Auto File: Tesla’s Split, Aptiv’s Warning

S Split

05/08/2022 16:20

Joe White
Global Autos Correspondent
joe.white@thomsonreuters.com
     
Greetings from the Motor City!
     
Welcome to the first Friday in August. If you are reading this,
thank you! And, also: Why aren’t you on vacation yet? Probably
because the world is not taking a vacation, and certainly not
the auto industry. 
     
There is plenty to review today before you slide out for the
weekend: Elon Musk promised a bright future as Tesla  TSLA.O  
shareholders approved another stock split. Aptiv rattled
investors with a gloomy outlook for the European auto sector.
And the Manchin-Schumer Democratic budget plan’s electric
vehicles (EV) incentives keep getting smaller the more you look
at them. 
     
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Have a great weekend! Here we go -
     
* Elon Musk: The Steve Jobs of Cars
Elon Musk has made the Tesla annual shareholders meeting a work
of performance art for years, and 2022 was no exception. Dressed
entirely in black, Musk bounced on a stage set up at Tesla’s
Austin Gigafactory roughly 59 minutes and 55 seconds into the
proceedings https://www.tesla.com/2022shareholdermeeting and
talked for more than an hour. His stand-up act has improved
since his Saturday Night Live appearance. His ability to wow
Tesla shareholders and make all obstacles seem to disappear 
https://www.wired.com/2008/01/how-steve-jobsis as powerful as
ever.
 
To substance: Tesla shareholders approved a 3-for-1 stock split,
which of course is a matter of optics that will take the
company’s current $921 share price down to a seemingly more
affordable $300 or so. But such splits are often treated as
bullish indicators. (Speaking of bullish, the landing page for
the annual meeting webcast featured an image of a Model Y with
longhorns stuck to the front.)
     
Musk brimmed with optimism for Tesla’s business, forecasting the
company will build 1.5 million vehicles this year, and exit 2022
building cars at an annualized rate of 2 million vehicles a
year. The object in BMW’s rear view mirror is much closer than
it appears.
     
There was more: https://techcrunch.com/2022/08/04/the-5-biggest-takeaways-from-teslas-cyber-roundup
 Promises that “Full Self Driving” software will roll out to all
North American customers, a prediction that robots and automated
driving will make Tesla the most valuable company in the world
(watch your back, Apple.), and a warning that the Cybertruck,
when it finally appears in production form, may not have the
same features, nor be as cheap, as once promised. https://insideevs.com/news/602618/tesla-cybertruck-prices-and-specs-will-change-elon-musk-admits
     
There could be another Tesla factory announced for somewhere by
the end of the year, Musk said. Where? Well, he observed that he
is half Canadian.
     
Tesla shareholders backed management on most of the proposals on
the proxy - rejecting proposals to require the company to open
the door to unions and deliver reports on sexual harrassment and
discrimination. But a proposal to allow shareholders to nominate
directors passed. 
     
* Tesla’s not-so-secret profit margin advantage
"We have the highest margins in the industry," Musk said to
applause from shareholders Thursday.  
     
Indeed. The company many executives in the established auto
industry once expected to go bust is now a benchmark. A new
report by consulting firm Accenture  https://urldefense.com/v3/__https:/www.accenture.com/us-en/insights/automotive/electric-vehicles-on-the-rise__;
!!GFN0sa3rsbfR8OLyAw!dKkDF0GAMT6loYhHhNUlvEL4FUHHssXuXQLZkk2Yww1
kP1ul8AQx_lM52pfEI-3Vmilh4y4ILMgNix8hpEldz2CxgaIWyPl3tmo$explain
s one of the reasons why: Tesla, with its direct-to-customer
sales system spends about 1,200 euros ($1,226) less on sales and
distribution than legacy automakers, Accenture reckons. And that
advantage layers on top of higher average transaction prices,
and higher volumes of sales per showroom.
     
