China’s germanium, gallium ban could cost the US $3.4 billion
According to the USGS, gallium prices could increase by more than 150% and germanium prices by 26% in the event of a total ban.
In April 2014, Mary Barra sat on Capitol Hill listening to accounts of families who’d lost a member while driving in a General Motors Co. Chevrolet Cobalt that malfunctioned. Months earlier, she’d been handed the reins of the largest U.S. car company.
Defects that the company had failed to disclose for more than a decade led to the recall of almost 3 million small vehicles. The crisis shattered trust in GM, five years after it had emerged from Chapter 11 bankruptcy and a $50 billion government bailout. Barra vowed “no more crappy cars.”
“No more crappy cars”
Almost half a decade on, GM’s chief executive officer confronts another formidable challenge: navigating tariffs and the wrath of President Donald Trump while reshaping the business and preparing for an all-electric future that’s likely to be centered on China.
Barra last month announced a wide-ranging plan that included shutting down manufacturing plants in North America, phasing out sedans, cutting almost 15 percent of the workforce and generating total savings of almost $6 billion by the end of 2020. Restructuring charges will cost GM close to $4 billion.
The numbers may be big but the actions are far from radical in the context of an auto industry in upheaval. The cuts, while commendable, were largely overdue compared with those of peers. Barra has been on a cost-cutting mission since she took over as CEO and multibillion-dollar savings programs aren’t new to GM.
The biggest challenge — for GM and the industry — is technology. The cost-cutting exercise helps with capital reallocation but will be a long drawn-out process. In a four-year plan implemented around the time when Barra took charge, the company said it was cutting costs by more than its “incremental investments in engineering, brand building and technology.”
Under pressure to pace shifts in technology, GM has outlined a car-of-the-future strategy and elevated the likes of Pam Fletcher, the brain behind the first mass-market electric car, the Chevy Bolt. In October last year, GM’s product development head, Mark Reuss, said the company “believes in an all-electric future,” committing to introduce at least 20 new battery electric vehicles by 2023.
China is a big part of the strategy, as the largest market for electric cars. GM already has a major business in the country through its joint ventures, selling 2.7 million vehicles in the nine months through September and recording equity income of $1.7 billion.
Even as the broader auto market slumps, China’s electric car sales have been surging, backed by its pro-green car policy. But GM’s success with the Bolt hasn’t translated. Of all the cars the U.S. automaker sells there, less than 1 percent are pure electric. GM’s top China executive has said it plans to launch as many as 20 electric models by 2023.
While GM has been ahead of the curve on technology, it doesn’t make the Bolt in big volumes. Meanwhile, its hybrid Chevy Volt, which wasn’t selling, is going to be phased out. The automaker also left a key market for electric cars by exiting Opel in Europe.
The real challenge, though, is in retaining value from the manufacturing process for electric cars, which have fewer moving parts so are simpler to produce. Almost 60 percent of the Bolt’s content is supplied by South Korea’s LG Chem Ltd. GM itself produces only 11 percent of the Bolt, compared with about 20 percent for a regular internal combustion engine car, according to analysts from UBS Group AG. That means a significant share of the value created in electric cars will come from outside the traditional auto supply chain.
With little added value, GM loses money on every Bolt it makes. The loss last year was about $7,000 per vehicle in terms of earnings before interest and tax, according to UBS estimates. Yet an electric car remains almost $9,000 more expensive than a conventional model. It will take about six years for the biggest cost element — the battery pack — to fall by around 40 percent.
GM has been ahead on futuristic technologies such as autonomous vehicles with its Cruise division though, as we’ve written, even co-investors such as SoftBank Group Corp. aren’t sure when these will come to fruition.
Barra’s challenges are a microcosm of those facing the auto industry. At what point does aggressive cost-cutting start to compromise the ability to make good cars for the future? And what happens to margins if car companies can’t keep up?
If there’s one certainty for automakers, it’s that costs will rise next year. Tariffs on raw materials such as steel and aluminum are already hurting and Trump’s trade spat with China will remain a thorny issue. For GM, these tariffs will hurt. Consider this: A Bolt has more aluminum and copper, and less steel, than a regular car, and weighs around 22 percent more than a Volkswagen Golf.
Yet companies have little choice but to innovate. Bad cars won’t survive as the global market gets saturated and consumer tastes and expectations evolve. Technology is becoming a larger part of every vehicle and increasingly, the Chinese buyer will determine whether a car does well.
Elon Musk has already decided Tesla Inc.’s ultimate future may lie in China. How GM’s next-generation models fare there may also determine GM’s — and Barra’s — fate.
(By Anjani Trivedi)
