General Motors Company (NYSE:GM) Deutsche Bank Global Auto Industry Conference 2022 June 15, 2022 11:55 AM ET
Company Participants
Paul Jacobson – EVP & CFO
Conference Call Participants
Emmanuel Rosner – Deutsche Bank
Emmanuel Rosner
All the electric vehicles we have in front of the building, GM was kind enough to bring down the Hummer; the Cadillac Cleric, which has obviously not been released yet, and you may actually be able to drive it before the sell side even get to; and you also have the Bolt EUV down. So if you’d like to add any of this to your schedule — meeting schedule, they’re here for the rest of the day and available for ride [ph].
The other thing that I absolutely do not want you to miss if you’re still around is this afternoon reception from 3:30 PM It will be on the spectacular rooftop Paris of this new Deutsche Bank Center, overlooking Central Park. And I cannot guarantee you the quality of the cocktails, but the view, you will not absolutely not to be [ph] and so if you’re on, please come and join us.
So with that all that out the way, Paul, thank you so much for being here.
Paul Jacobson
Well, Emmanuel, thank you for having us, and thanks to everybody for being here today. First, I want to thank the IR team. Ashish and Mike and the team are here, and we’ve got a lot of folks helping out with the vehicle ride and drive. So hopefully, each and you — each and every one of you have had a chance to experience that or at least go down and check it out. We’re very, very proud of those vehicles that are out there.
And also, we have Susan Sheffield in the GM Financial team here meeting with some investors as well. So really excited to have that and have the whole team here.
So before we begin on the fireside chat, Emmanuel, just a couple of things. Obviously, there’s a lot going on in the macro world right now, but I couldn’t be happier with our results as we continue to look down the road and out the horizon of the two sort of leadership technologies that we’re transforming into. One is autonomous vehicles, and the other is electric vehicles.
With regard to autonomous, undoubtedly, you all saw on June 02, we received the first ever permit to charge for driverless rides in an urban — highly dense urban metro area, and really proud of what the team at Cruise has been doing.
I had the good fortune of being able to take a ride a few weeks ago, and it was flawless and there were situations I faced even at late in the evening that I know a human driver would have behaved very differently and perhaps in a less safe manner. So really excited about what that is and what that potential has as we continue down the journey of commercializing autonomous ride here, first mile, last mile, a lot of other opportunities that are out there in the autonomous world.
And second is EVs. If obviously, everybody has been paying attention, we have really, really ratcheted up our EV adoption forecast. And our EV production forecast over time, nearly doubling where we were just a year ago for our 2025 outlook. And we’re well on our way to putting in place a million vehicles of production in North America by 2025.
Supply chain is making great progress. Manufacturing is making great progress. You may see from time to time, plants coming down for a period of time as we continue to lean in and accelerate that journey. We’re trying to manage that in the context of everything going on with chips, some logistics etcetera, but I think the team continues to do a great job.
So as you look at where we are with the Lyric and the Silverado and the Hummer EV, the reservations are clicking along really, really nicely and also proving out some of the thesis that we laid out at Investor Day, where we’re seeing particularly strong penetration for the Silverado for the Lyric and even for the Hummer in the coastal markets where GM’s historically underperformed.
So we feel good about this being a growth opportunity for the company going forward, and we’re continuing down that path. So lots of reasons to be excited in spite of some of the challenges that we might see in the short term.
Emmanuel Rosner
Yes. No, thanks so much for the overview. Lots of iron in the fire, and we will absolutely try and address a lot of those. Let’s talk maybe with setting the stage in terms of near-term operating condition, certainly on top of every investor mind. Can you provide us an update on latest industry operating conditions, the way you’re seeing them so far in the second quarter?
What’s the latest out of China in terms of disruptions? What are you seeing in terms of chip supply over the rest of the year? And does that leave you on — is it improving actively? And does that leave you on track for this 25% to 30% unit volume growth this year?
Paul Jacobson
Yes. It’s a great question. Obviously, the order of the day, Emmanuel, what I would say is we’re very much on track with the plans that we had outlined. It looks a little bit different. We’ve seen more logistics challenges, more sort of non-chip-related challenges this year than we saw last year. But I would say the overall environment is pretty consistent with where we thought we would be heading into the year. So we’re still very much in line with our targets of up 25% to 30% year-over-year.
We talked about how some of that was masked a little bit with some of the outbound logistics challenges we had in the first quarter, which didn’t completely show some of the production improvement year-over-year that we’ve had. And we’re facing some short-term tactical challenges. But I would say that as a general rule, it is better than it was a year ago. And certainly, as you look into GM’s third quarter, we underperformed last year.
