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'Car Wars' report tells Detroit Three to leave China, sell trucks to invest in EVs

Breana Noble, The Detroit News on

Published in Automotive News

FARMINGTON HILLS, Michigan — Detroit's three automakers should focus on their core businesses, including gas-powered trucks, and not the Chinese market in the next few years while pursuing advancements in electric-vehicle technologies until they can be produced with similar profitability as Tesla, a Bank of America Corp. analyst said.

With a $17,000 component cost difference between the average U.S. EV and a Tesla, EVs being produced by the Detroit Three aren't competitive and won't be for several more years, John Murphy, Bank of America Securities research analyst, said during a presentation of the annual "Car Wars" report. That means General Motors Co., Ford Motor Co. and Stellantis NV should focus on where they are making profits now to fund the research and development needed for the EVs of the future that customers will be able to afford.

Centering on those key profit makers also includes leaving China, the largest automotive market in the world, Murphy said. Although the Detroit Three all have said they remain committed to selling in the country, excessive capacity and competition and advanced technologies offered by domestic manufacturers there have made the market tougher and boosted pressure on pricing. GM lost money there in the first quarter. Meanwhile, there's a high risk of tariff retaliation. Murphy likened the situation to Europe when GM sold off its brands there in 2017.

"Focus on your core," he said before the Automotive Press Association at Bank of America in Farmington Hills on Tuesday. "And China is no longer a core strategy to GM, Ford or Stellantis."

That's a tough pill to swallow, Murphy acknowledged, but he emphasized the companies should focus on generating the close-to-record profits they can obtain from their legacy business to finance the powertrains in which they ultimately need to invest to survive.

Despite rising inventory level on dealer lots and high interest rates, Murphy forecasted pent-up demand as the share of vehicles on the road less than seven years old has decreased. He expects pricing to remain resilient through 2026 while the U.S. market grows to 18 million vehicle sales per year in 2028, a new peak and up from 15.5 million last year.

"It's going to be mission critical to ultimately becoming competitive on a price and cost basis with Tesla," Murphy said. "Pushing volume at the moment and losing money doesn't make a tremendous amount of sense. You really want to focus on some of the next-generation platforms to have a profitable business."

He suggested even the forthcoming EVs from companies like Ford that executives have emphasized will make strides in cost reductions won't be enough to bridge that gap. It will require a subsequent third generation, potentially four to five years out from now, to become cost competitive, Murphy said.

There is a balance to focusing on profitable fossil fuel-powered vehicles, he noted; the automakers still will have to sell enough EVs and fuel-efficient or low-emission models to meet government regulations in the meantime.

 

"You would not strip back your EV investment at the moment," Murphy said. "You would keep it going and use those profits to fund it."

He added there's value in automakers investing in connected and automated driving technologies, as well, since they represent high return-on-investment potential by capturing aftersales revenue outside the dealer ecosystem and change the value of vehicles if they can transport consumers more safely and give them driving time back.

Automakers have pulled back on EVs with delays in launches, reduced investments, nixed programs, eliminated production shifts and introduced plans for more hybrids as demand for all-electric vehicles hasn't met sales expectations. The Car Wars report is forecasting a lower replacement rate of old models in the next couple of years at about 15% annually, followed by more launches in 2027 and '28 with the rate growing to 29% and 20%, respectively. Customers remain wary of EVs' higher prices, range limits, and questions and concerns about new technology.

Tesla Inc.'s 24.1% replacement rate was the highest forecasted through 2028, portending an increased market share. GM's 17.2% replacement rate, dragged down by its commitment to EVs, was forecasted to be the lowest, suggesting it could see its market share drop. Ford's rate was 19.9%, higher than the industry average of 19.4%. Stellantis' was lower at 18.8%.

U.S. automakers in the coming years also could see more EV competition with comparable costs to Tesla. Chinese manufacturers like BYD Co. Ltd. are setting up manufacturing in Mexico, and Murphy said BYD could leverage the United States-Mexico-Canada agreement to sell duty-free or low-tariff vehicles in the United States.

Meanwhile in China, the automakers are seeking to leverage their strengths and partnerships. GM says it will focus on premium and luxury models there. Ford says it's been profitable for past the three years and plans to grow its export business there with its manufacturing partners. It's emphasizing sales of its passion products like Mustangs, Broncos and F-150 Raptors that even as niche products can draw large volumes because of China's size. Stellantis has stopped building Jeeps there, invested in China-based Zhejiang Leapmotor Technology Co. Ltd. and formed a joint venture to sell its Leapmotor products internationally.

"We think exiting China from a pure profit standpoint and strategic standpoint makes sense to focus on where you're making the money, which is North American trucks," Murphy said, "and ultimately investing in autonomous connected and electric vehicles over time."


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