GM - General Motors

[Guest Cameron]

On the issue of debt, when you buy a common share of GM, you are buying that 92B in captive financing arm debt. I looked through a couple of pages of the thread and there is no mention of the credit quality of the receivables considering how fast the financing arm is growing. They seem to be repeating the same mistake that they did last time and instead of being a car company with a finance arm they want to be a bank that makes cars.

 

In 2010 GM purchased AmeriCredit, which was a sub-prime auto lender.  In the past two years or so the majority or their loan originations have been higher quality near-prime or prime loans.  The percentage of sub-prime loans on the books has been decreasing since 2013.  GM Financial has their own investor relations and material which is a good starting point for looking at the financing arm. 

 

For bad subprime auto loans check Ally.

 

40% of their originated loans are still below 620.

[JRM]

Where are you seeing that number?  It's honestly been a while since I've looked closely at their numbers.  The most recent investor presentation says 25% of originations were sub 620 for the last quarter.  https://www.gmfinancial.com/Docs/Investors/gmf-earnings-call-slides-q3-2017.pdf

 

Looking at the most recent 10Q it looks like the percent of sub 620 loans on the books is 38.7%.  Is this what you are referring to?  This number has been dropping every quarter due to loan origination numbers. 

 

I'm pretty sure when I graduated college my credit score was below 620.  Not sure what that really said about my credit worthiness other than I had no history.

[Guest Cameron]

Where are you seeing that number?  It's honestly been a while since I've looked closely at their numbers.  The most recent investor presentation says 25% of originations were sub 620 for the last quarter.  https://www.gmfinancial.com/Docs/Investors/gmf-earnings-call-slides-q3-2017.pdf

 

Looking at the most recent 10Q it looks like the percent of sub 620 loans on the books is 38.7%.  Is this what you are referring to?  This number has been dropping every quarter due to loan origination numbers. 

 

I'm pretty sure when I graduated college my credit score was below 620.  Not sure what that really said about my credit worthiness other than I had no history.

 

That would be the number I was referring to.

 

https://www.gmfinancial.com/investors-information/financial-information/sec-filings.aspx

 

shows their overall loan book.

[JRM]

I'm with you now.  I think we were talking past each other.

 

By loan originations I meant new loans rather than all loans on the books.

[Dalal.Holdings]

On the issue of debt, when you buy a common share of GM, you are buying that 92B in captive financing arm debt. I looked through a couple of pages of the thread and there is no mention of the credit quality of the receivables considering how fast the financing arm is growing. They seem to be repeating the same mistake that they did last time and instead of being a car company with a finance arm they want to be a bank that makes cars.

 

In 2010 GM purchased AmeriCredit, which was a sub-prime auto lender.  In the past two years or so the majority or their loan originations have been higher quality near-prime or prime loans.  The percentage of sub-prime loans on the books has been decreasing since 2013.  GM Financial has their own investor relations and material which is a good starting point for looking at the financing arm. 

 

For bad subprime auto loans check Ally.

 

Good job. This is pretty much what every "GM and subprime loans" analysis has missed.

[Dalal.Holdings]

https://www.gm.com/events/5265893.html

 

GM has cars that can drive themselves in the most complex, obstacle ridden parts of the country. They actually put journalists and analysts in these things in the middle of the densest part of SF city. This is a massive milestone and shows that it’s really between Waymo and GM in this race.

 

Waymo thus far has done most of its testing and deployment in the suburbs which have far fewer obstacles and is much less of a challenge. GM, through its Cruise Automation subsidiary, seems intently focused on getting their product ready for much more challenging places like SF city proper and Manhattan. Kyle Vogt seems very talented and Cruise Automation has become a sought after employer in Silicon Valley.

 

IMO, the probability of GM’s success at deploying a viable autonomous product has greatly increased after this announcement.

 

The plan is for 2019 deployment of cars with no driver which will likely be in cities and really bring the fight to ride share companies which are burdened with paying a driver. GM will be able to significantly undercut these companies which already operate at losses.

 

Other business opportunities (like being the last mile shipment service) just add more gravy.

 

The price to value gap here remains large.

[Guest Cameron]

The price to value gap here remains large.

 

As long as they can continue to pull sales from the future, just introduce a 120 month loan.

[Dalal.Holdings]

The price to value gap here remains large.

 

As long as they can continue to pull sales from the future, just introduce a 120 month loan.

 

Or, you know, improve the credit quality of GMF which they have been doing rapidly over the past few years...

[gokou3]

I am a bit surprised and perhaps a bit annoyed by the lack of response from the market (and this forum) to GM's recent presentation "Changing the World with AV".  It seems obvious to me that less than a handful of companies will ever get the AV product working and GM will likely be one of the first.  As explained in the presentation, due to machine learning and network effect, this will possibly become another winner-take-all game where the first/biggest guy gets most / all of the profit.  This would be astounding given GM's estimated addressable market is $1.6 trillion by 2025 in the US alone.

 

Running some back of the envelope numbers, a 20% EBIT margin on $1.6T is $320B of operating profit. Give this a 10x EBIT multiple and you have a $3.2T market cap TAAS industry in 2025.  Apply a 10% discount rate for 7 years (bringing back to Jan 2018) and you still get a PV of $1.6T... vs $62B of GM market cap today.  Is the market saying that GM will eventually capture only 3.8% (62/1600) of TAAS profit, even though it is well in the lead (with Waymo perhaps head-to-head, and #3, whoever it is, far behind)?  Of course all of these numbers are very rough but the price-to-value gap seems very wide even if more conservative assumptions / probabilities are applied.