We got hit by Malaysia a lot harder than some of our competitors did. So our comps get a little bit easier in the third quarter, but certainly on the run rate that we’re on, we feel good about that. China, obviously, a challenging situation there for many beyond the auto business. What I would say is that we’ve done a good job of managing through that.
There might be some short-term issues that we’ve had to work through. We don’t obviously talk about quarterly guidance, but that can affect the timing of where it is, but nothing that’s causing us to back off our $13 billion to $15 billion EBIT target for the year, and we continue to track towards that and we feel good about where we are.
Emmanuel Rosner
That’s very clear. And then I guess sort of like looking ahead at maybe sort of like early signs or leading indicators, are you seeing any signs of weakening consumer demand for vehicles so far in the market?
Paul Jacobson
We have not. And trust me, I’m looking for it and asking for every day. And what I’m stressing to the organization is the need to be nimble and agile, right? We obviously have long-term investments that we have to make. We have short-term targets that we have to hit. And in order to respond to this rapidly changing environment, we’ve got to be ready to act, and part of that is what are those signs that we’re going to be looking for.
And if you look at May, yes, sort of industry sales were kind of down a little bit. But when you look at what we were able to do, average transaction prices were still strong and hasn’t changed significantly. And we didn’t grow any inventory, grounded dealer inventory.
So that tells me that the vehicles are still moving, and that’s probably the #1 thing that I’m looking at. And we’ve got dashboards of what we’re looking at every day, every week, every month to see any signs that we need to be more aggressive in some of our cost management, et cetera.
Because what we don’t want to do — and I frame this to the organization this way, right, we’re charting a path through an unknown forest. I don’t want to end up in a situation where we walk off a cliff. Nobody wants that, obviously. But equally, we don’t want the perspective to be we steer so far away from the cliff. We don’t make progress on what we need to do. So striking that right balance.
The only way you can do that is being agile because what I don’t want to do is I don’t want to go cut long-term investments and things that we’re doing that are going to drive revenue growth in the business and put those off because of the fear of what might happen. But once we identify and get ahead of trends, then we can act if we need to.
But so far, I think the organization has done a really, really nice job of balancing those. And we’ve been able to overcome, as we talked about on the call, another $2.5 billion of inflation that we saw in the business. And we’re still holding to that guidance while I feel good about the long-term trajectory we’re on.
Emmanuel Rosner
That’s great. And then one more question in terms of leading indicators. So you mentioned pricing remains strong. So obviously, inventories remain low. What about order books, right? Not that you’re collecting those. You get to almost see how demand builds up on the minute-by-minute basis. Like have these been holding up. Are these continuing to build? Like what do order books look like?
Paul Jacobson
Yes. They’ve been really strong. And I think that speaks to both the sort of aggressive nature of EV adoption among those customers who have chosen to take an EV and want what’s new and coming out, and they’re impressed with the capabilities of our vehicles but also the rush to the quality of what we’ve got.
We’ve been very different and very intentional, and you probably noticed it in the way we’re sort of taking orders for the Silverado and taking orders for the Lyric. We’ve intentionally — we sold out the model year of the Lyric in 4 hours, and we’re taking indications of interest and reservations for future ones.
But what we want to do is we want to maintain some price flexibility from that standpoint. We don’t want to end up in a situation where a customer has ordered a vehicle 2, 3 years out and we don’t know where inflation is going. So we want to be able to make sure that we protect that dynamic a little bit, and that’s brought us a little bit of flexibility at the expense of being able to talk about really big numbers. But at the same time, I think that’s the more prudent step to take for the business.
Emmanuel Rosner
Okay. So let’s shift gears a little bit to your outlook. I guess you mentioned a lot of it certainly reconfirming. So you left your guidance and change back in April. You sort of like reconfirming or at least suggesting you’re on track currently. That’s about a flat EBIT versus sort of like 2021 at midpoint. What are the puts and takes that enable you to maintain this despite the considerable cost pressure?
Paul Jacobson
Yes. Well, I mean, number one, we’ve talked about $5 billion of cost pressure, so I don’t think you can talk about a flat year-over-year performance without talking about that. I mean that really is the story of everything. And I think both is a testament to what the company has done, but also the quality of the vehicles and the demand that we have we’ve been able to offset all of that in a year where most people didn’t think that was possible.
I think everybody going into 2022 to ’21 was an outlier, probably can’t be repeated. Obviously, maybe you’ve seen that in some of the stock price performance and expectations, but we haven’t settled for that. We’ve been scrapping and like I said, last year, a lot of tactical management.
