General Motors Company (GM) Earnings Call Transcript & Summary

Hi, everybody. We're going to try to wake you up or preempt you food coma right now. But I really am excited with this session and have the privilege of moderating Kristen Siemen, Vice President and Chief Sustainability Officer; of General Motors. And then to Kristen's left, we have Alejandro Zamora, who is the Head of Transportation of Calvert Research and Management, Morgan Stanley Investment Management. We're going to have a discussion about the important topic of decarbonizing and decarbonizing the automotive value chain, the automotive business model and some of the challenges and opportunities that Kristen and General Motors company has facing them through this transition. Just a few remarks for me. I've been at Morgan Stanley for almost 3 decades. And I feel more and more of my time spent looking back at the history of the auto industry from the period, for example, from 1908 to 1913, when the Model T was introduced when the moving assembly line was introduced when the Rant and the founders of General Motors were agglomerating these businesses and coming up with their company over 100 years ago. And we really are witnessing history again, where the topic of energy transition in autos and the enabling technologies in the supply chain, this is evolving, I mean we used to say hundreds of billions, that got out of style. I always say trillion. I mean this is like deka-trillions. I mean this is tens of trillions of investment and transfer of wealth over decades because this is not going to be a quick win. And I spent a lot of time thinking about the trade-offs, okay? The battery supply chain, for example. We all want EVs, right? Everyone wants EV, and that's great. EVs will help save the world. All right. Well, hold on a second. Where does your EV come from? Where are those materials coming from? How are those materials sourced? Because there's a couple inconvenient truths about the battery supply chain, the EV battery supply chain specifically, which involved geopolitics. Up to 90% of the upstream battery supply chain is refined and processed in China. Okay, good on China, that's fine. They had an industrial policy to skate to where the puck was going and to really be in a dominant position there. But if we want a quick energy transition in the West, are we going to do that while flipping our supply chain to economic rivals and have no control over own economic destiny? The Department of Energy doesn't think so, the Department of Defense is also -- doesn't think so, doesn't want to do this. Then aside from the geopolitical entanglement of the supply chain, we have the ESG and emission inconvenient truth of the supply chain. I was told, and it's been confirmed by many automakers. Kristen , if I'm wrong, tell me that in a nickel-based cathode battery that you'd have to drive a Tesla on solar and wind power for 5 years just to offset the coal emissions from refining the grade 2 pig iron in Indonesia to the grade 1 pig iron -- the grade 1 nickel that then goes in the nickel-based battery. So we have to -- as we get greater transparency on the supply chain on the batteries, not just for emissions, but water usage, land usage, tribal land rights, child labor issues, anyone I -- if you study the cobalt supply chain in the DRC, it's heartbreaking. Where is your blood battery come from? And so the challenge is to try to solve a major ESG problem and an energy transition problem without creating new challenges faster than we're solving them. And so that's what we're spending a lot of time looking at within the auto industry and trying to pick opportunities and risks along the value chain, all the way upstream, working with our partners in mining and refining and chemicals and Cap goods in semiconductors and batteries all the way downstream to electric utilities and recycling and charging infrastructure. So with that, and I want to pass it on to you to kind of describe a little bit about what your mission is on the investment management side and how you're spending your time and then we're going to go to Kristen and open it up for Q&A.

