How often do you see a company calling for a government industrial policy - not a five-year plan, but a 12-year plan - that will cause the price of your products to increase, anger 98.6% of your customers, subsidize your competitors, and cause your profits to plummet? That sounds like an almost impossibly bad dream.
As it turns out, I had to pinch myself when I woke up Friday morning to the realization that this was, in fact, not an impossibly bad dream. It was the management of General Motors (NYSE:GM) who suddenly has the brilliant idea of begging the U.S. government to cause its profits to plummet: General Motors Calls for National Zero Emissions Vehicle (NZEV) Program.
In other words, General Motors is calling for a U.S. national implementation of a variant of the California-led Zero Emissions Vehicle (ZEV) program. The phase-in of the program targets force the industry to produce 25% of cars as zero emissions ones by year 2030: A national electric vehicle program?
Let’s first note that the GM proposal does not technically say “battery-electric vehicle” (BEV). In other words, it could - at least in theory - include hydrogen fuel cell cars too. That said, given today’s cost of hydrogen as a fuel, and that hydrogen costs approximately three times as much as gasoline on a per-mile driven basis, we can probably dismiss hydrogen fuel cell cars as a viable consumer technology in the U.S. for the next few years.
If hydrogen prices fall by two thirds, or if gasoline prices rise to meet that gap, that would be another story. But the U.S. consumer is not going to switch from gasoline to hydrogen in order to have the privilege to pay more at the pump. Let’s talk about hydrogen again if those fuel prices change as dramatically as would be necessary.
Therefore, in practice, what this GM proposal really means, is the forced adoption of battery-electric vehicles (BEVs) onto the U.S. population. Such a mandate already is there in the 10 ZEV states now, led by California, as they have mandated a path to between 15% and 16% sales mix of such cars by 2025.
GM’s proposal is asinine for multiple reasons, on multiple levels. The way this program works in the ZEV states today, and would work nationally according to GM’s proposal, is that the automakers must sell a certain percentage of cars as ZEVs going forward. The ZEV sales mix would rise by 2% per year, reaching 15% in 2025 and 25% in 2030.
That of course begs the question: What happens if the consumer doesn’t want to buy these cars at a price where automakers can make their standard profit margin?
To understand the nature of this question, ask what would happen if the government mandated that every clothing store must sell 25% green sweaters as part of its sales mix, as opposed to 1.4% today. If people are not interested in those green sweaters, then they must be given away at horrible losses.
And who do you think pays for those losses? Higher prices on other products in the store, which of course hurts the consumer. This GM proposal is simply a way to tax the consumer in order to promote a product that the consumer doesn’t want.
Who precisely are those consumers who will have to pay higher prices for their pickup trucks, SUVs and cars? Mostly GM’s customers in the American heartland, that’s who. From Alabama to Wyoming, 98.6% of GM’s customers would be effectively taxed with higher prices.
The de-facto subsidies that will be paid for by higher prices on that Chevrolet Silverado or Suburban will benefit mostly a concentrated set of relatively wealthy people in two California coastal metros, as that’s where a disproportionate set of EVs are sold. Those two metropolitan areas around Los Angeles and San Francisco look completely different than the rest of America, in terms of electric cars.
Way to go, GM - angering and impoverishing 98.6% of your customers in order to subsidize a concentrated group of people who would mostly not be caught dead in a GM car to begin with. Rarely has one seen a corporate strategy this self defeating. It’s the automobile industry equivalent of Coca-Cola filling its cans with raw sewage and sending the sales proceeds to Pepsi as a subsidy to help the competition.
And in this case, Tesla (TSLA) is the Pepsi in the analogy.
You really can’t make this up, folks. Has GM’s management completely lost its mind?
GM’s U.S. unit sales were 1.4% plug-in during Q3 2018:
Chevrolet Volt -- 5,429 units
Chevrolet Bolt EV -- 3,949 units
Cadillac CT6 PHEV -- 197 units
Source: GM Delivered Nearly 700,000 Vehicles and Record Average Transaction Prices in the Third Quarter and Monthly Plug-In Sales Scorecard.
That’s a grand total of 9,595 units out of 694,638 total sold in the U.S. that quarter - or 1.4%.
Don’t get me wrong-- I love plug-in cars in general and GM’s plug-in cars in particular. I have more than 50,000 miles under the belt in GM’s plug-in cars. I recommend them.
But the simple fact is this: People have different preferences. I like plug-in cars. Others, evidently not so much. I’m part of the 1.4%. GM now says the U.S. government should effectively force it to tax the other 98.6% of GM’s customer base in order to subsidize the 1.4%.
What's the likely outcome of this GM proposal? Anyone with a passing grade in Economics 101 should understand that GM’s profits on 98.6% will fall, in order to be able to subsidize losses on the other 1.4%, seeing as consumers are unwilling to pay for them themselves.
Ask the GM shareholder now: Is what you want, lower profits? I can hear the champagne corks popping at the GM annual shareholder meeting already - NOT.
GM also is playing with fire here from another perspective. It's asking the U.S. government to dictate the product mix of what it sells. For any company, there's hardly anything more intimate than that. It's like an individual asking the U.S. government to choose for itself which profession to pursue or where to live.
GM would be wise to go back and study the logical implications of what it's asking the U.S. government to do: If you want to give the government the power to (insert whatever you want), you cannot complain when the government also seizes the power to (insert whatever you don’t want).
In other words, if GM thinks it's so cool that the U.S. government should dictate what products GM must sell, no matter consumer preferences, GM should not complain if one day the U.S. government simply expropriates all of General Motors. Or anything else it feels like doing.
As it turns out, that may actually be the eventual outcome of this sorry GM saga yet again. By calling for this loss-inducing tax-subsidy ZEV policy, GM assures that its profits will plummet, if this policy were to be implemented. Taken to its logical conclusion, that could eventually trigger yet another GM bankruptcy - and voila, a government takeover of GM.
One must wonder why GM’s management has not thought this through. There's a whiff of appeasement in this proposal, asking Father Government to spank the company, for it has been bad and deserves a punishment. It's certainly not in the GM shareholder interest.
So what "would" be in the GM shareholder interest?
GM should start by calling for a repeal of the existing U.S. - federal and state - regulations on what cars must and mustn’t be sold. This includes the California-led ZEV mandate. It also includes federal regulations on CAFE (corporate average fuel economy) fleet mix.
Basically, GM should be in favor of letting people buy whatever cars they want - diesel, gasoline, hybrid, plug-in hybrid, battery-electric and hydrogen fuel cell. Let the free market rule, allowing supply and demand steer the industry into satisfying consumer demand.
GM should not be afraid of such a free market. GM makes fully competitive cars, crossovers, SUVs and pickup trucks of all sizes and shapes, with all forms of powertrains. Today’s GM product is not the one of 15 years ago. It's at the top of the industry game, for the first time in 50 years.
As such, GM should quickly surrender this counterproductive quest to have the U.S. government dictate its product mix, which if implemented would yield a downward profitability spiral and potentially an eventual bankruptcy. Reversing course would be the right thing to do from the standpoint of economics, corporate finance and most importantly the GM shareholder.
If GM doesn’t switch course and somehow bamboozles the U.S. government into adopting this command-and-control economics that has failed all over the world over the last century, I think it’s time to look into shorting GM stock in order to profit from the inevitable decline and bankruptcy.
I never thought I would say this, but in the scenario that GM suddenly has planned out for itself and the industry, it would be on a path to go bankrupt sooner than Tesla. Let’s hope for GM’s sake and the rest of the industry that it switches course on this proposal as soon as possible.
