Behind GM, Ford’s new EV technique is old-time financing: Money

The cab to a Ford all-electric F-150 Lightning truck prototype is seen on an automated guided vehicle (AGV) at the Rouge Electric Vehicle Center in Dearborn, Michigan, September 16, 2021.

Rebecca Cook | Reuters

Detroit’s automakers have brought a surprisingly conservative financial strategy to making EVs the next vehicle of choice for American consumers.

They’re paying cash.

General Motors other ford are investing $65 billion between them – $35 billion at GM and $30 billion for Ford – and, so far, don’t propose to borrow any of it. Instead, the most radical change in auto products in a century is being paid for out of the companies’ operating cash flow – seriously reducing the risk to the companies over time, and, for now, boosting their stock prices.

“The short answer is that they are doing it because they can,” said Nishit Madlani, automotive sector lead at bond rating agency Standard and Poor’s. “The popularity of trucks [since the pandemic began] and strong pricing is giving them confidence.”

Detroit’s aggressive investment and conservative financing has been years in the making. It has been aided by $4 billion borrowed by GM in May 2020, and by Ford drawing down a revolving credit line by $15 billion around the same time, moves intended to cushion a feared sales implosion from Covid-19. As sales declined more modestly than feared in 2020 and then began to bounce back in 2021, cash flow remained strong, taking the companies’ stock prices higher and letting Ford repay high-interest debt.

At the same time, both companies held on to cash by suspending dividends and share repurchases. And the companies have cut billions in annual costs, by slashing whole lines of unprofitable sedans, withdrawing from unprofitable markets overseas, and focusing tightly on trucks, which remain the most profitable part of their business.

Put all of this together, and the two biggest native-born US automakers have the cash to take on the industry’s biggest technological transformation since its founding.

Record car profits, record car prices

“Auto manufacturers are expecting record profits once we get through supply chain issues and chip shortages, which we expect to last most of this year,” CFRA Research analyst Garrett Nelson said. “The existing business is good, and the driver is car prices at a record high.”

The Detroit 2’s financing strategy stands in stark contrast to how Tesla, then a start-up, financed its push into EVs over the last decade. The EV leader repeatedly raised money from the stock and bond markets to pay for its plans, filing paperwork with federal regulators for $10 billion in stock sales as recently as 2020. Tesla’s first EV factory in California was financed with a loan that was federally guaranteed in 2010, when the EV market was nascent, before the company went public or had material revenue.

GM and Ford are ready to spend even more.

“If anything, it will go up from there,” a Ford spokesman said.

The US car market’s bounce back to nearly 15 million units sold in 2021 provided the financial cushion Detroit needed to push forward aggressively, according to Nelson. The collapse was not nearly as large as the one that accompanied the 2008 financial crisis, when the US passenger vehicle market fell to slightly more than 10 million cars and trucks. The brief, shallow dip helped assure that the war chests of the two companies were big enough to meet the need for billions of dollars in new investment, Madlani said.

“We prepared for the known and the unknown,” said the Ford spokesman. “The unknown part was the pandemic. The known was that we needed to be a leader in electric vehicles.”

The sales rebound, while still well below pre-pandemic pace, has translated into $7.8 billion in free cash flow over the nine months that ended in September at Ford. At GM, where automotive operations barely broke even on operating cash flow in the first nine Months of 2020, liquidity was still strong enough to let the company spend more than $4 billion on capital expenditures. GM is due to report fourth-quarter results on Feb. 1, with Ford set to announce its results Feb. 3.

Analysts expect Ford to report profits of 42 cents a share on $35.8 billion of revenue, up 75% since the September quarter, according to Thomson Reuters data. GM is forecast to earn $1.11 a share, down from $1.52 in the third quarter. GM raised its own forecast for the full year in December, saying it will earn $14 billion in earnings before interest and taxes, up from $11.5 billion to $13.5 billion it had previously predicted.

Ford and GM profits have held up, even though US industry unit sales are off the 17 million-vehicle annual pace before Covid, because the companies aggressively cut costs to prepare for the transition, Nelson said. Ford got almost entirely out of the business of making sedans, for example, and GM laid off 4,000 salaried workers in 2019. That’s in addition to factory closings that included GM’s storied Lordstown, Ohio plan, later sold to EV start-up Lordstown Motors.

