from the Bolt EV. So that's really, really important. And so that's why our portfolio strategy on a vehicle basis matches our battery chemistry step in cost and energy density that we're laying out and beginning to capacitize. So on a profitability basis, we have both massive improvements on the ICE side and then we hit the high-volume LTM second gen at 60% of the Bolt EV costs on batteries today. That's a big deal. And the casting and fundamental changes in the core hardware technology that goes into the EV platforms, I would say I smile when we talk about Tesla on some of the big castings. The reason why I smile is because back in the beginning of the CT6, we had some of the largest castings done for the shock towers and motor compartments on that vehicle ever done in manufacturing of vehicles ever. That was one of the most high-tech advanced body shops in Detroit-Hamtramck ever. And so we took that -- and we did that on purpose and we did it on the CT6 knowing that we're going to want to use that on the Corvette, for instance. And the Corvette has something called the Bedford Six. If you go down to Bedford castings here, you'll see 6 of the most complicated, most technically advanced castings in the world. Again -- and we did that because the Corvette spine a mid-engine, new platform that we did, as you know, on the C8. We tested that out on the CT6 in lower volume. We moved into the Corvette high volume, which made the business case incredible, which we can offer the car under $60,000. So we have that. We've done it. We tested it out here in our advanced body shop at the tech center in Warren, and now we're moving that into high-volume production as we move into our electric vehicles. So I smile a little bit because someone made news on that recently. We've been doing it for many years.

Okay. Let's move on to software, again, kind of following up on some questions from the Capital Markets Day. In particular, you outlined the software strategy both for things that customers will pay for just as well as the general software in the vehicle. What are the metrics in '23, '24, '25 that would signal success on a software strategy? Is it penetration rates? Is it subscription revenue, subscription as a percent of installed rates? Is it sort of some DevOp metrics you might have internally around kind of iterations of releases?

Yes. Look, we just hired Edward Kummer on the digital space here, which we announced on that Investor Day. But I would say our vehicle intelligence platform is really going to enable that rides on top of our hardware platforms and EVs. And launch Ultifi in the software actually both our ICE and EV vehicles. It allows features like CrabWalk on a HUMMER and Watts to Freedom. Those are software-based activities that enables things like Super Cruise and Ultra Cruise. It enables a whole bunch of things that for not selling great vehicles, we won't be able to deliver all the software capability from a CX standpoint that we capacitized with our workforce. And so we've got to have those. We're pretty good at that. And so we have 16 million connected vehicles in the U.S. and Canada and about 14 million -- 4.2 million of paying customers on those vehicles. So in '21, it's forecasted to generate nearly $2 billion in revenue and the margins on that are greater than 70%. So we just went out with a consumer study that also indicates our customers are willing to spend an average of $135 per month on connected products and services. And we have a connected carpark, we think, of 30 million vehicles by 2030. So that's a massive opportunity for us, and we'll certainly be updating all of you on the progress as we execute. But it's really important to note that the revenue that I'm talking about is much more than a onetime purchase. It opens up subscriptions to second and third owners of the car. That's a big, big opportunity. So with our new OTA upgrades, that's all in place. And so I couldn't be more excited about the opportunity there for us.

Okay. So let's move on to some of the midterm challenges just in the core business, whether it's ICE or EVs. You showed us your new order system. But would you be considering, not just for EVs, but more broadly, developing build-to-order, reducing dealer inventory stocks, potentially adjusting the economics with the dealerships, recognizing kind of the consumer really wants that kind of seamless configure -- whether it's an ICE or electric vehicle, configure price and get the vehicle without necessarily having to go through awkward handoffs to the dealerships?

