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The existential threat facing the auto industry

The auto industry is healthy, making billions of dollars in profit around the globe. But it also faces great...

Posted: Nov 28, 2018 3:22 AM
Updated: Nov 28, 2018 3:22 AM

The auto industry is healthy, making billions of dollars in profit around the globe. But it also faces greater risks than it did even a decade ago when sales plunged, forcing bankruptcies and bailouts.

That's because the way people get from Point A to Point B is about to undergo the most radical change since the early automobiles replaced horses. Autonomous driving vehicles are about to change how cars are driven, powered and used. In the future, far more people will probably buy rides, rather than cars.

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For General Motors (GM) and the rest of the auto industry, that looming change poses an existential threat.

That's why GM announced plans to close five North American plants and cut about 14,000 jobs by the end of next year: Not because GM is in trouble today, but because it will soon be in trouble if it doesn't free up the cash it needs to radically change its business.

A changing industry

Self-driving cars will hasten the switch from gasoline-powered automobiles to electric vehicles. The sensors and computers calling the shots will need electrical power, rather than horsepower that gasoline engines provide.

The concept of car ownership could change, too. Today, privately owned cars spend most of their lives parked and unused. Self-driving cars of the future are expected to be on the roads for a much bigger portion of the day — once they drive you to work, they can drive someone else to the grocery store. That means roads could be filled with fewer vehicles overall.

That could be a tremendous opportunity for the auto industry: Automakers could sell rides, rather than cars.

Last year, GM President Dan Ammann said his company makes an average of $30,000 for each car it builds, between the sales price and maintenance. By selling rides in driverless cars, he said GM could make hundreds of thousands of dollars per car.

But there are other companies who hope to be the one selling those rides. All of this technology and change is attracting new players to the field, including upstart automakers like Tesla (TSLA) and deep-pocketed tech companies, such as Alphabet (GOOG), Apple (AAPL) and Uber.

When CNN Business asked Uber CEO Dara Khosrowshahi for his prediction 10 years in the future, he responded, "Hopefully, you won't own a car." He sees Uber, not GM, as the company that will be moving people.

The race is on

The battle to provide the vehicles of tomorrow is do-or-die for traditional automakers like GM and Ford (F). GM changed its motto to "Zero Crashes, Zero Emissions, Zero Congestion," a sign of the shift to self-driving, electric vehicles.

But it's an expensive bet — probably too expensive for the automakers to fund with the way they're currently doing business. And car companies will receive limited revenue from these futuristic vehicles in the coming few years, if not decades.

That's the reason why automakers are looking to slash their existing costs.

"We see these steps as necessary to ensuring the long-term sustainability and independence of GM," wrote Adam Jonas, auto analyst for Morgan Stanley, in a note to clients.

GM says it should save $6 billion a year with the moves it announced Monday. Ford said it expects to spend $11 billion in the next three to five years to reshape the company, though it has yet to announce the changes and cuts it will make to free up that cash.

Ford is also in talks with Volkswagen about some kind of alliance to help share the costs, short of a complete merger.

GM is also reaching out for new partners. It has set up a separate part of the company to focus on that new technology, and sold large stakes in the unit to Softbank and Honda (HMC).

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