Most people now seem to accept the importance of fuel economy and alternative energies, but with the poor sales of plug-in electrics, why should auto manufacturers focus much on this area? Global warming makes these things important, but these are still businesses, so profit is the ultimate concern. New U.S. government regulations could make this more important, but these regulations should still be subject to change. General Motors (GM) has a successful plug-in electric, so it could make profit off increased interest in this part of the industry. However, with the upcoming election, the disagreement over the new regulations, and the fact that these developments are looking far into the future, I think it is all too uncertain for anyone to invest in GM based on these recent news items.
GM's Chevrolet Volt did actually jump in sales during the month of August, marking its best month ever. It still falls short of expectations though, so GM is looking to suspend the production of the Volt at its Detroit-Hamtramck plant. The supply still surpasses sales greatly, so GM is clearing room for other projects until sales can catch up. The Volt is still outselling Toyota's (TM) plug-in Prius, Ford's (F) Focus Electric, and Nissan's (NSANY.OB) Leaf, so it is doing well in the market when compared to others. When this part of the industry does expand, GM is in a strong position, but this expansion may continue to be quite delayed.
Some could expect increased expansion, as global warming may be even worse than previously expected. Scientist Professor Peter Wadhams and his team have noted the dramatic effect that melting Arctic ice caps are having on global warming. The ocean water absorbs sunlight significantly more than the ice that was in its place, and according to Wadhams, this has added an equivalent of 20 years worth of CO2 emissions. Of course, threats of global warming have not previously altered consumer behavior so much in the auto industry, as plug-in electrics still struggle to take off.
While global warming has led to a surprisingly slow growth in the electric industry, government regulation could have a greater effect. The Obama administration has recently adjusted a rule for doubling average fuel economy by 2025. This now allows electric car manufacturers like Tesla Motors (TSLA) to opt in and then sell credits for exceeding standards to companies that cannot meet their efficiency goals. This clearly supports the electric car industry and makes plug-in electrics more appealing. This is mainly on the manufacturer's side, however, and it not may affect consumers so much. The new regulation has also received some criticism, as components of the plan may support U.S. auto manufacturers like GM. For this reason, German companies Daimler and Volkswagen refused to sign agreements. It is likely that we will hear more disagreement about these regulations. Especially with the goal being so far in the future, I expect these regulations to change drastically over the next 12 or 13 years.
In his recent acceptance speech, Obama noted that he will continue moving the U.S. toward a "clean energy future that combines natural gas with alternative power sources." This shows clear support of the plug-in electric industry, which is more good news for GM. With the U.S. presidential election so close, however, we have to also look at Romney's plan, which Obama considers to be dependent on fossil fuels. Others have claimed that Romney is focusing more on energy needs than on environmental concerns. Looking at Romney's website, this appears fairly clear, as production becomes one of his biggest concerns. The more important thing is that he is calling for "significant regulatory reform." Since Romney has an entirely different focus than Obama and a passion for major reform, regulations like the 2025 fuel economy goal could change greatly or fall apart if he wins the election.
GM is currently trading around $23 and has been rather erratic over the past year. Despite this, its price has not changed too dramatically. Its earnings-per-share growth was -41.56% though, and its revenue growth was -4.47%. The current state of the stock is not great, and things seem too unpredictable right now to jump in.
The other players? Ford is trading around $10. It had earnings-per-share growth of -55.93% and revenue growth of -6.52%. Tesla falls into the same category, as it has not been doing so well and faces uncertainty despite a positive change in the regulations. It is trading around $29, and it had revenue growth of -54.18%. Toyota has actually been quite successful. It is trading around the fairly high price of $82, and it had revenue growth of 62.74%. I do not think it's reasonable success, with its plug-in Prius deserving much weight at the moment, since this part of the sector is growing slowly at the moment.
The Effect On GM, Specifically
Reuters reported some remarkably bleak news on the Volt as recently as yesterday (as of the time this was written). It reported GM is losing thousands on each Volt it sells, mostly due to a high production cost (in the area of $75,000 per Volt) and low lease costs.
GM itself shrugs the losses off as a building potential move - and is staking hopes on its Generation 2 model picking up Volt sales and running off of good reviews from early buyers. The International Business Times reveals that Reuters' math only takes into account cars already sold, and not the fact that loss margins will decrease with each Volt sold.
Still, Chevy has a lot of ground to make up if it's lost around $50,000 for each of the 21,000 cars it has sold since December 2010. And will they get those good reviews? I'm not so sure, and the macro environment (as discussed above) isn't pointing in any particularly promising directions. It still takes several hours to plug in a Volt, and new global warming figures haven't seen the herd of new plug-in buyers that these companies were hoping for.
Still, the U.S. government has a vested interest in keeping GM afloat (it owns about 26% of the company) and so we might expect it to keep regulations in place that would allow for the Volt's success. The government's continued involvement here, as I see it, won't allow for much success on GM's part. Either regulations encourage other companies to compete in the plug-in environment, or they keep them out (spelling a possible doom for the car market, something the U.S. government wouldn't want). If other companies come in, GM is going to be competing against the same names it competes with across other sectors and I can't expect much more success here than there.
I think the larger message is that GM, in the short term, either needs a stellar plug-in product or macro conditions to support a rush to buy any plug-in car at all. Right now, it has neither. It can certainly hold its breath on the generation 2 car, and hope the likes of Volkswagen, Toyota or Daimler don't come in with a better model (as they've been known to do), but really I think a revenue heading down and estimates of a $0.00 EPS should tell a more accurate story of the current situation. Analysts are slapping a "hold" on GM and I have to wonder if they're still standing to buy that with the loss figures from each Volt coming out. If not, I don't know how long one can hold out waiting for Volt sales to be the boost GM's been hoping for, because it just doesn't seem as destined to be as the company must have hoped.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.