Walk away from GM as it ramps up risky EV venture with Honda

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Two historic automakers on opposite ends of the globe are teaming up to make the cheapest electric vehicle yet. What could go wrong?

Honda engine (HMC) and General Motors

GM
(GM)
executives on Tuesday announced a plan to make an EV under $30,000, starting in 2027. They likely expected a positive response. It didn’t work that way.

Investors should continue to avoid General Motors.

The explosion of electric vehicles is still in its infancy. Although the number of owners is rapidly increasing in Europe and China, the important American and Japanese markets have not yet adopted electric cars and trucks. Electric vehicles represent less than 4% of the total market in these key markets according to research of the International Energy Association.

Much of the slow adoption rate can be attributed to vested interests in Detroit and Tokyo. Ford (F), Stellantis (STLA)GM, Toyota (TM), and Honda still makes a lot of money peddling internal combustion engines. Well, at least it was true.

Much of the auto industry has been in a frenzy since the pandemic.

With one exception, all major automakers have reduced their orders in 2020 for key semiconductors. Executives assumed sales would slow as many countries opted to lock down their economies. This fateful decision created the current semiconductor shortage. Chip suppliers have simply replaced automotive orders with demand from consumer power companies.

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TSLA
(TSLA)
did not cut chip orders. Its popular electric vehicles have been pre-sold.

Legacy automakers are desperate to replicate this business model. It takes away so much risk. However, getting there is going to be a struggle. Part modularity is a big deal in the legacy world. Wiring harnesses, brake assemblies and other auto parts are interchangeable between brands. Even small disruptions in the supply chain can spell disaster for the entire industry. The transition to electric vehicles will exacerbate these potential problems.

Honda and GM want to make a low-cost electric vehicle, but they can’t even start production until 2027.

The delay is particularly worrying given that the two companies have a common history the project will use battery technology developed in 2020and the new vehicles will be manufactured at existing GM facilities.

The Cruise Origin is an original electric vehicle jointly developed in 2020 by Honda and GM. The promotion website notes Origin will have no steering wheel, no pedals for braking or acceleration, and a bus-like format where two groups of passengers will be seated facing each other. The prototype was meant to show what was possible with technologies developed by self-driving vehicle startup Cruise Automation.

The 2027 collaboration isn’t expected to be self-contained, but it will be powered by GM’s Ultium battery platform and built in its North American factories, a joint says. Press release.

With so many necessary parts in place, the delay in production is inexcusable.

Tesla is the world leader in electric vehicles and the company is evolving at a breakneck pace. The Austin, Texas-based company began production of electric vehicles in 2010 at a renovated factory in Fremont, California, which was previously owned by Toyota. A new state-of-the-art facility was completed in 2018 in Shanghai, China. The company opened a duplicate factory last month near Berlin, Germany. And an even bigger gigafactory is set to open this week in Austin. Together, these factories have the capacity to manufacture 2 million vehicles today.

Admittedly, it is at the start of the transition from ICE vehicles to fully electric vehicles. It’s time for traditional automakers to step into the game with compelling products. Unfortunately, getting to market late isn’t going to help GM. Long delays coupled with increased spending will put pressure on stocks, leading to higher costs for additional capital.

At the current price of $41.42, GM shares are trading at 6x forward earnings and 0.5x sales. The market cap is $63.8 billion. Although this may seem like a good deal, it really is 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 period, revenues fell by 40.3%.

Investors should continue to avoid GM stocks.

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