This is a fat target for legacy industry executives scrambling
to cut costs, and they are zeroing in. Ford Chief Executive Jim
Farley said last week he wants to take $2,000 a vehicle out of
Ford’s distribution costs – a monster number in a business where
unions and managers argue over pennies of cost per vehicle.
Except this discussion will be with dealers, who in the United
States have powerful protections under state law. Pass the
popcorn?
     
* Automakers dig deep for batteries and chips
Once upon a time, big automakers would take weeks to pay
suppliers, and would cancel orders on short notice if sales
didn’t hit expectations. Those days are gone.
     
Now, automakers are paying up front to secure semiconductors, EV
battery raw materials and production capacity, agreeing to stick
to orders and getting directly involved in designing chips,
instead of leaving that work to suppliers.
     
Chip industry executives welcome the changes in behavior, not
least because the pre-pandemic lack of understanding among
automakers about semiconductor manufacturing made them difficult
customers.
     
Automakers are also paying up-front to secure supplies of
lithium and other battery materials. GM agreed to pay lithium
producer Livent $198 million in advance for supplies.
Lithium producer Albemarle boasted to investors that it has been
able to renegotiate contracts at higher prices, boosting
profits.
     
* The Inflation and EV Subsidy Reduction Act
The more auto industry executives and analysts look at the
complex clean vehicle subsidy machine outlined in the Senate
Democrats’“Inflation Reduction Act” https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf
 proposal, the more it looks like a detailed industrial policy
that could result in a sharp reduction in the number of EVs
eligible for federal purchase subsidies.
     
The proposals for overhauling “clean vehicle” tax credits “are
designed to spur additional deployment of clean vehicles, in new
and used form, to increase U.S. manufacturing…(and) address a
criticism that EVs are only for the wealthy,” said Levi
McAllister, a partner with the Washington, D.C. law firm Morgan,
Lewis & Bockius. McAllister points out that the proposal does
not limit subsidies and other policy support to electric
vehicles, but includes hybrids (good for Toyota) and hydrogen
vehicles (good for fuel cell and electric truck maker Nikola as
well as Daimler Trucks and other commercial vehicle makers going
big on hydrogen.)
     
A major part of the industrial policy impact of the proposal is
contained in requirements that before 2024 at least 40% of the
minerals used in an EV’s battery come from North America or a
country with which the United States has a trade agreement, and
at least 50% of the manufacturing be done in North America. The
percentages rise from there. By December 2028, only batteries
assembled in North America with minerals 80% sourced from North
America or friendly nations would qualify for the full $7,500
credit.
     
A Congressional Budget Office estimate suggests that only about
11,000 vehicles would qualify for the full $7,500 tax credit in
2023. In 2031, the CBO estimates the government will shell out
just $1.43 billion for clean vehicle credits - good for just
under 191,000 vehicles at the full rate. That would be a small
fraction of the projected total number of EVs sold in the United
States if the Biden administration’s goal of having half the new
vehicle market go electric by 2030 is achieved. 
     
Warren Browne of RFQ Insights, who forecasts North American
production, said he expects no manufacturer’s vehicles will
qualify for the full $7,500 tax credit next year. At best, he
said, some may clear the domestic content requirements for
battery manufacturing and allow customers to get a $3,750 tax
credit – if they earn less than $300,000 per household, or
$150,000 for an individual (another new criteria in the
Democratic plan.)
     
Nonetheless, GM Chief Executive Mary Barra on Thursday joined
the president to endorse passage of the proposal. Elon Musk
tweeted: “Thank goodness for Senator Manchin.” https://twitter.com/elonmusk/status/1555442024127537153
     
GM and Tesla get nothing under the current EV subsidy scheme -
and both have invested heavily in domestic battery production.
They could be winners if the proposal becomes law - and they
both would welcome anything that trips up non-U.S. EV
manufacturers or rivals dependent on foreign batteries.
     
And when it comes to federal budget policy, tomorrow is always
another day.
     
* You might get to keep your catalytic converter: Palladium
prices are falling.
Sky-high prices for platinum and palladium used in exhaust
scrubbing catalytic converters have encouraged thieves to
hack-saw the devices out of cars. Good news: Now commodities
analysts are predicting prices for these metals will fall as the
global economy slows.
     