Sure. I think your introduction was great. And yes, we're spending a lot of time to assess the financial materiality of the intended consequences of the transition. And we're trying to see in the long term, how those are going to play out. And the IRA, in fact, is quite helpful for us, for my analysis because it's making that supply chain quite transparent. It's making the company's disclosed information they wouldn't disclose otherwise to the public. So it's given us a lot of visibility on how that supply chain cluster is being built. But we still need to understand, in the long term, how the companies are going to deal with declining authorization rates globally. Deal with impact to communities, as you said, of mining of some of the metals in North America, in the U.S. or in FDA contracts that happen with the U.S. And we want to understand how the business is going to look in 10 years. If it's going to be a company that is twice the size that it is today that is just selling everything that is selling electric is additional to what it sells today? Or is it going to be a company that is selling -- of the same size that is just selling dual pricing technology and what that -- how that's going to impact the manufacturing footprint on the existing assets. So will the company still have 90,000 employees in the U.S. in 2035? Will the company will have 12 manufacturing plants in the U.S. in 2035 when the [indiscernible] transition continues to happen? And we look at those because, at this point, we believe that we are at a stage of execution of an environmental strategy for the car companies. So looking at the supply chain will give us a lot of visibility on that and at the targets and how the models are performing. Now they're starting to come out of the manufacturing facilities. But since we're building this cluster, where it doesn't exist. We need to understand what the social issues are going to be. So we're spending a lot of time looking at how companies governance I guess the strategies are changing as a result, how the Boards are changing as a result, how compensation is changing as a result to ensure that this cluster that is in the [indiscernible] being built here in North America actually doesn't face the issues that we have with the energy industry or for the mining industry today. We don't want to be in 10 years in 20 years where we are today in the extraction of natural resources. So that's kind of like the approach we're taking. In the end, we care about what could erode value or create value for the business in the long term. So that's our challenge. We have to quantify things that are pretty unquantifiable. We have to then try to understand how that's going to make the company stronger, and then we have to essentially rank these companies to see which ones are better poised for this transition. So it's what we're doing at Calvert and that's the piece of IT that we provide to the larger investment management team at Morgan Stanley in understanding how this transition is being carried out.

Thanks, Alejandro. All right. So Kristen . As, some of the key messages General Motors sustainability strategy and energy transition and how it might differentiate from some of your competitors?

Sure. So I mean we've made some big bold goals like lot of companies, right? Our plan to be carbon neutral in our products and operations by 2040. We plan to eliminate sale type of issues from new light duty U.S. vehicles by 2035. We've made some big announcements in the past year over our renewable energy strategy. Our original strategy we set back in 2016 was to be 100% renewable by 2050. We saw that we could actually accelerate that based on a lot of the agreements we had made. We bumped it up to 2035. And then last year, we actually -- so we can be there in the U.S. by '25. So we set a goal to -- we actually beat that 1 by 25 years in the U.S. So that was a big accomplishment for us. A lot of other initiatives in place. But I think at the core at GM, our sustainability strategy is fully integrated with our business strategy. They're one and the same. And so it's doing things to ensure that the company is planning for value, planning for growth, focused on the future, things like energy efficiency, water efficiency, waste elimination. Those aren't just good for the environment, they're very good for the business. And so we continue to focus on how we meet those strategies in and really make sure that the company is resilient and looking at things like sustainable supply chain, et cetera. But they're really weaved together throughout the company.

So what I like about your background is you've been at GM for 29 years

Yes.

27 of those years in product development.

Correct.

You told me that when Mary called you to say we wanted you to be...

Well, It was not Mary who called me, but yes.

When you got the call to the CSO at GM, your response was, why me?.

Exactly.

But I like that you bring to this to the role the science and the product development background to be able to call BS on something that just doesn't smell right and to see the challenges and be open, honest and realistic about them. So my question for you is how the hell did you achieve the carbon neutrality 25 years earlier?

So the renewable energy one is a great example of setting a goal. It was the renewable energy commitment that we achieved early and when we first set some of these rules, it's kind of okay, we can see a path to get there, but we're not exactly sure what the steps are, no different than engineering of products and we set goals on price and cost and range and everything else. And you see a path, but it's not identical, right, of each individual step. And so what we did by getting in early working with utilities and projects from a solar lens standpoint, we really found that we were able to, not only find projects that were good financially, but some that were in the communities where we are building and really working together. We participate in founding members of CEBA, Clean Energy Buyers Alliance. And so as part of -- we have a 4-pillar strategy around renewable energy. The first is energy efficiency. So everything we can save and reduce is good for the bottom line. The second is around sourcing renewables and finding a way to add additionality and really grow that market of decarbonizing. The third is around resiliency in things like backup storages and things like GM Energy and things we're doing there. And then the fourth is around policy. But as we look at that 4-pillar strategy and really put initiatives across the board, it's been successful.

