Universal and Ford Motor's Dilemma: When Will Electric Vehicle Business Make Money?

The cost of electric vehicles is decreasing, but not fast enough to stabilize the profit margins of traditional car manufacturers. This makes the long-term profitability of electric vehicles a "major risk" for traditional car makers.

On Wednesday, Wells Fargo analyst Colin Langan pointed out that the cost of manufacturing an electric vehicle was nearly $10,000 higher than that of an internal combustion engine vehicle. The cost of the battery is about $14,000, while the cost of the motor and battery control system is about $3,000. In contrast, the cost of a traditional engine and transmission is about $7,000.

Langan believes that today, the cost of manufacturing an electric vehicle is about $7,000 higher than that of an equivalent internal combustion engine vehicle. The biggest change is the battery component, which has decreased in price by about $3,000 per vehicle.

Overall, Langan estimates that in 2022, the operating profit margin of car manufacturers will be about 7.3%, with a profit of about $2,500 per vehicle. Due to the estimated cost of electric vehicles being $7,000 higher than that of internal combustion engine vehicles, he is unsure whether the profit margin can be maintained.

Bearish on General Motors and Ford Motor

The profitability problem of electric vehicles is one of the reasons why he rated the stocks of Ford Motor and General Motors as sell. He set target prices of $10 and $30 for Ford Motor and General Motors, respectively.

According to FactSet, Langan has set the lowest target price for Ford Motor and General Motors.

Other analysts on Wall Street are more optimistic. The average target price for Ford Motor is about $13.50, and the average target price for General Motors is about $46.

Overall, 33% of analysts studying Ford Motor choose to buy, while about 56% of analysts studying General Motors choose to buy. The average buy rating ratio of S&P 500 index components is about 53%.

Can profitability be achieved?

Ford Motor's goal is to achieve an operating profit margin of 8% for its electric vehicle business by 2026. General Motors believes that its electric vehicle business will be profitable by 2025.

This optimism is mainly due to economies of scale. Car manufacturers believe that battery costs may decrease by 40% to 50%.

The profitability of electric vehicles may become a decisive issue for the automotive industry in the next decade. Of course, electric vehicle businesses can be profitable, as demonstrated by Tesla and BYD.

Although the profitability of electric vehicles is an important long-term issue that investors need to consider, there are more pressing issues, such as rising interest rates and declining affordability of cars, which are putting pressure on automotive stocks. Over the past 12 months, the stock prices of General Motors and Ford Motor have fallen by approximately 14% and 10%, respectively.