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You still have to pay a couple bucks for a gallon of gas (more in California, as always), but automakers are discovering that gas-powered cars may be a liability that detracts from their valuations, instead of an asset that enhances values.
New research from Morgan Stanley argues that traditional internal combustion engines—the mainstay of automobiles for more than a century—are destined to become money-losers as early as 2030. “We believe the market may be ascribing zero (or even negative?) value for ICE-derived revenues at GM and Ford,” auto analyst Adam Jonas wrote in a Jan. 29 analysis. He lists a variety of factors likely to “transform what were once profit-generating assets into potentially loss-making and cash-burning businesses.”
In late January, General Motors (GM) said it plans to stop selling vehicles with tailpipe emissions by 2035. That means GM won’t sell any gas- or diesel-powered vehicles, the types of cars that now account for nearly all GM sales and profit. That would require an all-electric fleet, powered off the electrical grid, as with most current electrics, or perhaps through on-board fuel cells powered by hydrogen. While most automakers are developing electric vehicles, GM is the first big one to commit to a full transition.
Ford (F) hasn’t gone as far as GM, but it, too, plans an aggressive rollout of EVs to complement and replace current models. Most other automakers are doing the same. Dozens of EVs will flood the market in coming years, including a Ford F-150 pickup, the Ford Mustang Mach-E, the GMC Hummer and the Cadillac Lyriq.
Shares of GM and Ford have surged recently, as investors seem to believe each old-line automaker is progressing toward EVs in earnest. GM shares are up 51% during the last three months, with Ford up 41%. Neither can touch Tesla (TSLA), up 126% during the last three months and a stunning 575% during the last year. But investors are now giving Detroit’s Big Two more credit for electrification plans they’ve been skeptical about, until recently.
Marketplace support
Joe Biden’s win in the November presidential election is part of the EV equation for GM and Ford. Biden supports an aggressive transformation toward green energy, with a goal of achieving net-zero carbon emissions in the U.S. economy by 2050. Tailpipe emissions are a major source of carbon pollution, with sharp reductions necessary for meaningful progress on climate change. President Trump questioned the science on climate change and instituted policies meant to favor carbon energy, such as lowering fuel economy standards that his predecessor, President Obama, raised.
Part of Trump’s pro-carbon policy was a lawsuit meant to force California and several other states, which have gas-mileage standards higher than federal levels, to lower them to the national standard. GM joined the Trump administration’s suit against California. But GM flipped after Trump lost in November, withdrawing from the suit on Nov. 23, when it was clear the Biden administration would end the suit anyway. Since then, GM has announced a variety of electrification plans, with investors bidding the stock higher.
Marketplace support for green technology is crucial, because government policy alone will fail if it raises costs, inconveniences consumers or creates inefficiencies. The Morgan Stanley analysis suggests market forces may now drive a move from carbon-fueled vehicles to electric ones, at least as much as government policy.
The investing firm recently surveyed institutional investors on the value of internal-combustion technology at GM and Ford. Seventeen percent said ICE technology had no value or negative value today. Sixty percent rated ICE technology as slightly positive, while 23% said it was a significantly positive value. That’s with electrification technology still in the early innings: total market share for fully electric vehicles is still less than 3%.
Risk in adapting too slowly
But essentially all of the growth in powertrain adoption in coming years will be electric, while ICE powertrains are certain to decline. The risk for automakers isn’t adapting too quickly and getting ahead of the market. It’s adapting too slowly and becoming overly reliant on dying technology consumers may no longer want as electrics get cheaper and range improves. That extends to factory capacity, with ICE assembly lines possibly becoming stranded assets with no market value. It would cost automakers money to disassemble or convert them to valuable use, thus the possibility of negative value.
“We fall into the camp believing that ICE technology is worth near zero today, which could potentially crystalize into a net liability,” Jonas wrote.
GM has better prospects than Ford at the moment. It’s been building EVs since the Chevy Volt went on sale in 2010, and its Ultium battery technology could become an industry standard used by other automakers. It also owns 70% of Cruise, the self-driving venture experimenting with new types of transportation. Seventeen equity analysts surveyed by S&P Capital IQ have an average 12-month price target for GM of $61, about 16% above the stock’s current level.
Ford doesn’t seem to be as far along on battery and self-driving technology, which may be why it hasn’t yet fixed a date on its plans to go all-electric. Seventeen analysts surveyed by S&P Capitalist IQ have an average price target of $10.34 for Ford, slightly below the current price of $10.90.
Investors, of course, are looking further into the future than most consumers are, and guessing about changes that haven’t happened yet. Most people who buy a car during the next five years will buy a gas-powered vehicle. Electrics still have premium prices and are inconvenient for long trips, which have to be structured around charging opportunities. They’re still nowhere near as convenient as gas models that can be fueled at almost every highway exit in five minutes.
But changes at the laboratory and factory level will presage changes in the showroom. With investors viewing internal-combustion powertrains as a dying technology, there’s likely to be little new investment, with research dollars flowing instead to the electrification efforts investors value. That will speed innovation and lower costs. Charging stations will proliferate and get faster, minimizing the inconvenience of electrics. At some crossover point, gas stations will start to disappear, and electric cars will start to seem like the obvious choice for just about everybody. Whenever that happens, it will be the wrong time to be hawking V-6 and V-8 engines.