 

To invert the question, what are the arguments against GM succeeding in the new TAAS business?  I can see a few: 1) GM losing the first mover advantage; 2) local govt and special interest groups (taxi driver) against AV (or, similarly, foreign govt not allowing GM to operate due to "national security" concern); 3) lack of cheap capital (vs Waymo, Tesla, etc) to expand into new markets quickly enough;

 

I was going to put a sell order of my GM warrants when it goes up by another 15% or so.  Now I think I will hold tight and see how things play out.

 

 

https://seekingalpha.com/article/4129468-general-motors-gm-investor-presentation-slideshow

https://seekingalpha.com/article/4129157-general-motors-gm-ceo-mary-barra-hosts-investor-day-transcript

[Dalal.Holdings]

Patience is the key trait necessary here. The market and even this forum DGAF.

 

It's cool. By Q3 2017, GM stated it had returned $2B to shareholders YTD, but maintained guidance of returning $7B in 2017. That means one thing only: nearly $4.5B in buybacks during this quarter, amounting to about 100 million shares repurchased. GM is out there buying a large number of shares for a co with ~1.3B shares outstanding at the end of Q3 2017 (which has declined about 25% since starting buybacks). This company generates a large amount of free cash despite being capital intensive and will continue to as capital draining businesses were sold off and margins are prioritized.

 

Furthermore, downside risk has been taken off the table as GM has sold off many operations (incl Europe) that has turned the company into #3 largest automaker making ~10M vehicles a year to a significantly smaller auto producer with fatter margins.

 

In the U.S., the company has dramatically cut sales to rental agencies (unlike Ford, and Fiat is starting to copy this strategy now) which again cuts the downside risk.

 

GMF is slowly being built up into a $2B/year profit part of the biz (currently ~$1.3B run rate) as GM's credit rating has improved year after year and GMF has improved the credit quality of its loan portfolio.

 

Add to this all of the positive black swan stuff that grows by the day (autonomous, electric), and it's a powerful play at this earnings multiple. The AV/EV ramp up is occurring over the next 2 years, so the probability of being a first mover and being recognized by the market for it is growing and 2018 may be an inflection point.

[vinod1]

I am a bit surprised and perhaps a bit annoyed by the lack of response from the market (and this forum) to GM's recent presentation "Changing the World with AV".  It seems obvious to me that less than a handful of companies will ever get the AV product working and GM will likely be one of the first.  As explained in the presentation, due to machine learning and network effect, this will possibly become another winner-take-all game where the first/biggest guy gets most / all of the profit.  This would be astounding given GM's estimated addressable market is $1.6 trillion by 2025 in the US alone.

 

Running some back of the envelope numbers, a 20% EBIT margin on $1.6T is $320B of operating profit. Give this a 10x EBIT multiple and you have a $3.2T market cap TAAS industry in 2025.  Apply a 10% discount rate for 7 years (bringing back to Jan 2018) and you still get a PV of $1.6T... vs $62B of GM market cap today.  Is the market saying that GM will eventually capture only 3.8% (62/1600) of TAAS profit, even though it is well in the lead (with Waymo perhaps head-to-head, and #3, whoever it is, far behind)?  Of course all of these numbers are very rough but the price-to-value gap seems very wide even if more conservative assumptions / probabilities are applied.

 

To invert the question, what are the arguments against GM succeeding in the new TAAS business?  I can see a few: 1) GM losing the first mover advantage; 2) local govt and special interest groups (taxi driver) against AV (or, similarly, foreign govt not allowing GM to operate due to "national security" concern); 3) lack of cheap capital (vs Waymo, Tesla, etc) to expand into new markets quickly enough;

 

I was going to put a sell order of my GM warrants when it goes up by another 15% or so.  Now I think I will hold tight and see how things play out.

 

 

https://seekingalpha.com/article/4129468-general-motors-gm-investor-presentation-slideshow

https://seekingalpha.com/article/4129157-general-motors-gm-ceo-mary-barra-hosts-investor-day-transcript

 

I do not even know how to assess if GM would be one of the winners in AV space. As a GM shareholder, that would be awesome but would not put too much hope on it. It would seem to me that either a Tech company like Google with AI chops or a company controlled by industry consortium would end up with the AV OS. Here is what I have written before on AV:

 

Many companies are investing in autonomous driving including Google. It is likely that all the companies would have the technology that is on par with each other as they cannot be deployed until it works nearly flawlessly. Alternately, optimal solution in this case would be for the best autonomous software to be widely adopted by all the market participants. It would be in the best interests of the industry that all vehicles have the best possible software. In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it. There are further advantages to using autonomous driving software from a single provider as it would be simpler and probably more safer to coordinate and manage interactions between vehicles.  The company whose technology was adopted would end up with a royalty stream that all companies would have to pay for using that software.

 

So most likely scenario is that one or two companies would have a dominant share of on autonomous driving software but that company would not be able to monopolize the profits as much as the market share would indicate. All the automobile companies would have to cooperate and this would be more akin to Visa/MasterCard when they are owned by the banks.

 

Vinod

[Guest Cameron]

Patience is the key trait necessary here. The market and even this forum DGAF.

 

It's cool. By Q3 2017, GM stated it had returned $2B to shareholders YTD, but maintained guidance of returning $7B in 2017. That means one thing only: nearly $4.5B in buybacks during this quarter, amounting to about 100 million shares repurchased. GM is out there buying a large number of shares for a co with ~1.3B shares outstanding at the end of Q3 2017 (which has declined about 25% since starting buybacks). This company generates a large amount of free cash despite being capital intensive and will continue to as capital draining businesses were sold off and margins are prioritized.

