Markman Capital Insight

Steer Clear Of GM As It Revs Up Risky EV Venture With Honda

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Two legacy car companies located on opposite ends of the glob are getting together to make the least expensive electric vehicle to date. What could possibly go wrong?

Honda Motor (HMC) and General MotorsGM (GM) executives announced Tuesday a plan to make a sub-$30,000 EV, starting in 2027. They probably expected a positive response. It didn’t work out that way.

Investors should continue to avoid General Motors.

The EV explosion is in its infancy. Although the uptick in ownership is growing fast in Europe and China, the important American and Japanese markets have yet to embrace electric cars and trucks. EVs comprise less than 4% of the total market in those key markets according research from the International Energy Association.

A large part of the sluggish adoption rate can be attributed to vested interests in Detroit and Tokyo.  Ford (F), Stellantis (STLA), GM, Toyota (TM), and Honda still make a lot of money peddling internal combustion engines. Well, at least that used to be true.

Most of the automotive industry has been in a deep funk since the pandemic.

With one exception, all of the major automakers cut orders in 2020 for key semiconductors. Executives assumed sales would slow given so many countries chose to lock down their economies. That fateful decision created the current semiconductor shortage. Chip contractors simply replaced automotive orders with demand from consumer electrics companies.

TeslaTSLA (TSLA) did not cut chip orders. Its popular EVs were presold.

Legacy automakers desperately want to duplicate that business model. It removes so much risk. However, getting there is going to be a struggle. Parts modularity is a big deal in the legacy world. Wiring harnesses, brake assemblies and other auto parts are interchangeable across brands. Even small disruptions in the supply chain can be catastrophic for the entire sector. The transition to EVs will exacerbate those potential problems.

Honda and GM want to make a low cost EV, yet they can’t even begin production until 2027.

The timeframe is especially worrisome given the two companies have a history together, the project will use battery technology developed in 2020, and the new vehicles will be manufactured in existing GM facilities.

The Cruise Origin is a quirky EV jointly developed in 2020 by Honda and GM. The promotional website notes Origin will have no steering wheel, no pedals for braking or acceleration, and bus-like format where two sets of passengers will sit facing each other. The prototype was supposed to showcase what was possible with technologies developed by Cruise Automation, an autonomous vehicle startup.

The 2027 collaboration is not expected to be autonomous, yet it will be powered by GM’s Ultium battery platform and built in its North American factories, according to a joint press release

With so many of the necessary pieces in place, the production hold-up is inexcusable.

Tesla is the global EV leader and the firm is moving at breakneck pace. The Austin, Tex.-based company started EV production in 2010 in a refurbished Fremont, Calif. factory that was previously owned by Toyota. A new state-of-the-art facility was completed in 2018 in Shanghai, China. The company opened a duplicate facility last month near Berlin, Germany. And an even larger gigafactory is set to open this week in Austin. Together these factories have the capability to manufacture 2 million vehicles right now.

Admittedly, it is early in the transition from ICE vehicles to fully electric. There is time for legacy automakers to get into the game with compelling products. Unfortunately, getting to the market late is not going to help GM. Long delays coupled with increased spending will put pressure on shares, leading to higher costs for additional capital.

At the current price of $41.42, GM shares trade at 6x forward earnings and 0.5x sales. The market capitalization is $63.8 billion. While this may seem like a bargain it is really a trap. Sales and profitability are declining at an accelerating rate.

According to the fourth quarter financial report in February, quarter-over-quarter sales fell 10.5%. During the same time earnings slipped 40.3%.

Investors should continue to avoid GM shares.