On top of that, the companies are holding plenty of extra cash as a reserve if their cash flow misses forecasts. As long ago as 2019, analysts who spoke warily of all the money Ford needed to invest in its business respectfully noted that it also had $37 billion in cash and short-term securities. Ford now has $46.4 billion, and generated more than $12 billion in operating cash in the first nine months of 2021.

Ford, GM EV forecasts

Both companies have had plenty to say about financing strategy, and EV planning, at investor conferences in the last year. The common theme: Building Ford’s EV strategy around existing model names like the Mustang and especially the F-150 pickup truck, for which the company has garnered 200,000 pre-orders, is paying off in both customer acceptance and cost containment.

“Within the next 24 months, based on the demand for these products, [we] would be the number two EV automaker, probably close to 600,000 EVs a year globally [from Ford’s current product lineup] and we don’t plan to stop there,” Ford’s North American chief operating officer Lisa Drake told a Goldman Sachs-sponsored investor conference in December. “The complexity of the product in EV space is much less than at [internal combustion engines]. …And that’s going to allow us to be more efficient with our capital and more efficient with the labor and the assembly plants.”

At GM, the EV strategy includes a wave of new vehicles using new and existing nameplates – most recently, the company unveiled a $42,000 electric version of its Chevrolet Silverado SUV – as well as its Cruise joint venture with Honda, Microsoft and other investors to build an EV-centered autonomous- car business.

That has meant manufacturing complexes devoted to EV production that are in progress – or in production – in two Michigan towns and in Spring Hill, Tennessee, with planned battery plants near the sold-off Lordstown plant and in Spring Hill. GM chief financial officer Paul Jacobson said in March the company saves $1 billion to $1.5 billion per plant by converting existing car factories rather than developing all-new ones, which will reach $20 billion to $30 billion by the time GM’s EV effort reaches its full scale .

For now, the challenge is that electric vehicles are much less profitable than the big pickups and SUVs that dominate the two companies’ business, Nelson says, but that isn’t likely to last. Nelson says that as battery costs continue to drop and Ford and GM build scale in their EV business, they can surpass the profitability of internal combustion powered vehicles – noting that Tesla is more profitable, per dollar of sales, than Ford or GM’s auto businesses. Ford says its Mustang Mach E is profitable even though it sold fewer than 30,000 units in 2021.

“We do eventually expect to match [internal combustion engine] profitability with EVs as battery cell costs decline and we scale our operations,” a GM spokesman wrote in an e-mail.

At Morgan Stanley, analyst Adam Jonas – a longstanding EV bull – says Ford’s surge which led its stock to outperform Tesla last year, suggests that its EV-focused businesses are now worth about $50 billion, with every 100,000 sales of EVs likely to add $2 to its stock price. But he warned in a Jan. 13 report that hard-to-avoid bumps in the rollout of the electric F-150 and other vehicles will likely cause the stock to dip temporarily later this year.

“From a $25 level, we believe expectations for Ford’s success in EVs, while possible to achieve, are difficult to exceed,” Jonas wrote.

Paul Polman blasts banks for financing extra coal than inexperienced power

LONDON – Former Unilever CEO Paul Polman beat up some big banks for investing more money in polluting industries than in renewable energy.

Speaking to CNBC’s Steve Sedgwick at the COP26 climate summit in Glasgow on Tuesday, Polman said, “We are still seeing some of the big banks funding more fossil fuels, funding coal than green energy, and that’s a big no-go.”

Sixty of the largest banks make up $ 3.8 trillion in fossil fuel companies between 2016 and 2020, according to a group of climate organizations called Banking on Climate Chaos 2021.

Polman acknowledged that some of the big banks are supporting projects that support the zero emissions transition, but said it was financially rather than ethically motivated.

“People are beginning to realize that implementing the Sustainable Development Goals – which cost $ 3 to 5 trillion annually – is far less than dealing with the dire consequences of inaction. And the financial market is actually the first to understand that. I don’t think they are moving for moral reasons, I want to be honest, but they are moving for economic reasons, “he said.