 

Furthermore, downside risk has been taken off the table as GM has sold off many operations (incl Europe) that has turned the company into #3 largest automaker making ~10M vehicles a year to a significantly smaller auto producer with fatter margins.

 

In the U.S., the company has dramatically cut sales to rental agencies (unlike Ford, and Fiat is starting to copy this strategy now) which again cuts the downside risk.

 

GMF is slowly being built up into a $2B/year profit part of the biz (currently ~$1.3B run rate) as GM's credit rating has improved year after year and GMF has improved the credit quality of its loan portfolio.

 

Add to this all of the positive black swan stuff that grows by the day (autonomous, electric), and it's a powerful play at this earnings multiple. The AV/EV ramp up is occurring over the next 2 years, so the probability of being a first mover and being recognized by the market for it is growing and 2018 may be an inflection point.

 

And does this assume we sell 17m cars a year for the next 5-10 years?

[hyten1]

vinod1

 

interesting comment on AV, but i am not sure i agree with you

 

i can't name another tech that a consortium owns it? windows .. no, iOS .. no, andriod ... no, search engine... no,  why do you think a consortium would own it?

 

i actually think what kyle said about having everything under one roof is very important, not just some biz talk or PR speak. you can iterate much faster especially in the beginning of any system where nothing is standardize/finalize (this is from experience). Look at the android space, mobile OS and mobile phone from different companies coming together is  a hell of a lot simpler problem to solve than a car working with autonamous system/software. and we know how long and the current state of andriod space is.

 

google has been at this much much much longer than cruise/GM, now maybe google is light years ahead? from what i can tell/see I don't think so. why is this i wonder? Is it talent, i don't think so, is it politics, maybe, is it resources, i don't think so... why then?

 

 

you assuming the best solution is what will happen, was MS-DOS the best solution? is andriod or iOS the best solution?

 

" In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. " So what? on the current road everyone is just as safe as the worst driver (remember this is very localize/location specific)? the AV doesn't need to be perfect in my opinion, it just need to be better than humans, even the best of the humans.

 

also you are forgetting they can limit AV to specific tasks first and gradually improve it and expand "their domain expertise"

 

"Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it." so you saying getting into a car with a great driver and a car with a teenage drive that just have its permit makes no difference or have an advantage?

 

 

I am a bit surprised and perhaps a bit annoyed by the lack of response from the market (and this forum) to GM's recent presentation "Changing the World with AV".  It seems obvious to me that less than a handful of companies will ever get the AV product working and GM will likely be one of the first.  As explained in the presentation, due to machine learning and network effect, this will possibly become another winner-take-all game where the first/biggest guy gets most / all of the profit.  This would be astounding given GM's estimated addressable market is $1.6 trillion by 2025 in the US alone.

 

Running some back of the envelope numbers, a 20% EBIT margin on $1.6T is $320B of operating profit. Give this a 10x EBIT multiple and you have a $3.2T market cap TAAS industry in 2025.  Apply a 10% discount rate for 7 years (bringing back to Jan 2018) and you still get a PV of $1.6T... vs $62B of GM market cap today.  Is the market saying that GM will eventually capture only 3.8% (62/1600) of TAAS profit, even though it is well in the lead (with Waymo perhaps head-to-head, and #3, whoever it is, far behind)?  Of course all of these numbers are very rough but the price-to-value gap seems very wide even if more conservative assumptions / probabilities are applied.

 

To invert the question, what are the arguments against GM succeeding in the new TAAS business?  I can see a few: 1) GM losing the first mover advantage; 2) local govt and special interest groups (taxi driver) against AV (or, similarly, foreign govt not allowing GM to operate due to "national security" concern); 3) lack of cheap capital (vs Waymo, Tesla, etc) to expand into new markets quickly enough;

 

I was going to put a sell order of my GM warrants when it goes up by another 15% or so.  Now I think I will hold tight and see how things play out.

 

 

https://seekingalpha.com/article/4129468-general-motors-gm-investor-presentation-slideshow

https://seekingalpha.com/article/4129157-general-motors-gm-ceo-mary-barra-hosts-investor-day-transcript

 

I do not even know how to assess if GM would be one of the winners in AV space. As a GM shareholder, that would be awesome but would not put too much hope on it. It would seem to me that either a Tech company like Google with AI chops or a company controlled by industry consortium would end up with the AV OS. Here is what I have written before on AV:

 

Many companies are investing in autonomous driving including Google. It is likely that all the companies would have the technology that is on par with each other as they cannot be deployed until it works nearly flawlessly. Alternately, optimal solution in this case would be for the best autonomous software to be widely adopted by all the market participants. It would be in the best interests of the industry that all vehicles have the best possible software. In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it. There are further advantages to using autonomous driving software from a single provider as it would be simpler and probably more safer to coordinate and manage interactions between vehicles.  The company whose technology was adopted would end up with a royalty stream that all companies would have to pay for using that software.

 

So most likely scenario is that one or two companies would have a dominant share of on autonomous driving software but that company would not be able to monopolize the profits as much as the market share would indicate. All the automobile companies would have to cooperate and this would be more akin to Visa/MasterCard when they are owned by the banks.

 

Vinod

[Dalal.Holdings]

vinod1

 

interesting comment on AV, but i am not sure i agree with you

 

i can't name another tech that a consortium owns it? windows .. no, iOS .. no, andriod ... no, search engine... no,  why do you think a consortium would own it?

 

i actually think what kyle said about having everything under one roof is very important, not just some biz talk or PR speak. you can iterate much faster especially in the beginning of any system where nothing is standardize/finalize (this is from experience). Look at the android space, mobile OS and mobile phone from different companies coming together is  a hell of a lot simpler problem to solve than a car working with autonamous system/software. and we know how long and the current state of andriod space is.

