In September 2024, news broke that Volkswagen Group, the second-largest automaker in the world—with a quarter of the European market—might have to do something it previously said was off the table: shutter two factories in Germany. Things are changing rapidly. If Volkswagen is not successful in this turnaround, then the existence of the whole company is in danger. Volkswagen has its own challenges, but many automakers are having the same problem: producing more cars than they can sell. I've been at this for over 35 years. I can never remember a period like this. With so many possibilities up in the air, that could really change the trajectory of the industry. Billion-dollar losses, job cuts, and a longer, rockier transition to EVs could very well be on the way...soon. We're in new territory. No one really knows how this is going to play out. This chart shows something called factory utilization—basically how close automakers are to

producing as many cars as they can in their factories. Ideally, they want to be at or around at least 80%. That is roughly the point at which the factory is profitable. Most factories were at or near that 80% threshold in 2018 and 2019, with some companies such as Toyota and Honda doing better than others. But since then, things have changed by a lot. General Motors, Tesla, and Rivian, Stellantis, and the Renault-Nissan-Mitsubishi Alliance are among those struggling the most. The global number is hard to calculate but is thought to be somewhere in the high 50s or low 60s. China's overproduction problem plays a big role here. There are around 140 EV brands in the country, and one analysis forecast that only about 19 of them will be profitable by the end of 2030. The country is trying to get rid of the EVs Chinese customers don't want by exporting them abroad.

By the end of the decade, China's exports are expected to be a third of the global total. And that is bloating the system right now. We're seeing a lot of potential production from these plants that will never be realized, and at some point, they'll have to be closed down and removed from the calculation. North American factories are, on average, making about 70% of the cars they are equipped to produce, placing them above the global average. But even there, you see some pretty serious drops since 2019. Here are a few examples: Nissan's Canton and Smyrna plants, GM's Fairfax plant in Kansas, the Spring Hill, Tennessee plant, and Factory Zero in Michigan. Stellantis expects to reopen its Belvidere plant, but with a smaller capacity, and its Toluca, Warren Truck, and Jefferson North plants are all underproducing. Ford's Louisville plant, which is being refit for EVs, is expected to produce far fewer cars.

than it currently does, and Ford's large Oakville plant is supposed to make 100,000 trucks going forward. In 2016, that factory made 271,000. Prior to the Covid-19 pandemic, new vehicle sales in the U.S. were somewhere between 17 and 17.5 million units. In 2024, they are expected to be just under 16 million. Pandemic-induced factory shutdowns, parts and materials shortages, etc., crippled production. The pandemic is mostly over, but demand hasn't fully recovered. It feels like we're tapping out. Demand levels are not likely to greatly exceed where we're at right now over the next few years in the US, and I would argue globally because of pricing. But that is just one problem. Add to that during the Covid years, the industry started building out electric vehicle production to meet what it thought would be a massive shift toward EVs. As of September 2024, there are in North America

about $261.5 billion tied up in EV factory investments. This is how they break down. About 70% of that is invested in factories either already under construction or operational. The market of electric vehicles was supposed to bloom in the 2020s, and it just hasn't occurred to that level yet. Whether or not there is some kind of slowdown in EV sales inspires fierce debate. A record 1.2 million EVs sold in the US in 2023, and since then, EV sales have continued to grow. Still, they have grown at slower rates, and they're not on track to meet some of the more ambitious targets set for them. In 2022, GM said it planned to build 400,000 EVs by mid-2024, but later it cut that number multiple times. In January 2024, the company said it plans to bring back plug-in hybrids. A clear reversal from its earlier commitment to an all-electric portfolio.

But GM is not the only one. In August, Detroit rival Ford Motor Company reduced its annual EV capital expenditures from 40% to 30% of its total. It also scrapped a planned electric three-row SUV and a new version of its F-150 Lightning. Ford expects to lose $5 to $5.5 billion on its EV business in 2024. Drilling down into the data shows exactly where the problem is. The companies that probably have the most enviable factory utilization numbers in North America are Honda and Toyota. Those two brands, in particular, have historically been very good at capacity, managing inventory levels, and running efficiently. They tend to not overbuild, meaning build more than demand, and they also tend to run efficient plants. Toyota and Honda also have something else. They are the number one and number two sellers of hybrid vehicles, which have become extremely popular green alternatives to full electrics. Meanwhile, Toyota has a sparse EV lineup, one Lexus model, and one bearing its Toyota brand.

Full EV sales are a drop in the bucket compared with the hundreds of thousands of hybrids and plug-ins Toyota sells. Five years ago, as industry analysts, we would have said Toyota is way behind the curve here. Everybody else is pushing hard towards EVs, and Toyota is sitting back and waiting, and that's typically what they do. They're very conservative in terms of longer-range planning. It certainly has benefited them where they now have the capacity, they have the vehicle programs to launch, and have a stronger hybrid approach. In contrast, GM is only using about 67% of its factory capacity. Remember, the threshold automakers want to hit is 80%. But break down the numbers further, and things look quite different. GM's internal combustion plants are at 82% of capacity. Those are almost Toyota Honda levels. But its EV plants are at 24%. We're still selling plenty of Ford F-150s. We're still selling plenty of Chevy Silverados. They are filling their plants very well.