Polman added that the oil and gas industry needs to be helped to move towards greener alternatives. “We have to help the… high emitting industries that need to transform. I don’t think chastising them will do them any good … it just doesn’t work reflecting a lot of the stranding of their assets that are now worth these companies and helping them make this transition. “

The term “stranded assets” refers to fossil fuel-related assets such as coal and oil reserves that no longer able to generate financial returns when the economy moves towards green energy. Mark Carney, UN special envoy on climate change and finance, said financial markets need to be reshaped so that financial decisions can take climate change into account.

Carney chairs a coalition of financial firms called the United Nations’ Glasgow Financial Alliance for Net Zero, which aims to accelerate the transition to cleaner energy. Together, the banks manage more than $ 90 trillion in assets.

Read more about clean energy from CNBC Pro

“You see now with the Glasgow Promise that Mark Carney is a leader, that we have nearly $ 100 trillion, which is half the money in the world, and says that by 2050 I want to be net zero. Can we apply that to 2030 goals, which are absolutely crucial? Can we translate that into key actions now? ”Polman explained.

Polman’s comment comes after some of the big banks pledged to spend more to finance carbon reduction. Bank of America President Brian Moynihan said Tuesday the company will spend $ 1 trillion to achieve net-zero emissions by 2050. “To get there, we will provide $ 150 billion in funding over $ 1 trillion by 2030,” he said at COP26.

BofA is part of a task force called the Sustainable Markets Initiative that has issued a guide for financial services companies to help their customers achieve net zero emissions. Other members are JPMorgan, Barclays and Swiss credit.

– CNBC’s Sam Meredith and Catherine Clifford contributed to this report.

Why retailers are embracing purchase now, pay later financing companies

Supply chains are jumbled and production is limited. For weeks, headlines have been telegraphing a clear message to buyers: This Christmas season shop early.

In recent years, early risers may have made holiday gift plans to reserve Christmas gifts and pay for their purchases over time. But many retailers – including the largest in the country, Walmart – have abolished or reduced these programs. One reason for this is that there are new tools available to buyers to distribute payments.

A popular option for consumers is to buy now, pay later. Dealers are big fans too. The point of sale loans are easy for retailers to manage, and research shows that these options translate into bigger shopping carts and greater customer loyalty. RBC Capital Markets estimates that a BNPL option increases retail conversion rates by 20% to 30% and increases the average ticket size between 30% and 50%.

Add incremental sales

“It’s about incrementality,” said Russell Isaacson, director of retail and automotive lending at Ally Lending, “to reach that incremental sale or incremental consumer.”

Installment payments offer consumers options and convenience when it comes to managing budgets and shopping, according to Hemal Nagarsheth, associate partner in Kearney’s Financial Services Practice. He said the option also builds trust between retailers and consumers, resulting in “incremental sales, higher average purchase sizes and higher frequency of purchases.”

Buy Now, Pay Later Payment plans offered by companies like Confirm, based in Australia additional payment and Klarna from Sweden, are particularly attractive to younger buyers, such as the coveted Generation Z and millennial consumers. While every plan has differences – from the number of payments to the specific terms and conditions – the most important thing they have in common is the promise of a handful of equal payments over a relatively short period of time with no hidden fees. Often the plans are interest-free.

Installment payments are more popular with consumers who either do not have access to credit or who do not want to shop with credit cards for various reasons. According to Hans Zandhuis, President of Ally Lending, the option also makes a lot of sense for buyers who don’t have the money to cover the entire purchase but who can survive the next paychecks.

The average transaction value is around $ 200 for a purchase that is paid for later, Zandhuis said. Often times, if the option to pay later had not been available, the checkout value for the retailer would have been around $ 100, he said. This allows the same consumer to spend $ 175 to $ 200, with 4 monthly payments of $ 50. Payments should match the paycheck cycles.

Take the clothing retailer Rue21, for example. The most important target group is an 18 to 25 year old shopper who often does not use credit cards. With lots of cheap items on the website and decreasing traffic in the malls, increasing the average order volume is a top priority.

When the pandemic closed stores, Rue21 had to figure out how to sell to its buyers online with no credit. Since Rue21 added Klarna as a payment option in-store and online, the average order volume is 73% higher than other payment methods published a case study by Klarna. Rue21 shoppers doing business with Klarna have the highest sales per customer with a 6% higher purchase frequency. In May, Klarna purchases made up more than a quarter of rue21’s e-commerce sales.