 

google has been at this much much much longer than cruise/GM, now maybe google is light years ahead? from what i can tell/see I don't think so. why is this i wonder? Is it talent, i don't think so, is it politics, maybe, is it resources, i don't think so... why then?

 

 

you assuming the best solution is what will happen, was MS-DOS the best solution? is andriod or iOS the best solution?

 

" In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. " So what? on the current road everyone is just as safe as the worst driver (remember this is very localize/location specific)? the AV doesn't need to be perfect in my opinion, it just need to be better than humans, even the best of the humans.

 

also you are forgetting they can limit AV to specific tasks first and gradually improve it and expand "their domain expertise"

 

"Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it." so you saying getting into a car with a great driver and a car with a teenage drive that just have its permit makes no difference or have an advantage?

 

 

Well put. Steve Jobs said it best when he quoted Alan Kay: "People who are really serious about software should make their own hardware." The iOS environment a lot smoother than Android. The Mac experience a lot more seamless than the PC experience. Jobs exploited this.

 

There is LOTS of hardware needed to make this tech safe and fully deployable as GM has stated. And there is also LOTS of software involved.

 

Right now, GM is the only co making the hardware and software under one roof. GM is readying a means to MASS produce AV vehicles from its Michigan factories. There is no other competitor working on this. Tesla lost Mobileye and will have to rebuild its AV from a primarily software position, but Tesla is also mired in a whole host of other challenges.

 

The Waymo-Fiat relationship unlikely to be as seamless as having it all under one roof. Which is why proposals that GM "spin off" its AV units to "enhance shareholder value" is asinine.

[Dalal.Holdings]

And does this assume we sell 17m cars a year for the next 5-10 years?

 

Why don't you continue modeling Great Recession style collapse in auto sales (a once in 80 year event) into the near future and keep letting recency bias cloud your judgement. Recessions come in lots of sizes: the vast majority are not of the same magnitude or duration as 2008. The current deleveraged and well capitalized GM will easily weather such downturns.

[vinod1]

vinod1

 

interesting comment on AV, but i am not sure i agree with you

 

i can't name another tech that a consortium owns it? windows .. no, iOS .. no, andriod ... no, search engine... no,  why do you think a consortium would own it?

 

i actually think what kyle said about having everything under one roof is very important, not just some biz talk or PR speak. you can iterate much faster especially in the beginning of any system where nothing is standardize/finalize (this is from experience). Look at the android space, mobile OS and mobile phone from different companies coming together is  a hell of a lot simpler problem to solve than a car working with autonamous system/software. and we know how long and the current state of andriod space is.

 

google has been at this much much much longer than cruise/GM, now maybe google is light years ahead? from what i can tell/see I don't think so. why is this i wonder? Is it talent, i don't think so, is it politics, maybe, is it resources, i don't think so... why then?

 

 

you assuming the best solution is what will happen, was MS-DOS the best solution? is andriod or iOS the best solution?

 

" In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. " So what? on the current road everyone is just as safe as the worst driver (remember this is very localize/location specific)? the AV doesn't need to be perfect in my opinion, it just need to be better than humans, even the best of the humans.

 

also you are forgetting they can limit AV to specific tasks first and gradually improve it and expand "their domain expertise"

 

"Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it." so you saying getting into a car with a great driver and a car with a teenage drive that just have its permit makes no difference or have an advantage?

 

 

I am a bit surprised and perhaps a bit annoyed by the lack of response from the market (and this forum) to GM's recent presentation "Changing the World with AV".  It seems obvious to me that less than a handful of companies will ever get the AV product working and GM will likely be one of the first.  As explained in the presentation, due to machine learning and network effect, this will possibly become another winner-take-all game where the first/biggest guy gets most / all of the profit.  This would be astounding given GM's estimated addressable market is $1.6 trillion by 2025 in the US alone.

 

Running some back of the envelope numbers, a 20% EBIT margin on $1.6T is $320B of operating profit. Give this a 10x EBIT multiple and you have a $3.2T market cap TAAS industry in 2025.  Apply a 10% discount rate for 7 years (bringing back to Jan 2018) and you still get a PV of $1.6T... vs $62B of GM market cap today.  Is the market saying that GM will eventually capture only 3.8% (62/1600) of TAAS profit, even though it is well in the lead (with Waymo perhaps head-to-head, and #3, whoever it is, far behind)?  Of course all of these numbers are very rough but the price-to-value gap seems very wide even if more conservative assumptions / probabilities are applied.

 

To invert the question, what are the arguments against GM succeeding in the new TAAS business?  I can see a few: 1) GM losing the first mover advantage; 2) local govt and special interest groups (taxi driver) against AV (or, similarly, foreign govt not allowing GM to operate due to "national security" concern); 3) lack of cheap capital (vs Waymo, Tesla, etc) to expand into new markets quickly enough;

 

I was going to put a sell order of my GM warrants when it goes up by another 15% or so.  Now I think I will hold tight and see how things play out.

 

 

https://seekingalpha.com/article/4129468-general-motors-gm-investor-presentation-slideshow

https://seekingalpha.com/article/4129157-general-motors-gm-ceo-mary-barra-hosts-investor-day-transcript

 

I do not even know how to assess if GM would be one of the winners in AV space. As a GM shareholder, that would be awesome but would not put too much hope on it. It would seem to me that either a Tech company like Google with AI chops or a company controlled by industry consortium would end up with the AV OS. Here is what I have written before on AV:

 

Many companies are investing in autonomous driving including Google. It is likely that all the companies would have the technology that is on par with each other as they cannot be deployed until it works nearly flawlessly. Alternately, optimal solution in this case would be for the best autonomous software to be widely adopted by all the market participants. It would be in the best interests of the industry that all vehicles have the best possible software. In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it. There are further advantages to using autonomous driving software from a single provider as it would be simpler and probably more safer to coordinate and manage interactions between vehicles.  The company whose technology was adopted would end up with a royalty stream that all companies would have to pay for using that software.

