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Big diesel-burning pickups are paying for GM's electric future

Bloomberg logoBloomberg 2/5/2019 David Welch

The vehicles that will secure the next decade for General Motors Co. aren’t covered in self-driving sensors or loaded with batteries. No, the future depends on hulking pickup trucks that often run on diesel and cost more than the average BMW.

That’s the irony at the heart of GM’s event this week at its sprawling factory in Flint, Michigan, where the next iterations of the Chevrolet Silverado and GMC Sierra will be introduced. These revamped heavy-duty pickups, which go on sale in June, feature advanced, lightweight materials and fuel-efficient engines but none of the technology that will supposedly shape the next era of the auto industry. Yet in Detroit that future can’t exist without the profit margins generated by classic pickup trucks.

“These vehicles have among the highest margins in the business,” said Jeff Schuster, senior vice president of forecasting at LMC Automotive. “You have no tomorrow if you don’t sell these trucks today.”

GM’s pickup trucks combine for $65 billion in annual revenue. Heavy duty versions of the Silverado and Sierra make up about 20 percent of GM’s full-size truck sales, the company said, and sell at an average of almost $56,000. Competition in the segment is fierce: Ford Motor Co. is rolling out freshened version of its leading Super Duty models at this week's Chicago Auto Show.

The math makes it clear that GM will ride into the future on trucks that first went on sale decades ago. The operating profit on large pickups, according to Morningstar Inc. analyst David Whiston, are at least $12,000 apiece. GM reported sales of 210,000 heavy-duty pickups last year and hopes the new ones will sell even more. In rough math, they bring in more than $2 billion in pretax income. 

That alone covers the $1 billion a year that the automaker puts into its GM Cruise LLC self-driving unit, which has yet to bring in revenue and will only begin to pilot a ride-hailing service later this year. The investment required to solve the complex problem of getting a computer to drive a car is so expensive that GM sold a piece of Cruise to SoftBank Vision Fund for $2.25 billion and another stake to Honda Motor Co. for $2.75 billion.

GM’s truck program also does the most to help fill the financial hole created by the company’s electric vehicle program. In 2016, its first year available, each Chevy Bolt electric car sold lost about $9,000 for the automaker. Those losses only scratch the surface of overall spending on development of next-generation cars. By 2022 the global auto industry will spend $255 billion on EVs and another $61 billion developing self-drive technology, according to a report last year from consulting firm AlixPartners.

Related video: GM on track for higher earnings in 2019 (provided by CNBC)

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Of course, GM makes money on other models besides big pickups—just not quite as much. A Chevy Equinox crossover SUV may only bring in about $3,000 in operating profit. A vehicle like a Chevy Malibu sedan makes even less. Passenger cars often lose money for U.S. automakers, especially if the factories building them run at less than 70 percent of their production capacity. Several GM car plants are running on one shift, which means they are likely losing money, and the compact car factory in Ohio and a sedan plant in Detroit are slated to close.

No product embodies classic Detroit more than a heavy duty truck. They are built to haul heavy workloads and they often last for hundreds of thousands of miles. The Silverado and Sierra heavy duties are popular among tradesmen and construction contractors who haul trailers, equipment and heavy payloads.

The diesel engines inside many of these pickups may originate from yesteryear’s technology, but only luxury SUVs like the Cadillac Escalade put up better margins. The current heavy duty average sale price of $55,600 beats the average BMW by almost $4,000, said GM spokesman Jim Cain. 

In an investor presentation last month, GM President Mark Reuss took time to talk specifically about what the company has coming this summer with the heavy-duty program. The newest trucks are lighter, he said, thanks to advanced materials and smarter engineering and feature engines that are more powerful and efficient. Since many of the buyers are businesses, fuel economy matters.  

“It’s big, it’s bold and it’s exactly what heavy duty customers want,” Reuss said.

GM sold more than 800,000 full-size pickups last year. The automaker sold another 170,000 of its Chevy Colorado and GMC Canyon midsize pickups, which also make nice margins.  The Bolt EV didn’t crack 20,000 in the U.S. and it loses money. 

Selling electric cars these days is about scaling up battery technology, driving down the cost and preparing for tomorrow. Selling trucks is how GM generates much of the roughly $9 billion a year in profit it has earned for three years running.

In the pickup race, Ford has traditionally had more customers for its biggest pickups than GM and sold about 55,000 more than its rival last year. That’s an opportunity for GM, said Dan Ammann, the former company president who is now Chief Executive Officer of GM Cruise, at an investor presentation last year. The automaker has about 37 percent of the market for trucks priced between $35,000 and $55,000, he said, but only 27 percent of the market for trucks priced above $55,000. Those are mostly heavy duty trucks.

Ford has maintained an advantage, said Schuster, because they have historically catered to commercial customers. Ford’s Super Duty F-Series pickups have had their own chassis and the company has marketed the trucks as stronger than the competition's. Reuss said GM’s big trucks share a lot of engineering with the light-duty pickups but are bulked up to handle heavy work. 

Gaining ground will be tough. “GM may be able to gain market share on Ford,” LMC Automotive’s Schuster said, “but they have Ram coming up being them.”

Even holding share will help GM fund the technologies of tomorrow. GM CEO Mary Barra told investors in January that these trucks will be the profit engine for a long time. Autonomous ride services will become a phenomenon in cities before they hit the heartland. The drivers who prefer Silverados have a need that isn’t easily replaced by autonomous vehicles.

“Trucks in middle America,” Barra said, “will be one of the areas last disrupted.”

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