We’re still meeting weekly on chips and other logistics issues, making sure that we’re managing production forecast, making sure that we’re matching it to demand and making sure that we’re going — responding with go-to-market strategies while we can and where that is.
Do I think that can last forever? I don’t know. But we are obviously in a situation where we can offset that now, and we need to make sure that we’re taking advantage.
Emmanuel Rosner
So in terms of specific offsets, you’ve got volume growth, obviously, which is a major one, right, 25% to 30%. Cost savings? What, I guess, sort of pricing? What are the other offsets?
Paul Jacobson
Yes. So when we talked about the extra $2.5 million on the first quarter earnings call, we said that was going to be addressed through a mix of go-to-market. We’re probably around 50-50 of cost initiatives, as well go-to-market. We’ve gone through every line item of the business, looked at what are those things that we can defer without sacrificing some of the long-term trajectory that we’ve been on. And I think the team has responded well, so we’re not done with that.
I mean everything is a sort of gradation of what are the pressures that we’re facing. And if we continue to face inflation and we’re in a place where we can’t offset that with go-to-market strategies, then we’re going to have to go look at reprioritizing costs again from that standpoint. So this isn’t a one-stop, one-solution fix everything. This is a very, very sort of tactical management, balancing the short term against the long term.
Emmanuel Rosner
And on the pricing piece of the equation, how confident are you in the ability to maintain strong pricing even as the volumes actually recover? And also is summarizing pressure on the consumer from other inflation?
Paul Jacobson
Yes. I think that’s the biggest challenge, not just from higher inflation but also from higher interest rates and financing costs going up. So, so far, like I said, consumers have been — continue to be attracted to our products and our quality, and that’s a testament to what we put out there, and it remains strong.
So that’s why we’re watching inventory levels and where grounded inventory is. It hasn’t grown despite the fact that production has been going up for us. And that’s a really, really good sign.
Emmanuel Rosner
Where do you want them to be?
Paul Jacobson
Where do I want what?
Emmanuel Rosner
Inventories?
Paul Jacobson
I think what we’ve said not to be flippant is much lower than they were historically but higher than where they are today. I think having a little bit more grounded inventory on the lots is not a bad thing, especially when you see the type of products that are out here.
I just stopped by the team outside and not just the conference attendees, but everybody walking by turns their head and wants to check it out and ask questions, and that’s part of the dealer lot behavior that you would like is you’re rolling out this new suite of products that are somewhat unfamiliar to the market.
So we think it’s a little bit more than what it is right now. But certainly, the trade-off between pricing tension and inventory on the lots is something that everybody is taking notice of and one that we need to maintain that relationship.
Emmanuel Rosner
Now the $5 billion in commodity inflation for this year, does that include also help to the supply base? Throughout the whole conference, we’re hearing auto suppliers. They’re in the middle of discussions with automakers for help on their commodities but also on all the rest of their inflation. Is that all included in your $5 billion? Or is that sort of additional headwinds? How are you dealing with this?
Paul Jacobson
It’s a catch-all basket for inflation in the business. So it’s not just raw commodities. It’s everything that we’re seeing. A lot of that is logistics. A lot of that is priority logistics. So we’re spending quite a bit more year-over-year on expediting things.
That’s part of how we manage the China situation, it’s making sure that when we have lower inventory levels in the system, we’re spending more on freight to get them to market, and that’s important to do, and that’s what’s helping our margin performance as well. So it’s really just a catch-all basket for that. And obviously, the entire industry is under some pressure, and we’re trying to manage through that.
Emmanuel Rosner
And then as you mentioned before, I think part of the offsets were, I guess, maybe cutting back on some discretionary spending or being more efficient with that. First of all, is my understanding accurate? And is there more opportunity to delay some of that without sort of like impacting the gross profile?
Paul Jacobson
What I would say is we’ve got a really good balance right now with what we see. The environment is changing. For instance, we’ve seen commodity prices come off of their peaks a little bit in certain sectors. So we’re just going to continue to manage that bag.
We’ve really put an emphasis on making sure that we scrutinize every new hire into the company, every new position to make sure that it’s needed because you don’t want to be growing your headcount significantly into the face of a big downturn. So we’re just being sort of more mindful about 2 to 3 years out in every decision that we’re making going forward and scrutinize cost additions at a higher rate than maybe we did a year ago.
Emmanuel Rosner
And then just one more, I guess, tangential to pricing. But as you move to this direct online order book more and more, certainly with the EVs, what role of the dealers continue to play in your model? And the — is part of the pricing and margin opportunities sort of like get back, I guess, some of the pricing to towards you?
