Companies facing massive technology shifts have two choices—bet the company on the next era, or collect cash in a shrinking industry before hanging up your spurs. Plenty of companies fail to make the leap: Kodak in digital photography, Blackberry in smartphones, and most newspaper companies on the internet, to name a few.
GM is going to try. On Thursday, Detroit’s biggest automaker said it plans to exclusively offer electric light-duty cars and trucks by 2035, five years ahead of a previously announced goal and part of a broader mission to make its production and operations carbon neutral by 2040. That timeline puts GM well ahead of market forecasts: Less than half of the US vehicle market is expected to be electric by 2035.
GM is taking a big risk, but it’s not a profile in courage, says Sven Beiker, a former BMW engineer who now runs the consulting firm Silicon Valley Mobility. The writing is on the wall. Overseas, where GM sells about two-thirds of its cars (pdf), Europe, Japan, and China have all said the internal combustion engine’s days are numbered. In the US, combustion engines will be phased out in California and Massachusetts by 2035, and other states are sure to follow. The Biden administration is also planning to use the federal government’s procurement budget and policies to accelerate an EV transition.
The market, too, is sending a strong signal, and it has been unkind to laggards in the EV race. Tesla’s stratospheric valuation—up seven-fold since 2019—is leaving America’s other automakers in the dust, while investors pounce on companies seen as moving too slowly. Ford, for example, has seen three chief executives cycle through the boardroom since 2014.
The Great Write-Off
By moving up its EV goalposts, the company is speeding up the depreciation of its factories and supplier relationships, but also its decades of intangible know-how. The world’s automakers have learned better than anyone how to squeeze every last drop out of their mastery of the internal combustion engine, a technology first installed in commercial cars in 1886. Turning away from this is more than just junking materiel; it’s abandoning a competitive advantage formed over more than a century.
In its place, legacy automakers must build entirely new strengths: electric batteries, self-driving software, mobility networks, and more. That’s one major reason Tesla, valued at $752 billion, is the world’s most valuable automaker, even though GM sold more than 20 times as many vehicles in 2019 (pdf). The market is now valuing something else, says David Keith, an engineer and professor at the MIT Sloan School of Management. “Do you want to be the company that bends metal in a very low-margin business,” he says, “or a technology business with reoccurring revenue and a blue-sky valuation?” Today’s automaker strengths are tomorrow’s stranded assets.
Think of it like this: GM could double down on selling internal combustion engine vehicles through 2040, while EVs (still only about 3% of new car sales globally) erode its market. By then, however, it would be too late to catch up with companies that spent billions of dollars retooling their factories and workforce. Traditionally, it takes about six years to roll out new vehicle models, and more than a decade to design a new engine, says Keith. That kind of lag would qualify GM for the ranks of Kodak and Blackberry.
“In a five-year time frame, the best thing you could do is make money selling Silverados and Escalades,” says Keith. “All the money is in selling SUVs and pickup trucks. It’s incredibly hard to actively pull back and say it’s all going to pay off in five or 15 years. It’s not what a lot of investors want to hear.” But that’s the bet almost all major automakers are now making.
So far, VW has been the most aggressive. After a disastrous bet on diesel and a €30 billion ($36 billion) emissions scandal, the German automaker is spending €73 billion ($86 billion) to flip the script with autonomous electric cars. Time is short: EVs outsold diesel cars for the first time in Europe this September. By 2028, the company is targeting production of 28 million EVs and 70 different models, a goal some analysts say is out of reach.
We’re not in the 20th century anymore
GM’s dilemma reflects the existential question across every fossil fuel industry: Make the leap, or remain wedded to an industry model destined to shrink as the world clamps down on greenhouse gas emissions.
So far, oil and gas have mostly made noises about giving up on old business models: France’s Total has styled itself as “energy company” while “energy transition company” Shell is promising that a third of its revenue will come from electricity by the mid-2030s. But in practice, oil and gas are only inching toward the energy transition. Less than 10% of the industry’s capital expenditures are dedicated to renewables, while $166 billion in new oil and gas projects are planned over the next few years, according to an analysis by Rystad Energy.
A few fossil fuel firms are pairing new technology with a more audacious strategy. The former Danish Oil and Natural Gas company, one of Europe’s leading state-owned coal utilities, changed its name to Ørsted in 2009, pledging to abandon fossil fuels. By 2017, it had sold off its oil and gas assets and is now on track to eliminate fossil fuels entirely from its energy mix by 2025. That has turned out to be a good bet: Ørsted has roughly tripled in value since its IPO five years ago. Last February, British oil major BP made similar intimations, pledging to eliminate or offset all emissions from operations and burning of oil and gas it supplies by 2050 (a goal long on ambition and short on details).
Few oil and gas companies will be able to pull this off, says economist and energy analyst Philip Verleger. The new energy industry will run on electrons, not oil, a competency far afield of oil and gas companies’ traditional domain. “They’re going to fail,” Verleger told Quartz, comparing the challenge to Kodak’s failure to master digital photography. “Very few companies have transformed from being really good at one business to really good at another.”
The auto industry may be different. Mass-producing vehicles, as Tesla discovered while narrowly avoiding bankruptcy, is tough. Only a few companies can do it well, and fewer consistently turn a profit. And GM is better positioned than most. It pioneered EV technology in 1997 with the launch of the EV1. It is today America’s largest automaker, and its pickups and trucks throw out cash. GM already has the relatively popular, if uninspiring, Bolt EV, and plans to introduce 20 more models by 2023.
GM could see its big risk pay off. The company will just have to bet everything it has to find out.