Companies facing major technological changes have two options – betting on the company in the next era or collecting money in a declining sector before hanging up their spurs. Many companies fail to make the leap: Kodak in digital photography, Blackberry on smartphones and most newspaper companies on the Internet, to name a few.
GM will try. On Thursday, Detroit’s biggest automaker said it plans to offer exclusively light electric cars and trucks by 2035, five years before a previously announced goal and part of a broader mission to make its production and operations carbon neutral by 2040. This schedule puts GM well ahead of market forecasts: less than half of the United States vehicle market is expected to be electric by 2035.
GM is taking a big risk, but it is not a profile of courage, says Sven Beiker, a former BMW engineer who now runs the consulting firm Silicon Valley Mobility. The writing is on the wall. Abroad, where GM sells about two-thirds of its cars (pdf), Europe, Japan and China said the days of the internal combustion engine are numbered. In the United States, combustion engines will be deactivated in California and Massachusetts by 2035, and other states are certain to follow. The Biden administration is also planning to use the federal government’s budget and procurement policies to accelerate an EV transition.
The market is also sending a strong signal, and it has been impolite to laggards in the EV race. Tesla’s stratospheric appreciation – seven times higher since 2019 – is leaving other American automakers in the dust while investors attack companies that appear to be moving very slowly. Ford, for example, has seen three chief executives walk around the boardroom since 2014.
The Great Downtown
By increasing its EV goals, the company is accelerating the depreciation of its factories and supplier relationships, but also its decades of intangible know-how. World automakers have learned better than anyone how to get the last straw out of their internal combustion engine, a technology first installed in commercial cars in 1886. Getting away from it is more than just garbage; is abandoning a competitive advantage formed over more than a century.
Instead, legacy automakers must build entirely new forces: electric batteries, autonomous software, mobility networks and more. This is one of the main reasons why Tesla, valued at $ 752 billion, is the most valuable automaker in the world, although GM sold more than 20 times more vehicles in 2019 (pdf). The market is now valuing something else, says David Keith, an engineer and professor at MIT Sloan School of Management. “Do you want to be the company that bends metal in a very low margin business,” he says, “or a technology business with recurring revenue and a blue sky assessment?” The strengths of today’s automaker are tomorrow’s lost assets.
Think of it this way: GM could double sales of vehicles with an internal combustion engine by 2040, while EVs (still only about 3% of new car sales worldwide) erode its market. By then, however, it would be too late to reach companies that have spent billions of dollars refurbishing their factories and workforce. Traditionally, it takes about six years to launch new vehicle models and more than a decade to design a new engine, says Keith. Such a delay would qualify GM for the positions of Kodak and Blackberry.
“In a five-year period, the best thing you can do is make money by selling Silverados and Escalades,” says Keith. “All the money is in the sale of SUVs and pickup trucks. It is incredibly difficult to actively step back and say that everything will be fine in five or 15 years. It is not what many investors want to hear. ”But that is the bet that almost all major automakers are making now.
So far, VW has been the most aggressive. After a disastrous bet on diesel and a € 30 billion ($ 36 billion) emissions scandal, the German automaker is spending € 73 billion ($ 86 billion) to turn the road with autonomous electric cars. Time is short: electric vehicles surpassed diesel cars for the first time in Europe in September. In 2028, the company aims to produce 28 million EVs and 70 different models, a goal that some analysts say is out of reach.
We are no longer in the 20th century
GM’s dilemma reflects the existential issue in all fossil fuel industries: take the leap or remain attached to an industry model designed to shrink as the world represses greenhouse gas emissions.
So far, oil and gas have been making a noise mainly about giving up old business models: France’s Total calls itself “energy company”, while “energy transition company” Shell promises that a third of its revenue will come from electricity until mid-2030s. But in practice, oil and gas are slowly advancing towards the energy transition. Less than 10% of industry capital expenditures are dedicated to renewable energy, while $ 166 billion in new oil and gas projects are planned for the coming years, according to an analysis by Rystad Energy.
Some fossil fuel companies are combining new technology with a more daring strategy. The former Danish oil and natural gas company, one of Europe’s leading state-owned coal companies, changed its name to Ørsted in 2009, promising to abandon fossil fuels. In 2017, it had sold its oil and gas assets and is now on track to completely eliminate fossil fuels from its energy matrix by 2025. This turned out to be a good bet: Ørsted has practically tripled in value since its five-year IPO behind. Last February, British oil company BP made similar statements, promising to eliminate or offset all emissions from operations and flaring oil and gas it supplies by 2050 (a goal with a lot of ambition and few details).
Few oil and gas companies will be able to do this, says energy economist and analyst Philip Verleger. The new energy industry will operate on electrons, not oil, a competence far removed from the traditional domain of oil and gas companies. “They will fail,” Verleger told Quartz, comparing the challenge to Kodak’s failure to master digital photography. “Very few companies have gone from being really good in one business to being really good in another.”
The auto industry can be different. Mass production vehicles, as Tesla discovered, while narrowly avoiding bankruptcy, are difficult. Only a few companies can do this well, and less consistently generate profits. But GM is better positioned than most. It pioneered EV technology in 1997 with the launch of EV1. Today it is America’s largest automaker, and its pickup trucks and trucks throw money away. GM already has the relatively popular, albeit uninspiring, Bolt EV, and plans to launch another 20 models by 2023.
GM could see its great risk rewarded. The company will only have to bet everything it can to find out.