Paul Jacobson
Well, I mean we’ve been working very proactively with our dealers on what the model is in the new world, and I think the collaborative approach is a very good one. We’ve talked about the technology that’s available that helps them lower their cost which in turn helps improve our margins as well.
So ordering the vehicles that we know and we can provide the data that are in high demand order books that give them an idea of where the demand is, et cetera, I think, is all streamlining this to make it much, much more efficient across the board in a collaborative way.
I certainly don’t think we want to go to war with our dealers, but our dealers have been very professional. We’re having great conversations with them about what needs to be done to be competitive in the landscape because the dealer — our dealers don’t win if at the end of the day everybody goes to competitor vehicles that don’t have dealers. And I think they recognize it, and that’s that team orientation that I think works better, and we’re going to be just fine because the dealers are an important role, particularly in EV transition.
When you go across the broad market of what we’re going to offer and where consumers are, some of them are going to need more help understanding what an EV means for their lifestyle. It’s easy perhaps easier to get an EV when you’ve got a nice vehicle in your garage and you might have 2 or 3 vehicles in your household. But if it’s your only vehicle, it’s a very different sort of handholding, a very different education on what that means for how my life might change driving an EV exclusively. So we think the dealers have a very important role in that.
Emmanuel Rosner
Understood. So I guess maybe switching gears again towards some of your targets, operation and margin targets. How confident are you maintaining this 10% margin in North America? I mean, I guess, this year, but then more generally, can this be maintained sustainably across cycle when industry price makes volume normalize?
Paul Jacobson
Yes. No, that, I think, is the $50 billion question, Emmanuel. And I would say that we’re very confident that over the long term, we’re going to do that. Obviously, there’s a lot of noise in the system in the short run, right? Vehicles are costing more vehicles that we produce in the next two years are costing more than we thought they were going to a year or two ago.
But that’s going to change. I mean everything is going to have to go through a normalization period across the board, and we just have to watch that. So back to the earlier question when you talked about consumer weakness. Well, the question is, is the consumer going to weaken?
The question is really from a CFO perspective, is the consumer demand going to weaken and what will happen to commodity prices? Because presumably, if we take demand out of the system on a macro basis, we’re going to see some normalization in input costs logistics, et cetera, that’s the natural hedge that exists.
Now that’s not a guarantee, and we have to make sure that we prepare for a world where maybe the inflation persists a little bit longer. And that’s our job as a finance team, but we’re not going to solve that — presolve that on paper before it ever happens. We’ve got to make sure, again, that we’re just tactical and very nimble in how we think about it, and that’s a big piece of it.
Emmanuel Rosner
So I was going to ask you about downturn sensitivity. I think a number of years ago, I think GM used to run these GM universities, I think we’re like deep dive into some topics of interest. And I say once again, investors get to wonder what if we go into a recession or what if the consumer weakens. What does that do to the financials of GM? Well, how would you think about your earnings power, your free cash flow sort of like in this kind of environment? What are — yes, how would you go about flexing those down and in particular, pricing part?
Paul Jacobson
Yes. Well, I think we — any time you go through a business cycle, the #1 thing you can desire is to go in from a position of strength. And I think when you look at our performance in 2021 and where we’re projecting and guiding to 2022, whether it happens 6 months or 18 months or we’re in it now, the reality is we’re going in with a really, really strong hand.
We’ve got a great balance sheet. The pension is in a stronger position than it’s been in over 20 years. Margins are strong. Vehicle pricing and demand is strong, and we’ve got that hedge of the input costs that we’ve seen at unnatural layers.
When you think about it from a liquidity perspective, also understand that with depressed inventories, the historical big drawdown of working capital A lot of that has already happened, right? Because we haven’t been able to build inventories off of the pre-COVID levels or off of the COVID level. So we’re monitoring that, and you can get to literally endless cycles of what a recession might look like.
But I think when we look at it in cases, we look at a scenario where what if commodities stay high, demand goes down, what if we see that natural hedge take place over time and how does it affect. So what we’ve got to do is make sure that we look at normalization different from weakening, and that’s something that our colleagues at GM Financial are looking at every single day in terms of their own credit metrics as well.
Emmanuel Rosner
Another what you may qualify $5 billion question. But what could your mid-decade EBIT margin look like as you ramp up the EV volume, which are at least for now less profitable? What would be the positive offsets to serve essentially maintain profitability even as you become more and more of an EV player?
