Krafcik: “Invest wisely.”
The world's major automakers are sitting on tens of billions of dollars in cash.
Given the challenges they face, they're going to need it.
It's not just the known challenges, such as meeting stricter regulations in the U.S. and Europe, that threaten to put a strain on their reserves. It's also the things they don't yet know: Which technologies will prevail in the marketplace? And how will trends and companies outside the industry influence the pace of progress?
"The industry is going through transformational change," said John Krafcik, president of TrueCar, who saw the investment demands firsthand when he ran Hyundai's U.S. operations for five years through 2013. "The capital requirements have never been greater, and you are at your peril if you fail to invest wisely."
That uncertainty is why some in the industry leaned in to take a close look at the impact of General Motors' announcement last week that it would use $5 billion to buy back its own shares and funnel more of its free cash flow to shareholders.
The move, a bid to sidestep a battle with activist investor Harry Wilson, will reduce GM's cash pile by about a fifth. Credit ratings agencies said they're not about to downgrade GM, but Fitch Ratings noted that a drop below the $20 billion threshold for any extended period could be grounds for a negative rating action.
Automaking has always been a cash-intensive business. But for most of the past 100 years, automotive technology moved along a fairly predictable and linear path. Change was incremental. And even then, automakers ran into severe cash shortages.
Today, automakers are looking at a far more demanding future. Fuel economy alone presents a massive challenge. In the U.S., carmakers have to hit a fleetwide average of 54.5 mpg by the 2025 model year under a deal struck with federal regulators. Europe is tightening emissions rules. Together, those changes require more investments in zero-emission vehicles and lightweight materials, as well as continuing improvements in gasoline, diesel and hybrid powertrains.
On top of that, automakers are pouring vast sums into geographical expansion. To catch up in North America, for example, Volkswagen has a plan to spend $7 billion on new plants, models and technology and a new engineering center over the next five years.
Connectivity and smartphone integration are another cash-intensive area. The next frontier, automated driving, will require the integration of sensors and electrification of just about every component inside a vehicle.
Where it all leads is harder than ever to predict. In the past, changes in automotive technology almost always came from within the industry. Now, outside forces are reshaping the business, including companies such as Apple, Google and Tesla, as well as alternative models for transportation, as represented by the likes of Uber and Zipcar.
"They all could disrupt the industry in a major way," Krafcik said.
For now, automakers aren't expressing fears, at least publicly, that the investments they need to make will outstrip their resources.
Volkswagen AG has $32 billion in cash, deposits and marketable securities, according to the 2014 earnings report it delivered last week. Toyota Motor Corp. has even more, about $37 billion. Ford Motor's cash and cash equivalents total $21.7 billion. Fiat Chrysler has $22.8 billion. GM has $25.2 billion -- at least for now.
And they have credit and financing sources beyond that. Most are raking in robust profits that provide a steady source of new cash.
But there's some acknowledgment that the demands are daunting and are increasing.
"The reality is, this business consumes an inordinate amount of capital. It sucks up capital at the speed of light," Fiat Chrysler CEO Sergio Marchionne said at the Automotive News World Congress in January.
He believes the cash needs eventually will force the industry into a period of consolidation. "It cannot survive long term without it," Marchionne said.
Some level of collaboration is inevitable. Automakers will rely on their suppliers for some technology development, and companies such as Bosch, Delphi and Continental are spending heavily on their own research into automated driving and electric vehicles. Panasonic, Harman and others are working on new head units that integrate with iPhones and Android devices.
But car companies still must take a leading role because the powertrain technology and the in-car electronics will define the personality of their cars and their brands.
"No automaker can afford to outsource these" completely, Krafcik said.
Today's investment demands stem from uncertainty -- about which way technology will go, who will emerge as leaders and winners, and which bets will pay off.
Take fuel efficiency. Automakers aren't investing in just one technology. They're spreading money across the table in search of the bigger payoffs they'll need to meet the federal targets.
BMW has invested in carbon-fiber production to reduce vehicle weight, as well as electric powertrains. Toyota and Honda led the way with hybrids, but now they're also making a push in hydrogen fuel cells. Volkswagen, long a leader in diesels, is rolling out more plug-in vehicles.
"It's a constant challenge," said Mark Wakefield, a managing director at AlixPartners, a consulting firm with a large automotive practice. "It's not just 'How do we get the money?' It's 'Are we committing to the right path?'"
Hans Greimel contributed to this report.
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