And I'd love to know, as you approach the kind of pallet of things that GM can do to continually improve efficiency and emissions and sustainability. What we're -- in addition to renewable energy, what were some of the areas of lower hanging fruit? And what are some of the things that are just really like the very high hard-to-reach fruit that, frankly, maybe you need to work with policymakers on achieving.

Yes. I mean if you look at our -- I mean, if you take our carbon footprint, as an example, right, less than 2% of our carbon footprint is Scope 1 and 2. So renewables are attacking a very small piece of our carbon footprint. And the rest is Scope 3, which is the same for most companies. For us, 75% is the customer usage of our vehicles. And then the next big is -- so obviously, our transition to EVs will take care of that, assuming the greatest decarbonized and we get to charging with green energy 100% of the time. The next biggest piece is our supply chain, which is around 18%. And so as we look at those, obviously, the transition to EVs, as I said, is that's our business strategy. It's a growth strategy. It's is a future of where the industry is heading. On the supply chain, we're working very closely with our suppliers. Last year, we issued -- actually in '21, we issued a supplier pledge and ESG pledge, where we've asked our suppliers to also sign up for their own both carbon-neutral goals as well as minimum score on EcoVadis. So a way for us to ensure that we're getting at things like labor relations, forced labor, child labor, et cetera, throughout the supply chain as well. And so far, we've had over 70% of our Tier 1s have -- APV has signed on. And what we're seeing, which is great, is they're now doing the same thing with their suppliers. And so it's really working as we had hoped and planned that it's going down through the supply chain to Tier 2 to 3 to 4 to ensure that these things are progressing the way we want them progress. And that we are helping each other with how to do renewable energy agreements, looking at ways to make this supply chain more sustainable, more resilient, more reliable. And so when you ask what's the toughest, obviously, the transition is the biggest piece in the grid and really getting to green energy across the board is going to be tough. But it's those 2 categories that I'd say we have the most focused on.

And just one more for me. I want to ask Alejandro. But on the supply chain side, we're talking for the panel that if we're going to onshore battery supply chain, and we're going to do the upstream stuff, extraction, refining, processing, we're going to have to do it very differently from the way it's done in Far East. What are some of the technologies that GM is investing in right now to help not just to accelerate onshore, but to make sure it's done in a way that is equitable and done in a more renewable way.

Yes. I mean I think if you look at the agreements we've made and as we talked before, we have all of the raw materials lined up for -- to meet our volume goals for 2025, and now we're working on '26 to '30, and we're well on our way to that. That's really looking at how do we bring as much into North America as possible? And how do we ensure that it's done in, again, a very sustainable way. And so there's companies like Controlled Thermal Resources out in the Salton Sea in California that are able to extract lithium in a less carbon-intensive way. And so finding solutions like that, finding companies that have commitments and goals, whether it be Posco , the joint venture in Canada around cathode active materials or some of the things we've even done all the way down to Lithium Americas, which is extracting on their own as well. So trying to find the right partnerships with companies that have the same goals, beliefs and objectives that we do, I think, is really the key to the ultimate solutions. And GM is very committed to ensure that we're part of that success. And we talked to kind of the make versus buy earlier as well. And so it's timing those critical materials and insuring, we learned a lot through the last few years of supply chains and where we have to be strategically engaged with each step of the process.

Alejandro?.

I'll stay with the topic then. So something that we've observed at Calvert is that especially the Japanese and Korean OEMs are very comfortable being fully vertically integrated. They've been like that for a while. But the U.S. OEMs, they basically -- and the debt structure and created the Tier system of suppliers. With the electrification change, it looks like we're going back to the vertical integration all the way to the metal in the mines. So my question is, when you're assessing you brought up [indiscernible] example, you're assessing that project, [ Lithi More ] more versus lithium brine, what ESG factors coming to that? Is it purely a financial decision? Or is it -- are you taking into account the emerging risks around local communities, water usage, which could, in the end, If you are worried to put about financial market value materiality, your own brand value.