Paul Jacobson
Yes. So Emmanuel, go back — I’d like to go back to Investor Day, and we kind of talked about the walk from where we were in 2021 to 2030 and those goals, and we talked about over time getting to an expansion of a couple of hundred basis points on margin. We also talked about the trajectory we thought was smoother than where a lot of folks were assuming. And that really comes from the cadence of EV adoption, which we’ve said in the short term is going to be at lower margins than their ICE counterparts.
Number one, there’s some growth in the business, and that’s the reason for highlighting some of those statistics about where we’re seeing demand the Lyric and the Hummer and the Silverado in terms of the orders and reservations that are coming in. So there’s some growth element to that.
But also, when you’re looking at substitution, also keep in mind that at the same time, we’ll be ramping up our software revenues and what the vehicle capabilities are. So as we get more vehicles out there with the Ultifi platform, we’ll have a platform to be able to grow those revenues. So that trajectory, the volume increases of the EVs at a lower margin in the short run was being offset by growth in some of the higher-margin software business, assurance businesses, etcetera.
That’s something that we have to continue to watch as EVs inflect faster, making sure that we’re continuing to put pressure on the software side of the business to say if EVs are accelerating faster, your subscription services, your commercial operations need to accelerate faster as well so that we can scale up in the short run while the EVs are catching up to ICE by the end of the decade, as we’ve articulated.
So like I said before, commodity inflation is putting some pressure on that in the short run. But what we don’t know is are we going to continue to have a strong consumer response to that. So far, it’s been very, very encouraging what we’ve seen, and we’re going to continue to manage that.
Emmanuel Rosner
And I guess, as it ties to trajectory for EV profitability by itself, what’s your related thinking? Obviously, the — it seems higher input costs may have pressured a little bit, I mean some of these previous trajectories around that. But what are you thinking for GM in terms of which volume or which year you think that EV cannot just be a positive contributor but also approach parity and being a good replacement for combustion engine?
Paul Jacobson
Yes. So we don’t talk about specific vehicle profitability, but keep in mind that nothing happens in a vacuum, right? So the macro factors that — and the inflation and the input costs are affecting everybody. It’s going to affect the market for EVs. And ultimately, we’re not going to be an industry that produces EVs at depressed margins that don’t allow us to invest in the business going forward. And so that’s going to affect pricing, it’s going to affect demand, and all of this stuff is going to happen together.
So I’m not trying to duck your question, but I’m really trying to say that this is — there’s no magic bullet to say that margins are down by X because we don’t know what the demand environment is going to be, we don’t know what the macro factors are going to be. So that’s why we — the approach that I articulated what we’re doing with the Lyric, right?
We’re sacrificing headline numbers where we could go out and report massive order book, right? It’s not the right thing to do for the business in the short run when we need flexibility to understand that those cars that are delivering 3, 4 years out.
I don’t want to lock in a price for those today when I don’t know what the input costs will be as the input costs could end up considerably lower. And that’s a risk that we have to manage within the business, but that’s what our shareholders passed.
Emmanuel Rosner
Now focusing more specifically on some of your electric vehicle efforts. So just first, you set the stage, remind us the volume targets for your EVs over the coming years as you accelerate your capacity expansion.
Paul Jacobson
Yes. So that’s significantly greater than where we were a year ago. So we’re now at 400,000 by the end of 2023. And you see that, we’re ratcheting up production of the Hummer EV. We’re increasing and being more aggressive in terms of our start-ups of the Lyric going forward, et cetera. So we feel good about where that is. And then that’s on its way to 1 million vehicles annually in North America by 2025.
Emmanuel Rosner
Understood. And then the longer-term targets are around…
Paul Jacobson
40% to 50% by 2030, what we’ve talked about public.
Emmanuel Rosner
Right. I speak about EV pricing then. Do you expect to raise prices on the EVs that are — that you already have on the market or that you’ve announced already just to help with these rising input costs? And maybe as part of this question, can you explain the price reduction of 6,000 hours in the bolt, which seems to be counterintuitive to what’s required, I guess, to remain profitable?
Paul Jacobson
Yes. Without getting specific on pricing strategies going forward for obviously competitive and more importantly anticompetitive reasons, we’re going to continue to watch the market, see where we are with demand for our vehicles as well as the cost and margin targets that we have for them. So we’ll look at that as we go through model year by model year.
As it relates to the Bolt, this is an example of, I think, how the market is changing because the way the Bolt had been pricing and the way we’ve been incentivizing sales on that was a little bit counterintuitive of higher MSRP, higher incentives.