 

So most likely scenario is that one or two companies would have a dominant share of on autonomous driving software but that company would not be able to monopolize the profits as much as the market share would indicate. All the automobile companies would have to cooperate and this would be more akin to Visa/MasterCard when they are owned by the banks.

 

Vinod

 

hyten1,

 

All are valid points.

 

1. I simply do not have an opinion on who might be ahead in AV tech. I have not read anything that would make be believe that one company is ahead of the other.

 

It seems more likely that many (Google, GM, Tesla, etc) would have roughly the same level of maturity. Just given the nature of the problem. All the big companies know about its importance and the problem has been researched for a long time even though at a lower level of intensity - way back in 1995 when I am doing M.S. my lab mate Phd is in autonomous driving.

 

Given the diffusion of ideas through the research community, I do not think any one company can keep the lead to itself. All the big Auto companies are investing in this - the only difference is how much they talk about it.

 

GM seems to be having FANG/Tesla envy. Hence the optimistic presentation. So I am skeptical of their lead and talk about "winner take all".

 

I simply do not see what GM has with "everything under one roof" that Google does not have.

 

2. I agree the best need not necessarily win in the marketplace.

 

There might be three possible scenarios with AV software

a) One company licenses the AV software to many Auto companies. Could be a tech or Auto company.

b) Many Auto companies have roughly equally good AV software

c) One or two companies dominate the AV software and monopolize Auto market

 

My comment is along the lines that either a) or b) is more likely.

 

If it is (a), then it seems likely that it could be a standalone company that owns the software with many Auto companies owning equity interests in that. To me it looks like AV is a big expense for all companies and it seems more economical to pool the expenses. At first each would try to do on their own, come the next business cycle downturn, they might instead choose to partner. This looks to be a somewhat weak form of how Visa/Mastercard came about. Or this is entirely my hallucination!

 

GM is betting in ©. Of course, it is in their interest to make shareholders believe in that possibility.

 

3) As to safety, I thought companies self interest would be to have safe AV vehicles both to promote adoption and reduce accidents which expose then to liability - which would mean helping competitors as well.

 

Vinod

[vinod1]

In case you are interested I put my thoughts on Auto industry risks in a post here http://vinodp.com/blog/?p=48

 

Vinod

[Guest Cameron]

And does this assume we sell 17m cars a year for the next 5-10 years?

 

Why don't you continue modeling Great Recession style collapse in auto sales (a once in 80 year event) into the near future and keep letting recency bias cloud your judgement. Recessions come in lots of sizes: the vast majority are not of the same magnitude or duration as 2008. The current deleveraged and well capitalized GM will easily weather such downturns.

 

Was a genuine question, 20% declines in auto sales isn't uncommon in a recession. But who knows nothing is cyclical anymore, the party must go on. What do I know with all my recency bias and all.

[Dalal.Holdings]

And does this assume we sell 17m cars a year for the next 5-10 years?

 

Why don't you continue modeling Great Recession style collapse in auto sales (a once in 80 year event) into the near future and keep letting recency bias cloud your judgement. Recessions come in lots of sizes: the vast majority are not of the same magnitude or duration as 2008. The current deleveraged and well capitalized GM will easily weather such downturns.

 

Was a genuine question, 20% declines in auto sales isn't uncommon in a recession. But who knows nothing is cyclical anymore, the party must go on. What do I know with all my recency bias and all.

 

Well, GM has a 100+ history of selling cars. Maybe you could look at all the 20% declines in the 20th century and see how GM fared and come up with a rough idea. Just a thought.

[Dalal.Holdings]

vinod1

 

interesting comment on AV, but i am not sure i agree with you

 

i can't name another tech that a consortium owns it? windows .. no, iOS .. no, andriod ... no, search engine... no,  why do you think a consortium would own it?

 

i actually think what kyle said about having everything under one roof is very important, not just some biz talk or PR speak. you can iterate much faster especially in the beginning of any system where nothing is standardize/finalize (this is from experience). Look at the android space, mobile OS and mobile phone from different companies coming together is  a hell of a lot simpler problem to solve than a car working with autonamous system/software. and we know how long and the current state of andriod space is.

 

google has been at this much much much longer than cruise/GM, now maybe google is light years ahead? from what i can tell/see I don't think so. why is this i wonder? Is it talent, i don't think so, is it politics, maybe, is it resources, i don't think so... why then?

 

 

you assuming the best solution is what will happen, was MS-DOS the best solution? is andriod or iOS the best solution?

 

" In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. " So what? on the current road everyone is just as safe as the worst driver (remember this is very localize/location specific)? the AV doesn't need to be perfect in my opinion, it just need to be better than humans, even the best of the humans.

 

also you are forgetting they can limit AV to specific tasks first and gradually improve it and expand "their domain expertise"

 

"Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it." so you saying getting into a car with a great driver and a car with a teenage drive that just have its permit makes no difference or have an advantage?

 

 

I am a bit surprised and perhaps a bit annoyed by the lack of response from the market (and this forum) to GM's recent presentation "Changing the World with AV".  It seems obvious to me that less than a handful of companies will ever get the AV product working and GM will likely be one of the first.  As explained in the presentation, due to machine learning and network effect, this will possibly become another winner-take-all game where the first/biggest guy gets most / all of the profit.  This would be astounding given GM's estimated addressable market is $1.6 trillion by 2025 in the US alone.