So the capacity utilization for a plant in Kansas City, in Flint, Michigan, these are running at optimal levels with electric vehicle plants a few miles away running at a fraction of what they can build. Until EV factories overtake those making gas-burning cars, this gap will persist, and a fair bit of GM's factory floor space will sit unused. And they are not alone. When Tesla came on the market and started doing very well, everybody anticipated that the market was ready for these modern electric vehicles. Well, Tesla was the early adopters. Tesla got the buyers who were tech-savvy and wanted to spend extra money to have those early models. Now, once everybody is ready to build electric vehicles. The rest of the market is not there yet. And that's really the root of what we call stranded capital. Stranded capital refers to all the money that is tied up in investments that aren't yielding returns. It hurts not just automakers, but the whole supply chain. S&P Global Mobility estimates that about

65% of the total value of a vehicle comes from suppliers. Every time an automaker decides to start a new vehicle program, hundreds of suppliers have to be mobilized to create all the parts that go into that vehicle. This is going to be a very, very important topic going forward because the vehicle manufacturers have spent a lot of time working with the suppliers to develop these vehicles and bring them to market and all the capital infrastructure required to do that. And if the volumes don't develop, there's a lot of people that have loaned money and or have shareholders that they have to answer to. There's a financial risk here that a lot of suppliers are making to be prepared for the full production of that vehicle, but have to make money on the actual production of that vehicle. This risk is huge, especially when it's an unknown market and you could be selling 200,000. You could be selling 50,000. That's a large gap to fill with risk.

For years, many automakers were hoping to jump directly from gas-burning cars to EVs. But the transition isn't happening as fast as they thought. Today, they're juggling up to four different powertrains, and that is extremely costly and cumbersome to survive. Some are trying to save money elsewhere. This starts with platforms. What cars and trucks are built around? They house the battery or the engine, gas tank or motors, and everything else that makes up the guts of a car. Historically, an automaker would design as few platforms as possible and use them in as many models as it could. This spreads out the cost of developing it. In general, a platform has to be used in about 500,000 vehicles before it becomes profitable. Example: the Chevrolet Silverado, Chevy Tahoe, Suburban, the GMC Sierra and Yukon, and the Cadillac Escalade in all their various sizes, including the heavy-duty trucks, are all built on the same platform.

This is typical, and it was a lot easier to do when all cars ran solely on gasoline-powered engines. Many early EVs, like the Chevrolet Bolt, used platforms borrowed from gas cars, but since then, nearly all automakers have moved toward using platforms specifically tailored for the needs of EVs and their advantages. EVs are simpler than gas cars and easier to assemble. Hybrids and plug-in hybrids are the most complicated. They have both powertrains in the same car. The last thing an automaker wants to do is have a separate platform for its EVs, another for hybrids, another for gas, etc. This is one of the main reasons why so many companies like GM and Volkswagen went all in on EVs. Simpler is cheaper. You can spread your costs out and achieve economies of scale. Now automakers are building platforms that can be adapted to all these different powertrains. So it's giving them a little bit more leeway for the

billions of dollars they've invested in the vehicles that now they can build these same vehicles with an evolutionary platform that is more dynamic and allows them to transition better over the next 10 or 15 years. But that means plants designed to build electric vehicles will now have to find ways of adding engines, adding a gas tank, adding emissions controls, and all the pieces that were not in an electric vehicle in the first place. The number of plants producing three types of powertrains is expected to nearly double by 2029. It is possible to build plants that are ultimately very flexible, but every time you do that, it can get expensive. And it's one of the reasons why many manufacturers decided early on, if I'm going to battery electric, I'm moving a lot of my operations over there because I need to attain scale quickly and bring the cost down to be more competitive. And that flexibility strategy is positive for the customer, but not great for bringing overall costs for

the different types of vehicles down. So, automakers are left with a tough choice: either build specialized plants that are at risk of sitting idle and losing money, or try to build highly flexible plants, which could cost a lot. There are a lot of compromises that were not anticipated in this transition to electric vehicles. We just expected to go from one to the other, and now there's this middle space where we have to figure out how both can live together. It's probably not the most efficient plan—it may be for this transition period. But in the long run, if we can get through this transition, the pure EV plant will eventually be the plant that you're going to want to have. But right now, the industry doesn't know when that's going to occur. And it definitely is being delayed from where it was thought of a few years ago.

Why Automaker's EV Factory Investments Aren't Paying Off In The U.S.

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Why Automaker's EV Factory Investments Aren't Paying Off In The U.S.

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