So what we did is we took down that sticker price, that MSR preprice. At the same time, we took down incentives. So it’s actually kind of net neutral to us from where it is. But when you’re competing with some online retailers that have a fixed price in there, we want to make sure that we’re more transparent in terms of how things are working going forward.
So I think it’s a move that customers have responded well to. There is nothing about demand or margin deterioration in the face of that. It really was a net neutral trade for us with obviously longer-term benefits for how we think about it internally.
Emmanuel Rosner
And in terms of supporting your ramp-up in electric vehicle, have you secured already enough supply to be able to get to 400,000 units over this year and next?
Paul Jacobson
Yes. So when you look at what we’ve done, we obviously have a concerted effort not just thinking about the next couple of years, but really thinking about the next decade, and perhaps we disadvantaged ourselves a little bit because we talk about deals that are done, and we’ve logged a lot of them. We don’t talk about necessarily sort of the nonbinding MOUs that are out there. We want to make sure the deal is done.
So when you look at the strides that we’ve made with lithium and other raw materials, I think we’re in a really, really good position. There will be more to come later this year on how far we’ve gone out and what we’ve done with that.
Emmanuel Rosner
But so far, I guess, for the 400,000 units, this is…
Paul Jacobson
Still very comfortable where we are in materials.
Emmanuel Rosner
Okay. And I guess what’s the strategy in terms of sourcing going forward? Are you going to vertically integrate further? I mean you have signed deals. But would you even on some of these assets or make some equity investments there?
Paul Jacobson
Yes. I’ve said before that really everything is on the table when it comes to the way we have to be thinking about some of these commodities that might be in tighter supply in the future going forward. And if that means we take some at spot, we take some at term. We take some forward prices. We put some equity in. We help finance start-ups like we’ve done. We’re thinking really creatively because what we can’t do is limit ourselves to the way business has always been done with some of these trends in the future.
So I think the team has done a really good job. We have a combined team that spans not just supply chain, but also corporate development, finance and manufacturing to get everybody together to understand what we need when and how do we think creatively to get it.
Emmanuel Rosner
And one more on the battery side. Will you utilize LFP chemistry for some of your vehicles, maybe BrightDrop, which is sort of like a specific range of deliveries or some other models?
Paul Jacobson
Yes. So what I would say is we’re looking at all chemistries across the board, and that’s the beauty of the Ultium program is it’s really agnostic to chemistry. It can work in any chemistry situation, which gives us the flexibility to be able to manage that. And what we’ve got to do is measure against the energy density and obviously, lower range, but lower cost to go with an equivalent sort of battery cell.
So what I would say is we want to be careful not to lean in too far on long-term decisions on short-term data. But at the same time, we’ve got to be mindful of what’s going on in the market. So without any specificity, yes, we’re looking at that, but we’re looking at a lot of other things as well.
Emmanuel Rosner
Right. And then just in terms of managing both sides of the business, combustion engine, electric vehicle, have you looked at — consider the possibility of reorganization or spin-off for separate? I know a couple of years ago, there was sort of obviously a big top against many looked into it pretty seriously. But do you feel now you keeping it combined under one organization is still very much the best way to unlock value from both?
Paul Jacobson
Yes. So we’ve done a lot of that sort of reorganization reshuffling, putting people in charge of different legs of the stool. We did that a couple of years ago, and it’s worked pretty well. I think the organization and the environment around us continues to evolve, and we need to make sure that we’re nimble in that.
So we’re looking at how is the business going to evolve, but we have people that are looking at EVs. We have people that are looking at ICE. We have people that can look at both from that standpoint. So it’s really about optimizing within that.
So we’re always taking a look at it. We’re always taking a look at how we look at our financials and how we present those to investors for the transparency that we need to, to effectively run the business, not necessarily to do it just for data set, but to run the business the most efficient way we can. And I think, like I said, we just continue to evaluate that right now.
Emmanuel Rosner
Would you consider spinning off some smaller assets like OnStar or GM Defense or in BrightDrop? Do all these things necessarily make sense as part of GM?
Paul Jacobson
Well, I think we look at where is the business going, not necessarily where it is, and there are going to be opportunities across the board to think about it differently. And as Mary has said, we look at everything in the eyes of what’s best for the shareholder and creating shareholder value over the long term. That doesn’t mean that you respond to things that are here that you know have a lot of value creation in the future as well. So we’re trying to make the best long-term decisions that we can, and we’ll continue to evaluate that.