* Shenzhen slices the AV liability knot
In Shenzhen, a city of 18 million adjacent to Hong Kong,
automated vehicle deployment is expanding in part because
officials have come up with a framework for sorting out
liability in accidents where a robot-driven vehicle is
involved. 
     
If the AV has a human driver behind the wheel when an accident
happens, the driver is responsible. If only the robot is
driving, the vehicle owner is liable. If a defect causes an
accident, the owner can seek compensation from the manufacturer.
Americans and Europeans worried about China taking a lead in AV
development should be.
     
* China Rising: Part Two
On the subject of China, Breakingviews cautions that Western
automakers, such as Stellantis, worried about the Chinese
government meddling in their affairs should really be concerned
that Chinese domestic automakers now own more than half of the
world’s largest market.
     
“Foreign automakers last year saw their collective share of the
Chinese car market shrink by 5.5 percentage points http://www.chinadaily.com.cn/a/202201/24/WS61ee1172a310cdd39bc82cd1.html
 to 45.6%,” write Pete Sweeney and Neil Unmack. 
     
* SUVs power Mahindra
Indian automaker Mahindra said demand for new SUVs and other
vehicles is outrunning its ability to build them. The company
reported strong profits, and said it was expanding capacity.
     
* The Bad Results Roundup: Aptiv
This week produced some rough financial results. One of the most
significant underperformers was automotive technology supplier
Aptiv, which cut its full-year outlook and warned that vehicle
production in Europe is going to drop by 5% for the full year,
not rise 10% as once forecast.
     
“The reality is there are OEMs who have raised significant
concerns as it relates to their outlook on the European macro
situation and the impact on vehicle production,” Aptiv CEO Kevin
Clark told analysts Thursday.
     
* The Bad Results Roundup: Toyota
Toyota said profits for the April-June quarter fell by 42% as
supply chain snafus forced a series of production cuts. The
tumble was far worse than analysts had expected. “Extremely
bad,” is how one analyst put it.
Toyota put on a brave face, saying it still expects to build 9.7
million vehicles for the full fiscal year, and achieve its
operating profit goals. Click your heels together and say,
“Second half recovery, second half recovery, second half
recovery.”
     
* The Bad Results Roundup: Lucid 
Next in the Bad Earnings Surprise parade comes electric luxury
vehicle startup Lucid, which slashed its production forecast for
the year by half, to just 6,000 to 7,000 vehicles.
     
Chief Executive Peter Rawlinson said Lucid has 37,000 orders for
its vehicles, and $4.6 billion in the bank. Still, Lucid shares
buckled, dropping about 10%. Elon Musk, for whom Rawlinson once
worked, did not resist the temptation to give his rival a kick.
“I had more kids in Q2 than they made cars!” Musk tweeted. https://twitter.com/garyblack00/status/1554922964650426368
     
* Carvana gets a bounce
Online used car retailer Carvana’s shares bounced up https://investors.carvana.com/news-releases/2022/08-04-2022-210011611
 after it reported a 16% increase in Q2 revenue compared to a
year earlier. The company lost $439 million and remains a “long
way” from its $3,000/vehicle goal for overhead costs. 
CEO Ernie Garcia has already outlined plans to cut SG&A
(selling, general and administrative) costs. Still, Carvana
shares are down nearly 86% for the year, making it one of the
big losers in the washout of pandemic-darling stocks. 

* Essential Reading
     
Could banks give Elon Musk an escape from Twitter?  urn:newsml:reuters.com:*:nL4N2Z60Y3
     
The cars and trucks Americans steal most. https://www.autoweek.com/news/industry-news/a40808664/these-were-the-most-stolen-vehicles-of-2021
     
AV trucking startup TuSimple and the fallout from one accident.
https://www.wsj.com/articles/self-driving-truck-accident-draws-attention-to-safety-at-tusimple-11659346202
    
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