Yes, it's definitely all in. In fact, -- so one of the things I do with the company is around what we call an office of sustainability in this representative senior leader-level representatives from across all of the various functions, everything from purchasing and supply chain to marketing, manufacturing, et cetera, so that we can come together and talk through these major initiatives. So when we're looking at a company, when we're looking at a partnership or a new agreement or initiative to sign on to, we're all evaluating it for our functions and to ensure that those things aren't being ignored. As far as where we engage and where we don't, and you talked about the vertical integration, in reality, our propulsion systems were very vertically integrated throughout the company for years. And so if we look at electrifying the propulsion system, it's very consistent with what we've done traditionally. So finding those things where we believe either we need a competitive advantage to be engaged earlier in the supply chain, or where maybe there's a supply risk, et cetera. And so all of that is factored in, including all of the ESG aspects.

When it comes to -- we were doing some analysis recently and roughly 80% of the EV capacity on the passenger vehicle side outside of China is coming from 5 cell makers that are working with OEMs globally. So we see a very strong concentration there, and we see potential emerging risks from our ESG perspective. I don't know if Adam has views on the fundamental side. Have you thought about that? GM? I know you're working with those GM Samsung, but micros, have you thought about it? How do we approach that is?

Yes. I mean I think the LG partnership is a great example, it's a 50-50 joint venture on the cell manufacturing. I mean we have one plant producing already in the U.S. The second one is about to come on board. Third one in construction, and the fourth one announced the fourth one with a new partner. But GM is very knowledgeable and has a lot of expertise in the manufacturing, the quality aspect to take that and partner with the chemistry that LG has it's been a very successful joint venture as well as we continue -- I think a lot of people forget you talked about looking back in the industry. GM has been doing electric vehicles for over 25 years, right? And so there's still engineers that worked on those early chemistries and early vehicles that are working on it today and advancing every day, there's new and more innovations. We just built a new innovation center on our tech center around battery chemistry and cell development. So that innovation in those new technologies are going to continue to happen every day in advance. And so I think it's finding the right partners for the right reasons and then also continuing to do our own development as well.

And the other one, if I may, Adam, I don't know. I don't want to take your time, but -- when -- so we are all very excited with the IRA. There's unexpected blooming construction. Labor markets are going to be doing relatively well. We're starting to think about, once this boom passes, talking about 2035 when you're already selling over 1 million EVs, how do you think about that -- it's kind of to my initial point, the size of the business? What's going to happen to those facilities that cannot be retool, that has to be shut down? What's going to happen to those communities in those places where you've had a footprint for 100 years? Have you thought about that? Do you take into account that when you decide these long-term strategies?

Very much Alejandro , and I mean I think our track record to date shows that we do care, right? I mean, we continue to transform our facilities where we are today. So things like Spring Hill or in assembly factory zeroed in Detroit in China. And so even our parts facilities that we're making components for some of our ICE engines are now transitioning to build electric drive units. And so very much a commitment to those communities where we live and work. It's very important to us. And so I think we'll continue to evaluate as we go forward and keep making those important and strategic decisions of where it makes a lot of sense. But very committed to being localized.

I wanted to give the audience a chance. Ask any questions or question. Anybody? Right here.

[indiscernible]

Just want to make sure people heard that question on autonomous driving and how that factors into your mission?

Yes. I mean are you asking the question in regards to the carbon footprint aspect of autonomous driving or... Yes. I mean, certainly, if you drive a vehicle, I'll go back to my engineering things here now. If you drive a vehicle on cruise control, you're going to get the most efficient performance of the vehicle. And so from a range perspective and that with autonomous driving, we're certainly -- it's certainly an advantage from that standpoint. And what it does to if you look at the bigger ESG aspect and the social piece of what autonomous driving does for communities and offers that freedom, our autonomous vehicles are EV vehicles. And so it plays directly into our overall strategy and business strategy. And again, as we can transition more of the grid from a decarbonized in the grid, be able to charge those with green energy is a zero emissions game that plays right into our overall business strategy.