Emmanuel Rosner
Great. And maybe shifting gear one more time, and then we’ll turn it over to the audience for any questions here. But first of all, Cruise. So as you said, reached a very important milestones sort of like the last authorization to be able to charge customers in San Francisco for truly driverless, right? So what important milestones is Cruise expected to achieve over the next year or 2? I believe production of the origin, which will support it eventually scheduled to start next year. Would that be the start of larger deployment?
Paul Jacobson
Well, I think first and foremost, what we’re doing with the Bolt in San Francisco right now, there’s an opportunity. We’re still — by the end of the year, we expect to be 24/7 in the full 7×7 of San Francisco. So we’re continuing to expand that, both in windows of time we can operate, but also geographies where we can charge for rides as well. So I think by the end of the year, you’ll see us in San Francisco and continuing to grow that business going forward.
I think going forward, the important milestones, Origin is one. But I also think the expansion, right? Because as I’ve said before to a number of folks that we’re all focused on the technology of Cruise, which is great, right? It’s revolutionary, and the team has done a phenomenal job. But if you’re going to do autonomous ride share, there’s a very, very important operational element to that as well. And when you look at Gil West to — who’s the Chief Operating Officer at Delta responsible for the customer experience for 200 million customers a year, he’s in charge of that, right?
So you’ve got to be able to say that I can take the technology and I can take the operation and I can scale it into a second city into a third city into a fourth city. So I think those are the types of milestones that we’re really fixed on in terms of rapid expansion of Cruise and being able to demonstrate that. So I would say that there really leaning in hard to execution mode right now in terms of where the business is going.
Emmanuel Rosner
But what will be the business model of Cruise? Is it third-party or running your own network? Is it passenger? Is it delivery? Who owns the cars? I guess what is the business model? And how do you bridge towards the $50 billion revenue target by 2030?
Paul Jacobson
Yes. Well, I think the I think the great thing is that with a business like that, that’s so revolutionary, where you can deliver a superior product for that, which is in the market at a lower cost, is a really, really good hand to be holding, right? And I think you can look at any number of ways to see how you can deploy that.
In the short run, obviously, we’re going to continue to — we’re going to own the vehicles. Cruise has a $5 billion line of credit from GM Financial to finance the first batch and the first wave of vehicles, and we’ll rapidly scale that business.
So like I said, once you get to the point where you’re able to plant a flag in a new city and start that operation up and start to scale that up, it becomes much easier to do it going forward. So that is one something that, obviously, you want to control the experience very well because it’s important as customers get comfortable with the idea of autonomy, they also really, really get addicted and get attached to the quality of what you can offer in terms of a superior product. So controlling that element of it is a really important piece of the puzzle in the short run.
Emmanuel Rosner
Right. And maybe 2 more questions on the software side of the business. The — can you talk to us about your strategy to get new revenue streams from selling services to vehicle owners during the ownership period? I mean you brought it up before as potential earnings offset to some of maybe other pressures as you move towards mid-decade. So can you size this opportunity for us? And real sticking beyond ADAS, for example, or semi-autonomous driving. What sort of services could be sold?
Paul Jacobson
Yes. So we’ve done extensive testing. We talked about this at Investor Day last fall, where we put a suite of 45 software applications that range from convenience to security, to additional features and functionality, et cetera, in front of consumers and let them run a cumulative total. So you weren’t just deciding do I like product one?
Do I like product two? Do I like product three? It was more, will I pay for product three after I’ve already decided to pay for product two and product one? And that’s what helped to form our estimates of $20 billion to $25 billion in revenue by 2030.
We took that data. We extrapolated it to about $135 a customer, and we’ve put that on an attachment rate similar to what we see with OnStar and then expanded that across the fleet of 30 million connected vehicles by 2030. So I think as we continue to ramp up EV production, it’s not out of the question to say that we might see a much, much bigger connected car park in 2030 than where we are. We’re certainly producing at kind of double the rate over the next few years as where we thought we were going to be a year ago.
So that’s where the excitement comes in. And I think that’s one that is going to require a lot of investment, a lot of innovation because you can’t just go with the 45 applications that you created in 2021 and expect to sell those in 2030, right?
You’ve got to continue to iterate and continue to do that. And I think having a platform that potentially opens up to third-party developers is one that we certainly are looking to do and that gives an opportunity to come in and drive additional revenues and much more capital-efficient way going forward. So that’s where we see the opportunity to grow that business and offset some of the shorter-term margin pressures that we’ve seen in — that we expect to see in EV.
Emmanuel Rosner
Thanks, Paul. Let me turn it over to you. Any questions in the room?