Yes. I think, look, the whole pandemic taught us a whole bunch of things, right? How to sell and execute and operate with reduced inventories and the reason why we've been able to do that is we've been putting in systems that can actually show the dealer in the pipeline when the vehicle is going to be built, when it leaves the factory, and they can actually act and sell on those vehicles before they hit their lots. So that's one big efficiency from a cost standpoint, both for the dealer, but also from a customer standpoint. So we're doing that today. We talked also in our Investor Day on the digital retail platform that we're implementing, that really is landmark. And the reason why I say that is because it will allow our customers to purchase a vehicle any way they want. So it's called buy my way. And so there's still customers that want to go to a dealer, they want to see it, they want to touch it, they want to drive it. We respect that, and we want to sell to them, too. There's also a lot of people that say, "Well, I want to order the car, I know what the car is. I've already seen it." In the case of a HUMMER, for instance, when we sell those vehicles, those will be ordered. And if they want to have them delivered to their house, we can have it delivered to their house. We can do all kinds of things. The strength of what we have because the brick-and-mortar has already been done by our 4,000 dealers is the fact that we have a service and accessory type business that's already in place. So we don't want to abandon any of that. But we do want to offer the customer the ability to buy their way. And that's what the digital retail platform really offers and we're working very hard on that over the pandemic. And I would say the inventory, as you know, we'll see. We're -- I think Paul Jacobson really talked during our Q3 earnings that we expect that inventory to remain very low through 2022, and that's really based on the strong demand for our products. I mean everything that we're launching and making is bought. And so that's not a bad place to be. However, we do need to have more availability from a chip standpoint, and that's beginning to happen as well.

And if the consumer is going online with the new system, configuring, getting delivered, how does that change the dealer economics? And is that something that is going to improve the long-term earnings trajectory of GM?

I think it is, number one, on the latter. Number two, the dealers that want to participate in this and you can see what we're doing with Cadillac as we become an EV brand. Some of the first Cadillac EVs will mark that. And the dealer piece of that, some dealers won't want to participate in that opportunity with electric vehicles in a different model of how we sell service and service our customers. So that's okay, but we're going to give them the opportunity to do it. And we've had a ton of people signing up to do it. So they see the opportunity for themselves. It changes it, but there is still a very healthy place for our dealers and our customers with their new model of how we deliver the vehicle itself, but also the software services, the buying experience itself, all of that. So it's very much changed, and you can see us walking through that with our dealer body as we introduce our new EV portfolio, with HUMMER and LYRIQ to begin with.

And again, kind of the economics of the core business, we've had a bunch of suppliers, obviously, in the last 1.5 days, all of them are dealing with commodity pressures. But more than that, just general inflationary pressures, whether it's energy, freight, labor rates and price going up. Your historical purchasing contracts while index for commodities often don't have pass-throughs for all those various other parts of the supplier. Cost of goods sold then to a person, they're saying, we're having dialogue with our customers. So how do you as an OEM think about that issue of can you continue to get price downs out of the supply base productivity improvements when there's not just commodity inflation that you index, but general broad-based inflation flowing through their -- through them and then eventually up to you?

I guess we have a lot of suppliers, obviously, and we run a lot of money through the supply chain. $88 billion worth roughly in a normal situation. A lot of those contracts are long-term contracts as well, and a lot of them aren't. So it depends on the contract length. We see the fluctuation. That's why we both enter into those long-term contracts in some cases. So I guess it's dependent on which part of it that we're really talking about. But I would say passing things through is not the way to create value for our customers, either in the supply base or our retail and fleet customers. So that drives innovation. It drives innovation like the chips that I talked about. It drives that kind of thinking to get higher volume off of a less complex scenario in all cases. And that's why I go back to the LTM platforms that we've designed. Again, these are not ICE platforms that are very specific by market segment. These are really 2 platforms with some variants that get high scale. And so I think the suppliers, as we go forward in the LTM platforms, are going to reap the benefits of us doing the hard work over the last 2 or 3 years when we decided to go all EV. And not do hybrids and not do retrofitted ICE platforms with batteries. That's why we did it. The scale piece of that, we got to get really innovated and we have been very creative with the manufacturing footprint in all cases, that has high volume, and that's how we're doing it.

Okay. So on that note, we could talk for another hour, but need to move on to our next presenter. Thank you very much, Mark. Thank you, GM team, and look forward to continuing the dialogue.

Thank you, Brian.