 

Running some back of the envelope numbers, a 20% EBIT margin on $1.6T is $320B of operating profit. Give this a 10x EBIT multiple and you have a $3.2T market cap TAAS industry in 2025.  Apply a 10% discount rate for 7 years (bringing back to Jan 2018) and you still get a PV of $1.6T... vs $62B of GM market cap today.  Is the market saying that GM will eventually capture only 3.8% (62/1600) of TAAS profit, even though it is well in the lead (with Waymo perhaps head-to-head, and #3, whoever it is, far behind)?  Of course all of these numbers are very rough but the price-to-value gap seems very wide even if more conservative assumptions / probabilities are applied.

 

To invert the question, what are the arguments against GM succeeding in the new TAAS business?  I can see a few: 1) GM losing the first mover advantage; 2) local govt and special interest groups (taxi driver) against AV (or, similarly, foreign govt not allowing GM to operate due to "national security" concern); 3) lack of cheap capital (vs Waymo, Tesla, etc) to expand into new markets quickly enough;

 

I was going to put a sell order of my GM warrants when it goes up by another 15% or so.  Now I think I will hold tight and see how things play out.

 

 

https://seekingalpha.com/article/4129468-general-motors-gm-investor-presentation-slideshow

https://seekingalpha.com/article/4129157-general-motors-gm-ceo-mary-barra-hosts-investor-day-transcript

 

I do not even know how to assess if GM would be one of the winners in AV space. As a GM shareholder, that would be awesome but would not put too much hope on it. It would seem to me that either a Tech company like Google with AI chops or a company controlled by industry consortium would end up with the AV OS. Here is what I have written before on AV:

 

Many companies are investing in autonomous driving including Google. It is likely that all the companies would have the technology that is on par with each other as they cannot be deployed until it works nearly flawlessly. Alternately, optimal solution in this case would be for the best autonomous software to be widely adopted by all the market participants. It would be in the best interests of the industry that all vehicles have the best possible software. In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it. There are further advantages to using autonomous driving software from a single provider as it would be simpler and probably more safer to coordinate and manage interactions between vehicles.  The company whose technology was adopted would end up with a royalty stream that all companies would have to pay for using that software.

 

So most likely scenario is that one or two companies would have a dominant share of on autonomous driving software but that company would not be able to monopolize the profits as much as the market share would indicate. All the automobile companies would have to cooperate and this would be more akin to Visa/MasterCard when they are owned by the banks.

 

Vinod

 

hyten1,

 

All are valid points.

 

1. I simply do not have an opinion on who might be ahead in AV tech. I have not read anything that would make be believe that one company is ahead of the other.

 

It seems more likely that many (Google, GM, Tesla, etc) would have roughly the same level of maturity. Just given the nature of the problem. All the big companies know about its importance and the problem has been researched for a long time even though at a lower level of intensity - way back in 1995 when I am doing M.S. my lab mate Phd is in autonomous driving.

 

Given the diffusion of ideas through the research community, I do not think any one company can keep the lead to itself. All the big Auto companies are investing in this - the only difference is how much they talk about it.

 

GM seems to be having FANG/Tesla envy. Hence the optimistic presentation. So I am skeptical of their lead and talk about "winner take all".

 

I simply do not see what GM has with "everything under one roof" that Google does not have.

 

2. I agree the best need not necessarily win in the marketplace.

 

There might be three possible scenarios with AV software

a) One company licenses the AV software to many Auto companies. Could be a tech or Auto company.

b) Many Auto companies have roughly equally good AV software

c) One or two companies dominate the AV software and monopolize Auto market

 

My comment is along the lines that either a) or b) is more likely.

 

If it is (a), then it seems likely that it could be a standalone company that owns the software with many Auto companies owning equity interests in that. To me it looks like AV is a big expense for all companies and it seems more economical to pool the expenses. At first each would try to do on their own, come the next business cycle downturn, they might instead choose to partner. This looks to be a somewhat weak form of how Visa/Mastercard came about. Or this is entirely my hallucination!

 

GM is betting in ©. Of course, it is in their interest to make shareholders believe in that possibility.

 

3) As to safety, I thought companies self interest would be to have safe AV vehicles both to promote adoption and reduce accidents which expose then to liability - which would mean helping competitors as well.

 

Vinod

 

Only two companies have been willing to put journalists in their cars without a driver touching the wheel in real world driving environments (Waymo in the suburbs, GM's Cruise Automation in the heart of SF). That should tell you everything about who's in the lead. Yeah, every old world auto company says they're investing in EVs (like they now claim with AVs), but GM is the only one with a real mass market product out on dealer lots today.

[Gregmal]

vinod1

 

interesting comment on AV, but i am not sure i agree with you

 

i can't name another tech that a consortium owns it? windows .. no, iOS .. no, andriod ... no, search engine... no,  why do you think a consortium would own it?

 

i actually think what kyle said about having everything under one roof is very important, not just some biz talk or PR speak. you can iterate much faster especially in the beginning of any system where nothing is standardize/finalize (this is from experience). Look at the android space, mobile OS and mobile phone from different companies coming together is  a hell of a lot simpler problem to solve than a car working with autonamous system/software. and we know how long and the current state of andriod space is.

 

google has been at this much much much longer than cruise/GM, now maybe google is light years ahead? from what i can tell/see I don't think so. why is this i wonder? Is it talent, i don't think so, is it politics, maybe, is it resources, i don't think so... why then?