Question-and-Answer Session
Q – Unidentified Analyst
Hi. Could you provide more color on any trends that you’re seeing within delinquency rates or other consumer-related factors at GM that you mentioned you were tracking?
Paul Jacobson
Yes, it’s a great question. So the GM Financial team has done an extraordinary job, and what we’re trying to do is make sure that we’re looking between what we might think as an increase due to a weakening consumer versus something that would expect to be normalized because we have seen historically record strong consumer in GMF going back through the pandemic.
A lot of that is driven by the amount of capital that’s been injected to the system, higher wages, et cetera. So we expect some normalization of that, and that’s been built into our forecast this year and some of the pressure that we’re facing year-over-year as well.
But then also looking at some — maybe in the subprime where we see a little bit of softness, but subprime is not a big issue at all for GM Financial. They’ve got a really good strong quality book, and we’ve seen that performing really, really well and continuing to perform strongly. So, so far, nothing to be concerned about in terms of what we’ve seen at GMF.
Unidentified Analyst
Two questions that are different. First, just kind of on the demand side. Or how do you think about — dealer inventory supplies is very low, as you’ve mentioned. What do you think like an annual — how many units on an annual rate do you think the dealer channel is short just from a normal — inventory normalization perspective?
Paul Jacobson
Yes. I think I’ve got to go back to sort of my pre-GM history here at data bank. I think we’re several hundred thousand vehicles short in the system. So if you extrapolate that across the dealer network, I’d say it’s probably 3 to 4 weeks of inventory short, if not more, than what’s traditionally been held.
But like I said, I don’t think anybody believes that we have to go back to the historical levels that we’ve had in the past because dealers are smarter about what they’re ordering. We’ve got more data to help them in terms of knowing what the vehicles are in demand. And I think they realize that when I can have a leaner sales force when I can have lower shopping costs versus somebody who’s actually transacting, that provides with them a lot of uplift in their own performance.
So I think the tools that we’ve rolled out, and we have gotten them comfortable with through this lower inventory environment, are things that are going to be really sticky going forward. So that’s why I said I do expect more inventory than what we have right now.
It’s frighteningly low in a lot of dealer lots if you drive by them. It’s marginally better than where it was a year ago, but we still have a little ways to go from that standpoint. That being said, we don’t obviously want to ramp up dealer inventories in the face of a weakening consumer. So we’re also being mindful about production in that way as well.
Unidentified Analyst
Got you. That’s helpful. And then just my second question. When you think about capital allocation from an EV kind of engineering perspective, there’s a lot of — like a lot of components are obviously going away, but there’s also obviously a lot of new demands on like, for example, software, right? That’s something that you never really had. That’s going to be a bit of demand.
How do you think about capital allocation of resources and utilizing our supply base as we design these new platforms? Or what do you see as your core capabilities? And where you’re going to be investing capital? And what part of that kind of process to see maybe outsourcing?
Paul Jacobson
Yes. It’s a great question. So I think as it relates to the broad capital base, we’re in a position right now where I would say that close to 75%, 80% of all our program capital is in EVs right now. So there’s a little bit of sort of ICE mid-cycles that are coming down the road that we’re preparing for and kind of sort of run-of-the-mill program costs. But the lion’s share of our engineering and capital is going into going into electric vehicles and, of course, autonomous. So that’s where we continue to lean on the allocation side.
As it relates to how do we spend that, how do we best deploy that I think the biggest dichotomy is in software, as you mentioned. I mean, the vehicle itself and the functionality and the capabilities, I think, is going to be pretty similar as to EV because we’ve got a really strong buildup expertise in that.
As you look at software, there’s going to be elements of the software in the vehicle that’s going to be somewhat commoditized, right? Systems work that is behind the scenes that customers don’t differentiate on, that’s something that you could outsource and you could make that to be something that’s more common, somebody that can have scale efficiencies across multiple OEMs, et cetera. But then there’s a very sort of brand-specific value-added OEM aspect of that, where we want to maintain control of that.
Now we’ve got to prove that we can deploy capital effectively and then we can get the talent to be able to do that, but there are certain elements of technology and software in the vehicle that can be very brand accretive for us, and I think others have led the way in that in terms of the attractiveness of the vehicle because of the software dimensions. So you’re going to see a big piece of that continue to be controlled in by GM, and I think that’s the right approach as long as we can deliver that effectively and drive value creation.
Emmanuel Rosner
I think we’re just bit out of time. So Paul, thank you so much, and thanks to the entire GM team for your time and for all these callers. Thank you.
Paul Jacobson
Thanks, Emmanuel. Thanks, everybody, for your questions.
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