GM’s Strategic Pivot
Last week, General Motors’ Chairman and CEO Mary Barra increased the company’s commitment to electric vehicles from $20 billion to $27 billion by 2025 and announced the company’s plan for an all-electric future. More than half of GM’s product development resources are focused on electric vehicles, a significant tipping point from the company’s deep heritage in gas-powered internal combustion engine cars and trucks.
“We are resolved as a management team to move even faster to expedite the transition to EVs. The all-electric future we are building integrates all the things we do better than anybody else — so we can put everyone in an EV, generate profitable growth and create shareholder value.”
This week General Motors sent another significant signal of this pivot by withdrawing from the Trump administration-led litigation against California’s tough fuel economy and emissions regulations.
Startups often pivot multiple times before settling on a winning business model. What GM is doing is much trickier.
In 1886, 25-year old high school dropout Billy Durant rode in a friend’s new spring-suspension horse drawn carriage and was so impressed that he tracked down the developer, bought the patent and manufacturing rights, and formed the Flint Road-Car Company. By 1900 the company (renamed Durant-Dort Carriage Company) was the leading manufacturer of horse-drawn carriages selling 50,000 per year.
At first, Billy was skeptical of the new horseless carriages, but in 1908 he formed General Motors as a holding company and acquired Buick Motor Company. Durant’s holding company rapidly completed twenty more acquisitions including Oldsmobile, Cadillac, Oakland (later renamed Pontiac), and Rapid Motor Vehicle Company (later renamed GMC). In 1910, the company tried to buy Ford, but the deal fell through and the next year Durant was forced out of the company. He co-founded Chevrolet and in 1918 Chevrolet acquired a controlling ownership in General Motors, putting Durant back in charge of an even bigger company.
GM passed Ford in sales in the late 1920s and was the world leader in car sales into the 1980s. Today, the most valuable automakers in the world include Toyota, Volkswagen, Daimler, Honda, BMW. GM has fallen to number seven. Tesla is the highest valued American car maker.
All industries follow similar lifecycles. There’s a startup phase when the industry starts small and as awareness and demand grow, so do sales. Then comes the growth phase when everyone seems to want what the industry produces. Then finally, the industry matures. Growth slows and sales eventually begin to decline. This is often represented using the Sigmoid mathematical function as shown below, although it’s usually simply called the S-curve.
The auto industry has been a mature industry for quite some time. When industries approach the end of their life, smart companies try to “jump” to another S-curve still in the startup phase.
That’s what GM (and every other automaker) is trying to do. Even though GM introduced an electric concept car in 1990 and its first mass-produced electric vehicle in 1996, the company remained fully committed to gas powered cars, even going so far as prohibiting consumers from buying that first car at the end of their lease, and destroying all the reclaimed cars.
Making an S-curve jump is hard.
The auto industry is heavily impacted by regulations. Regulatory decisions can have huge impacts on the profitability of car makers, so those companies invest heavily in trying to influence regulatory outcomes. Often, regulatory decisions that favor electric vehicles hurt the sales of gas powered cars and vice versa, so a company like GM has to choose which side they want to favor. Until now, that side has been gas powered cars.
But obviously, that’s changing. Why?
Some of it is obviously politics. The Trump administration was openly opposed to many of the fuel efficiency and emissions regulations that hurt gas powered car makers. The Biden administration is expected to largely support even stricter regulations, explicitly pushing consumers towards electric vehicles.
Some of it is economics. Electric cars have cost more to make than gas powered cars. Government tax credits, exemptions, and rebates have helped close that gap so that consumers can afford to choose an electric vehicle over a gas powered one.
Some of it is technology. Perhaps the biggest impediment to broad adoption of electric cars has been battery technology. Battery costs are the biggest driver of the cost disadvantage EVs face. Battery range and recharging times make electric vehicles a challenge for long road trips. And news reports of exploding batteries create fear, uncertainty, and doubt in the minds of consumers. But battery technology is rapidly improving on all those fronts.
General Motors is investing heavily in battery technology. The first generation of the company’s Ultium batteries are 40% less expensive than those used in the Chevy Bolt and the second generation is expected to improve that by another 50%.
But the switch isn’t going to be easy. Big mature companies are complex. GM customers, employees, and dealers are all heavily invested in the company’s gas-powered legacy. The company’s business model and economic engine are fine tuned for the way GM has always operated.
While it might seem that logically GM has a strong starting point for the transition, with solid supply chain, manufacturing facilities, distribution, and customer service for a product that is largely the same, the investment that the company needs to make to transition to electric vehicles may be greater than for a pure-play startup like Tesla. General Motors also has everything at stake. Their existing revenue streams and loyalties can easily be lost if the company stumbles in this transition.
Billy Durant successfully led his companies through the S-curve jump from horseless carriages to automobiles. Can Mary Barra do the same as GM tries to jump from gas-powered to electric-powered vehicles? We will have to wait and see.