 

 

you assuming the best solution is what will happen, was MS-DOS the best solution? is andriod or iOS the best solution?

 

" In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. " So what? on the current road everyone is just as safe as the worst driver (remember this is very localize/location specific)? the AV doesn't need to be perfect in my opinion, it just need to be better than humans, even the best of the humans.

 

also you are forgetting they can limit AV to specific tasks first and gradually improve it and expand "their domain expertise"

 

"Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it." so you saying getting into a car with a great driver and a car with a teenage drive that just have its permit makes no difference or have an advantage?

 

 

I am a bit surprised and perhaps a bit annoyed by the lack of response from the market (and this forum) to GM's recent presentation "Changing the World with AV".  It seems obvious to me that less than a handful of companies will ever get the AV product working and GM will likely be one of the first.  As explained in the presentation, due to machine learning and network effect, this will possibly become another winner-take-all game where the first/biggest guy gets most / all of the profit.  This would be astounding given GM's estimated addressable market is $1.6 trillion by 2025 in the US alone.

 

Running some back of the envelope numbers, a 20% EBIT margin on $1.6T is $320B of operating profit. Give this a 10x EBIT multiple and you have a $3.2T market cap TAAS industry in 2025.  Apply a 10% discount rate for 7 years (bringing back to Jan 2018) and you still get a PV of $1.6T... vs $62B of GM market cap today.  Is the market saying that GM will eventually capture only 3.8% (62/1600) of TAAS profit, even though it is well in the lead (with Waymo perhaps head-to-head, and #3, whoever it is, far behind)?  Of course all of these numbers are very rough but the price-to-value gap seems very wide even if more conservative assumptions / probabilities are applied.

 

To invert the question, what are the arguments against GM succeeding in the new TAAS business?  I can see a few: 1) GM losing the first mover advantage; 2) local govt and special interest groups (taxi driver) against AV (or, similarly, foreign govt not allowing GM to operate due to "national security" concern); 3) lack of cheap capital (vs Waymo, Tesla, etc) to expand into new markets quickly enough;

 

I was going to put a sell order of my GM warrants when it goes up by another 15% or so.  Now I think I will hold tight and see how things play out.

 

 

https://seekingalpha.com/article/4129468-general-motors-gm-investor-presentation-slideshow

https://seekingalpha.com/article/4129157-general-motors-gm-ceo-mary-barra-hosts-investor-day-transcript

 

I do not even know how to assess if GM would be one of the winners in AV space. As a GM shareholder, that would be awesome but would not put too much hope on it. It would seem to me that either a Tech company like Google with AI chops or a company controlled by industry consortium would end up with the AV OS. Here is what I have written before on AV:

 

Many companies are investing in autonomous driving including Google. It is likely that all the companies would have the technology that is on par with each other as they cannot be deployed until it works nearly flawlessly. Alternately, optimal solution in this case would be for the best autonomous software to be widely adopted by all the market participants. It would be in the best interests of the industry that all vehicles have the best possible software. In any given road, an autonomous vehicle would be just as safe as the least safe vehicle in that particular area. Thus, even if one company had a superior autonomous driving technology, it would not be a big competitive advantage by itself if it is the only one using it. There are further advantages to using autonomous driving software from a single provider as it would be simpler and probably more safer to coordinate and manage interactions between vehicles.  The company whose technology was adopted would end up with a royalty stream that all companies would have to pay for using that software.

 

So most likely scenario is that one or two companies would have a dominant share of on autonomous driving software but that company would not be able to monopolize the profits as much as the market share would indicate. All the automobile companies would have to cooperate and this would be more akin to Visa/MasterCard when they are owned by the banks.

 

Vinod

 

hyten1,

 

All are valid points.

 

1. I simply do not have an opinion on who might be ahead in AV tech. I have not read anything that would make be believe that one company is ahead of the other.

 

It seems more likely that many (Google, GM, Tesla, etc) would have roughly the same level of maturity. Just given the nature of the problem. All the big companies know about its importance and the problem has been researched for a long time even though at a lower level of intensity - way back in 1995 when I am doing M.S. my lab mate Phd is in autonomous driving.

 

Given the diffusion of ideas through the research community, I do not think any one company can keep the lead to itself. All the big Auto companies are investing in this - the only difference is how much they talk about it.

 

GM seems to be having FANG/Tesla envy. Hence the optimistic presentation. So I am skeptical of their lead and talk about "winner take all".

 

I simply do not see what GM has with "everything under one roof" that Google does not have.

 

2. I agree the best need not necessarily win in the marketplace.

 

There might be three possible scenarios with AV software

a) One company licenses the AV software to many Auto companies. Could be a tech or Auto company.

b) Many Auto companies have roughly equally good AV software

c) One or two companies dominate the AV software and monopolize Auto market

 

My comment is along the lines that either a) or b) is more likely.

 

If it is (a), then it seems likely that it could be a standalone company that owns the software with many Auto companies owning equity interests in that. To me it looks like AV is a big expense for all companies and it seems more economical to pool the expenses. At first each would try to do on their own, come the next business cycle downturn, they might instead choose to partner. This looks to be a somewhat weak form of how Visa/Mastercard came about. Or this is entirely my hallucination!

 

GM is betting in ©. Of course, it is in their interest to make shareholders believe in that possibility.

 

3) As to safety, I thought companies self interest would be to have safe AV vehicles both to promote adoption and reduce accidents which expose then to liability - which would mean helping competitors as well.

 

Vinod

 

Just own GM and GOOG, problem solved.

