Summary
- Mary Barra, GM CEO is moving the company aggressively to become just an electric vehicle producing company, getting rid of all other lines of business.
- There are two driving forces behind this move, first, the advancement of “new” vehicle producers, like Tesla, and, second, the pressure that is coming in this area from China.
- This seems to be the way the world is now moving, and Ms. Barra seems to be leading her company into this “new” world better than a lot of others.
- The stock market has given her good marks since this commitment to electric vehicles was announced last fall as GM seems to be leaving the “legacy” world to enter the “new” world.
Mary Barra, CEO of General Motors Co. (NYSE: GM) has taken the step that most “legacy” companies have to face at one time or another, when wanting to compete with the “new” Modern Corporations that are coming to dominate the world.
Ms. Barra has made to the move to declare that General Motors will phase out all gas- and diesel-powered vehicles by 2035.
This is quite a commitment. One reason it is quite a commitment is that it means that General Motors must move out of its production of gas- and diesel-powered vehicles.
I have discussed the magnitude of such an effort in an earlier post. It is hard to give up something you have been such a leader in, for such a long time.
One sees the difficulties faced by such legacy companies in current situations of General Electric Co. (NYSE: GE) and AT&T Inc. (NYSE: T). The efforts needed to get out of the old ways of doing things are massive.
Ms. Barra, during her tenure as the CEO of GM has already made some important decisions, one of the being to retreat from focusing on being number one in sales in the world and accepting a lesser position in the marketplace and the company regroups.
But, now, she apparently sees the writing on the wall and wants to commit all of GM’s effort to moving into the EV field. This is a brave jump.
General Motors came through most of 2020 in good shape financially with third quarter cash flow catching up with a slower first half of the year. Full year 2020 earnings will not be out for another week and one-half but Ms. Barra has been preparing for this and has the financial backing to make the transition. Getting the money is not going to be a problem.
What Legacy Companies Face
But, GM, and other legacy companies are facing the “new kids on the block,” companies that don’t have the legacy to hold on to, and can just focus on the new business model.
Of course, the major player to point to here is Tesla (NASDAQ:TSLA).
And, Tesla is considered by many to be a “new” Modern Corporation because it is considered to be a robotics company.
Cathie Wood, founder and chief executive of Ark Investment Management argues that Tesla is a robotics company, one, because automatic vehicles are “robots”; and, two, is also an energy storage company because automatic vehicles will been electricity; and, three, is an artificial intelligence company because AI will power autonomous vehicles.
Ms. Wood believes that traditional auto analysts don’t know what to do with a company like Tesla.
And. consequently, they don’t understand the real difference between being a “legacy” company and being a “new” modern corporation.
Furthermore, investors also do not know this difference, but must gain this insight to invest well.
Reasons For The Change
There are two fundamental forces driving this change.
First, as just alluded to, the technology to drive the changes mentioned above, does exist. And, in addition to Tesla, there are a number of other companies that are working to take advantage of the emerging markets for electric vehicles.
The thing with this is that it is hard to compete with these new companies if you are being held back by trying to maintain the old way of doing business. The “new” Modern Corporation is providing new business models and must be met head on with a full concentration on the creation and development of the new markets.
Second, China is playing a big role in the development of electric vehicles and has the biggest motor vehicle market in the world.
As Keith Bradsher writes in the New York Times,
The business of making cars has reached a critical juncture—and it looks as if China is in the driver’s seat.”
China has been in this space since 2007 and has set the bar for what is happening worldwide. “When it comes to global automakers’ electric vehicle plans, all roads lead back to Beijing.”
And, China means to maintain that lead. But, Ms. Barra is trying to build up to “match Beijing’s speed.” That is why the focus Ms. Barra is trying to bring to GM is needed.
This is not unlike the situation faced in other sectors, like the banking sector. As I have written about JPMorgan Chase & Co. (NYSE: JPM), the bank is starting an all-digital consumer bank in the UK. The UK has the most open market for financial institutions in this space and there are many new fintech companies in the market already. In addition, as far as electronic banking, China has been the leader in the world.
JPMorgan is building a whole new business model as the foundation of this effort, much like General Motors is trying to do, and, if the UK effort proves successful, the bank hopes to move the model to Europe and then the U.S. and then the rest of the world.
The transformation of the world is taking place in many different industries, and the most successful models appear to be focus on the new as much as you can and accept that your competition will be global. And, the competition is going to be fierce.
General Motors
Ms. Barra has been the CEO of General Motors since January 2014. At the time she ascended to the CEO position, GM stock was priced around $41 per share. For six year the GM stock fluctuated around the $40 level until March 2020 when the stock market tanked because of the spread of the coronavirus pandemic and the connected economic recession.
GM stock price tumbled to just under $18 before rising by the end of September 2020 to just under $30 per share. This is the time that Ms. Barra began to talk about the growing focus on electric vehicles.
Then in the fall Ms. Barra committed to spending $27 billion by 2025 on the development of the electric vehicles and the GM stock began to take off. As mentioned above, she has the financial resources to make this commitment.
On Friday, GM stock closed at just over $41 per share. Quite a recovery.
Again, this is a time of radical uncertainty. A lot of things are taking place in the industry and in the economy and in the world. Can Ms. Barr and General Motors bring off the transformation? Will they be able to compete with Tesla and others in the world of the “new” Modern Corporation?
These are things the investor needs to learn about and understand. Ms. Barra is taking a very aggressive stand right now and seems to be fully committed to the new pathway. Right now, I think she is doing the right things and has a good chance of success. The rise in the stock price has been warranted.