General Motors (GM.N) has signaled in recent announcements on plant retoolings that it plans to keep its most significant and most profitable combustion trucks and SUVs in production longer than expected – another 10 to 12 years, according to analysts and suppliers, that could enable the automaker to reap tens of billions of dollars in additional profit. That’s an important stepping stone for GM as it shifts completely to zero-emission electric vehicles in 2035.
During the 1990s, GM and Ford built enormous market shares producing enormous profits mainly from light-duty pickups and sport utility vehicles. In the aftermath of the September 11th attacks, the stock market decline, and a pension and retiree health care crisis, those profits collapsed. By the early 2000s, a severe recession and weaker consumer demand caused a global economic slowdown, with U.S. automakers struggling to restructure their businesses. GM, in particular, needed to cut costs, raise wages and retool plants to meet a new reality of lower sales and higher capital spending.
The retooling effort has already been underway in the United States, including a $4 billion investment to turn the Orion Township, Michigan plant into a battery-electric production facility. It’s a massive commitment to a future business model. Still, retooling an existing plant means less money upfront and lower long-term maintenance bills compared with building a greenfield factory from scratch.
For GM, the Orion plant is a crucial piece of its strategy to stay competitive in the new world of EVs. Its current product lineup includes the Silverado HD and GMC Sierra HD pickups, retailing for $107,000 to $160,000. According to analysts, by continuing to build those trucks through 2035, the plant could generate $2 to $3 billion in pretax profit a year.
GM has also begun investing in retooling its Spring Hill, Tennessee factory to build EVs alongside gas-powered vehicles. Similarly, it’s invested in its renamed “Factory Zero” plant in Detroit-Hamtramck and its Lansing Delta Township Assembly plant in Michigan to produce full-size electric SUVs and pickups.
The new models that GM is developing for its core North American market are more fuel-efficient than its traditional vehicles, meaning they require less raw material and manufacturing processes to make. That should translate into lower production costs and better profit margins in the long run. But the company faces several challenges, from rising interest rates to changing customer preferences and Silicon Valley upstarts.
In the near term, lower profit at GM’s finance unit and a more comprehensive loss from its Cruise robo-taxi operation will likely offset the improved profit from North American operations. Those challenges, along with the cost of a $200 million charge for devaluing Venezuelan currency and an anticipated investment in ride-sharing service Lyft, may eat into earnings next year. Investors will also want a more concrete plan for the transition to electric cars. Options include a spinoff of just GM’s Ultium battery operations; hiving off the EV assets into a fully owned but separately listed stock, as it did with Hughes Electronics and Electronic Data Systems; or breaking up GM’s Cruise self-driving unit.