Can I add to that just from a research lens? Your question is -- involves a lot of trade-offs. I mean 120 people dying every day in this country in traffic fatalities and growing. 15x at a serious in capacitating injuries. 2,000 deaths globally per day in traffic fatality. So the life-saving injury saving aspect is huge. Anyone in this room has been affected by automobile tragedy. -- statistically, there's a number of you. know what I'm talking about. If you're able to match supply and demand of transportation as well through autonomous network, there's hope that you can increase utilization of the car park, which is woefully underutilized at only 4%, and we can produce less cars and there's other ways for GM to make money instead of just making cars, you can have more recurring revenue. But then there's the unintended consequence that Elon talked about fairly recently, and I agree with it, which is if you take the -- if autonomy takes the price per mile traveled down from $1 a mile to $0.10 a mile or some imaginably, unimaginably low number. we tend to consume more of it. And then you kind of have these dystopian kind of views of our infrastructure not being ready for just people sitting in traffic jams just coming away, just consuming some, I don't know, living a metaverse when your way to your community otherwise would have taken or something. So this -- we're going to have to see how this goes. I'm very hopeful in our team at Morgan Stanley working with our colleagues. We're very optimistic on autonomous technology, but we are trying to push the more we learn them and we realize this is maybe the hardest thing you may has ever tried to problems that we try to solve. And the regulatory aspect is also incredibly complex. So there's some stepping stones along the way and GM Super Cruise technology and other technologies are saving lives today.

For sure. I mean, absolutely. I mean, you could go through all the statistics of how much safer you are in a vehicle with those systems, and particular Super Cruise, which is very gated on safety and ultimately Ultra Cruise, which is coming, which opens it up to much more roads as well. And the thing that autonomous also provides is there's less accidents. So now there's less congestion on the road. You figure you've got less traffic incidents where you need police or ambulance or that type of thing coming to the scene. And so all of that plays together I think, ultimately frees up a lot of things to happen in really advanced things. But the safety aspects are tremendous. And also the Freedom my parents are aging with soring they're not as quick as they were 10, 15, 20 years ago. And so think of the freedom of what it will continue to give them where people with disability now can have access to transportation that didn't have access. And we continue to follow on everything GM has always done is been gated by safety. I mean I kind of estimate going back in my engineering days. We were driving around our tax under or I'm sorry, our proven grounds 15-plus years ago autonomously. It's easy when you know exactly what route you're on and what's around you. And so to think of where we've come since. It's really amazing both the technology and capability.

While the audience thinks of your next great questions, and there's a couple here. Well, I don't even have to ask. So we're and then over here. Yes, please.

[Indiscernible] to describe the common competition with Chinese automakers. And I know in the U.S., historically, we've had some protections. I mean there's some European brands I never even saw on U.S. road until they went outside the country. If that is the reality, what does the company like GM doing to try to, I guess, tackle that or deal with that potential threat?

Yes. I mean I think at the end of the day, it's great products. It's great services. It's a safety record, and it's who we are as a company. And I think we will continue to win based on the products and what's available. And there's very few full-scale automotive companies out there that cover all segments and price points. And we have a portfolio announced a number of EVs across that range as well as other branches that are new to GM, which signify growth and value and opportunity, things like GM Energy, so energy source services, backup power generation. Our BrightDrop, which is delivery services, both from a vehicle van level perspective as well as small delivery cards for kind of that last mile. And all of those are new businesses that didn't exist before and so provide more opportunities for us in the future.

I think I heard that point as well earlier today and something that was brought up when that point came was that most of the Western new OEMs have been working in China via JVs for decades. So if somebody knows the competition that is coming are the Western OEMs. They essentially helped build that industry there for their case. So I think it was a little bit [indiscernible] in my view how it was proposed. -- because there's a lot of know-how from the Western OEMs on how cars are made in China, what cars are made and what are the advantages of bringing around that, But...

No, I totally agree.