[gokou3]

 

Glad to see some interesting discussions. :)

 

I disagree that the "tech" companies have an edge over traditional automakers due to their expertise in software / AI / etc.  First of all, what is a "tech" company? I would argue GM is a tech company too in the sense that they employ technology elements in their mass-manufacturing process: automation, robots, new materials, just in time inventory.  These elements cannot be learned or even bought overnight by the "tech" guys.  In fact, Tesla for one seems to be struggling massively:

 

https://www.bloomberg.com/news/articles/2017-11-01/tesla-delays-model-3-goals-as-early-bottlenecks-worsen-cash-burn

 

This is why I am drinking the kool-aid that there must be a joint-force between the traditional tech and traditional car manufacturer.  Waymo-FCAU is one, but GM-cruise is an enhanced version of that.  Getting the AV product requires iterations, and having all developments under one company is highly beneficial.  First mover advantage is critical.

 

I am not an expert in this industry so I don't know who will be the winner in the EV/AV/TAAS race, but again it seems to me that the market is assigning little to no value to GM for potentially becoming one.  In contrast, any company vaguely associated with fads like bitcoin/lithium/weed garner insane valuations regardless of whether such companies have any real business at all. 

 

Even for an oligopoly type industry, the 2nd tier players still have substantial value.  Think DFS in the land of Visa/MA.  Or Lyft under Uber.  Or Sprint/TMo under VZ/T.  AMD/Intel in the 1990/2000s.  If the market perceives that GM can grab a very small market share, its market value can quickly shoot up.  The catalyst is there.

 

 

[Dalal.Holdings]

 

Glad to see some interesting discussions. :)

 

I disagree that the "tech" companies have an edge over traditional automakers due to their expertise in software / AI / etc.  First of all, what is a "tech" company? I would argue GM is a tech company too in the sense that they employ technology elements in their mass-manufacturing process: automation, robots, new materials, just in time inventory.  These elements cannot be learned or even bought overnight by the "tech" guys.  In fact, Tesla for one seems to be struggling massively:

 

https://www.bloomberg.com/news/articles/2017-11-01/tesla-delays-model-3-goals-as-early-bottlenecks-worsen-cash-burn

 

This is why I am drinking the kool-aid that there must be a joint-force between the traditional tech and traditional car manufacturer.  Waymo-FCAU is one, but GM-cruise is an enhanced version of that.  Getting the AV product requires iterations, and having all developments under one company is highly beneficial.  First mover advantage is critical.

 

I am not an expert in this industry so I don't know who will be the winner in the EV/AV/TAAS race, but again it seems to me that the market is assigning little to no value to GM for potentially becoming one.  In contrast, any company vaguely associated with fads like bitcoin/lithium/weed garner insane valuations regardless of whether such companies have any real business at all. 

 

Even for an oligopoly type industry, the 2nd tier players still have substantial value.  Think DFS in the land of Visa/MA.  Or Lyft under Uber.  Or Sprint/TMo under VZ/T.  AMD/Intel in the 1990/2000s.  If the market perceives that GM can grab a very small market share, its market value can quickly shoot up.  The catalyst is there.

 

Cruise automation is a "tech company" that is testing a robust "machine learning" algorithm in the most complex driving environments. Its cars have encountered a vastly larger number obstacles and situations than Waymo's vehicles in closed suburban environments. The more testing that is done in places like SF center (and soon Manhattan), the more robust and safer the cars become. The recent webcast was an eye opener in terms of how far ahead GM may actually be to commercial deployment and how focused Vogt and the Cruise team are on achieving safety before comfort first. Yeah, iterative development is what truly matters here.

 

GM was wise to purchase this tech company. And so now this tech company is attached to a large traditional automaker with expertise in mass production auto capabilities and an existing product (the Bolt) that can be mass produced with autonomous capabilities from its factories in Michigan. There is no AV partnership setup with more favorable characteristics than GM and Cruise (full ownership). Tesla is learning that mass production ain't so simple and that being a "tech company" by itself may be overrated if the product you create is not some app, but a heavy piece of hardware (like a car). Google's strength has never been hardware--they're mostly just a software shop.

 

The upside here can be large and might come sooner than most people expect. At these levels, no one is giving GM credit for its AV prospects. If that changes into 2018 (when AV Bolts with drivers are in Manhattan) or in 2019 (when driverless vehicles are actually deployed), there may be a significantly large upward valuation. GM wouldn't necessarily need to demonstrate much profit or revenue for this revaluation to occur--merely that it has a real solution that works. The speculative forces of the market would take care of the rest--after all, look at TSLA or Uber which don't even earn real profits yet are valued close to (or even more than) GM currently...

[Dalal.Holdings]

It's coming (sooner than you think):

 

GM will make an autonomous car without steering wheel or pedals by 2019

https://www.theverge.com/2018/1/12/16880978/gm-autonomous-car-2019-detroit-auto-show-2018

 

https://www.nytimes.com/2018/01/12/business/gm-driverless-car.html?_r=0

 

 

Likely going to be in the form of an urban app hailed taxi service. A successful implementation would obliterate Uber and Lyft's business prospects and give GM a powerful first mover advantage and moat.

 

Shows the true merits of GM's Cruise Automation acquisition (not even 2 years old). If Cruise were its own startup with VC involvement, you could bet that its valuation at this stage would be in the tens of billions of dollars.

[JRM]

What is the moat here?  Is it the idea that out of the handful of companies seriously pursuing AV that there will emerge one leader such as Windows or iPhone?  Will other car companies simply pay a royalty to Cruise/GM for the right to use their hardware and software?

 

If not, where's the moat?  I still think this still has the chance to be a commodity service.  Companies will compete on cost and margins will be slim.  Quality of the service will be the only differentiator.