Tesla fallout: Will Detroit automakers slow down aggressive EV plans?
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General Motors (GM), Ford (F), and Stellantis (STLA) all fell during the week after Tesla (NASDAQ:TSLA) indicated the company was willing to sacrifice margins to build market share. "This is a good time to increase our lead further, and we'll continue to invest in growth as fast as possible," updated Elon Musk in a shot across the bow of the automobile industry.
The obvious question from investors is if Tesla (TSLA) follows through with an aggressive pricing strategy, how will legacy automakers generate a return on capital on their huge electric vehicle investments?
Morgan Stanley analyst Adam Jonas suspects legacy OEMs are recalculating the ROIC math on that next $50B of EV capex. He noted that even before Tesla reduced the base price of a Model Y in the U.S. by nearly 30% year-to-date, it was difficult to see how Detroit could achieve positive margins or a solid ROIC on their EV investment.
The view from Morgan Stanley is that this could be the moment where the boards of the legacy OEMs can reconsider dialing back the magnitude and timing of their EV capex and R&D plans. For investors, that could mean the ICE business will generate more cash than forecast just as the industry enters a more uncertain macroeconomic era.
"So while the path of least resistance may be to think that Detroit is backed into a corner, we believe some of the best decisions can be made during such times. Tesla's 'new era' of competition may, perhaps paradoxically, accelerate positive change in capital discipline for Detroit."
That line of thinking could put the Detroit automakers in a better position that the pure EV sellers such as Rivian Automotive (RIVN), Fisker (FSR), and Lucid Group (LCID) without the flexibility to alter strategies.
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