🔋At A Loss
🔋At A Loss
Ford lost a staggering ~$72,700 per EV sold in Q2 - why there is more than what meets the eye in that number and what may be to come.
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Electric vehicles (EVs) are such a hot topic these days. Many people think they are the future while many think they are a scam. Like how much of the world has become polarized politically which I discussed a few week ago in Debt Pt. 4: Populism, EVs are no different in this regard. Avid readers know that I am not a fan of right/left political divide and try to avoid those distinctions for laying out my arguments. I have in the past argued that the aggressive EV strategy currently being used is not optimal from a materials perspective given the supply/demand dynamics of the underlying battery metals. A plug in hybrid approach would make for a better strategy to avoid numerous problems, but that is not the track the US is on at the moment.
Automakers have been piling loads of money into EV development and manufacturing in recent years with a push from the government. As with any new technology, there is a hurdle to become profitable, especially if the economies of scale have not been built out yet. This is a big thing EV critics avoid when they mention profitability metrics. For automakers, the profitability of EVs has been not been achieved until recent years, and in many instances hasn’t yet. Tesla is comparably the most profitable EV company and has made big strides in its manufacturing factories and production quantities.
The figure below has net profit per vehicle for a number of automakers. There are some discrepancies with these numbers, like GM, who has said they are not profitable on their EVs and is hoping to be by 2025. Further, based on Ford’s Q2 earnings report and sales numbers, they are losing $1.08 billion or ~$72,700 per vehicle in Q2 (compared to losing ~$66,500 in Q1). This results in projected losses of $4.5 billion in 2023 (compared to losing $2 billion in 2022). To be clear, this is in their EV cars only and the rest of the business is solidly in profit. The first observation is how large those numbers are and how Ford and GM guidance disagrees with the figure below, which is a whole 2 orders of magnitude different for Ford comparing to Q3 2022. Since Ford is having particular trouble and I haven’t seen reports on the breakdown of other automakers, I assume the other big companies have fewer losses than this or it would also be newsworthy. The second observation is that the numbers are often headed in the wrong direction and actually less profitable as the production is increasing.
There are many things to consider for price of EVs including price of metals, demand, supply/production capacity, labor, US car market, economy, inflation, technology improvements, and government incentives. As I mentioned last week, raw materials and energy costs absent the other macro dynamics are what influences manufacturing as economies of scale are reached. While true scale hasn’t been reached for most EV makers, raw material costs are still cited as a dominating burden on production costs.
Back in 2021, the Stellantis (Chrysler, Dodge, Jeep, Fiat, etc.) CEO said EVs add 50% additional costs to production. This hasn’t shaken them from their commitment to have 50% of their vehicles EVs by 2030 in the US, and 100% in Europe. Most automakers have similar EV targets. Since then, the price of battery materials (50% of the EV cost) shot up aggressively and plummeted back down, but to still higher levels than the time of that publication. You can see below that the price of lithium and nickel, both vital to the battery are still more expensive than when that statement was made in December of 2021. In the meantime, prices were dramatically higher than the prices at the time he made that statement, meaning production costs became more expensive since then.
One explanation for the EV costs going the wrong direction and the discrepancy in the graph and the direct earnings is the lag in orders to impact the production cost. Material costs have varied wildly in that timeframe. For example, if there is more than a 4 month lead time in battery orders, the price of batteries due to rising raw material cost might not have impacted automakers in Q3 2022. Subsequently, even today with prices going down, battery prices paid for in those vehicles may have been from more expensive levels. In a few quarters we may see that the losses are no longer as bad due to lower commodity prices. Unfortunately, while this scenario still doesn’t explain the profitability even with the companies themselves saying they aren’t, it may help explain the difference in the values obtained for Ford and shows that even at this stage production is still quite commodity price sensitive.
While market efficiencies will play a role in lowering costs, the trend hasn’t helped automakers other than Tesla be profitable yet. With increased automation efforts and/or overseas manufacturing, labor costs are low meaning raw materials and energy become most important. This is why commodity prices are so crucial and why the US government is getting involved in mining activities and countries which I’ve discussed prior. Most technologies go through unprofitable stages before becoming profitable and that may still be the case for EVs. Automakers are aggressively increasing production and this scale will help lower these costs and raise profit margins. Regardless of these positive trends, automakers will still hit the energy and commodity brick wall that I think is coming for them in the medium/long term which will be a headwind to their slated objectives.
However currently, Tesla is lowering prices of their EVs with others following suit. Bringing macro trends back into the picture, the demand for cars has slowed due in large part to financing costs and in my opinion — a looming recession. To truly make this case well would require an article in itself. For now I’ll point to my article Year Of Pain, where I discuss a few reasons why recession is likely and a myriad of leading economic indicators which tend to signal before a recession occurs. Some examples may include company orders, savings rate, manufacturing output, and hours worked.
While lower car prices seem good to consumers, it may signal a problem for automakers. If car prices are coming down and thus demand for expensive cars is also going down, the profitability and scale up efforts of Ford, GM, and others reliant on increased sales of large expensive EVs, it is going to be a challenge to improve profit margin on these cars. Given a recession at some point in 2024/25, which I admit is inadequately defended in this piece, the consumer will be in worse shape to afford an EV. Further, in that environment corporate earnings in general tend to decline which overpower the potential cost savings of lower commodity/energy prices which I do think will contribute in a rebound in EV profitability numbers until that occurs. Worst case scenario would be that earnings recession plus EV losses mean the companies seek a bailout similar to airlines in 2020. Thanks for reading! See you next week,
-Grayson
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