A logo sign outside of a retail store on rue21 in Chambersburg, Pennsylvania on January 25, 2019.

Kristoffer Tripplaar | Sipa over AP pictures

Affirm boasts that its merchant customers report an 85% increase in average order value when consumers choose to use its BNPL plan over other payment methods. Affirm approves installment payments for purchases up to $ 17,500, which has been proven to be very important to Pelotons expensive exercise equipment and services. FT Partners, an investment bank focused on the fintech space, estimated that 30% of Affirm’s revenue in the first quarter of 2021 came from sales on the Peloton website.

Klarna’s merchant base reports a 45% increase in average order value when a buyer pays more than four payments. Buyers can also choose to pay interest-free within 30 days or, for larger purchases, get financing with monthly payments of 6 to 36 months with an APR between 0% and 29.9%.

New customers

Attracting a customer whom a retailer might otherwise not have influenced is another benefit of offering a buy-it-now option.

Earlier this year Macys CEO Jeff Gennette told investors that his partnership with Klarna will help attract new customers.

“We launched Klarna on the Macy’s website in October [2020] and since then we have scaled it to Macy’s, Bloomingdale’s and Bluemercury both online and in stores, “he said.” With Klarna we continue to see higher spend per visit and increased acquisition of new younger customers, 45% are under 40 years old. Our goal is to turn all of these new customers into loyal Macy’s customers who will come back for future purchases. “

Around 93% of Afterpay’s gross goods value in the last financial year came from repeat users of the installment payment service, with the longest-serving consumer making 30 additional transactions per year.

Higher conversion

Installment payments allow the retailer to “a [consumer’s] Desire into a sale, “said Chris Ventry, vice president of global advisory group SS&A.” It removes the payment block, “said Ventry through BNPL is enticing, ultimately enticing enough to drive conversion, which is the primary goal of all digital commerce websites . “

An analysis by Similarweb of the top 100 US fashion and retail websites compared 50 retailers who offer a buy-it-now option at checkout and 50 who don’t. On average, sites with a BNPL option had a conversion rate of 6% compared to 4% for those who didn’t.

Afterpay said it increases a retailer’s conversion rate and additional sales by 20 to 30% more than other payment options.

The incremental sales and increased conversion also make the additional transaction costs that the retailer pays to the fintech companies worthwhile. Zandhuis said that while the retailer pays the BNPL company an additional 2% higher transaction fees compared to the transaction fees charged by a traditional credit card company, “the math speaks for itself. The additional revenue is greater than the cost.”

Afterpay and Klarna charge merchants a 3% to 5% transaction fee, Affirm declined to disclose its transaction fees.

The programs also have advantages over the traditional layaway, which requires retailers to store items purchased locally while customers make installment payments over time. More and more retailers are using stores as mini-fulfillment centers to service online orders. With this model, the storage space is scarce.

Growth opportunity

Buy now, pay later, according to FIS Worldpay, is the fastest growing e-commerce payment method in the world, followed by the growth of digital wallets. In 2019, the $ 60 billion BNPL market accounted for 2.6% of global e-commerce, excluding China.

Worldpay estimates that use of the option could grow to $ 166 billion by 2023, with an average annual growth rate of 28%. At this rate, it would account for around 5% of global e-commerce outside of China.

According to FIS WorldPay, BNPL currently accounts for less than 2% of North American sales.

Coresight Senior Analyst John Harmon recognizes the opportunity for retailers but does not see it as a panacea.

“I don’t see BNPL as a magical solution, despite its booming adoption, as it’s just a different kind of loan,” Harmon said.

Turkey provides crypto companies to cash laundering, terror financing guidelines

A Bitcoin logo can be seen next to the Turkish flag in a cryptocurrency exchange store in Istanbul, Turkey, on April 27, 2021. The photo was taken on April 27, 2021. REUTERS / Murad Sezer

Turkey has added cryptocurrency trading platforms to the list of companies covered by anti-money laundering and terrorist financing regulations, according to a presidential decree released on Saturday.

The Official Gazette said the country’s recent expansion of rules on cryptocurrency transactions would take effect immediately, covering “crypto asset service providers” who would be subject to the existing regulations.

Last month, Turkey’s central bank banned the use of crypto assets for payments because such transactions were risky. In the days that followed, two Turkey-based cryptocurrency trading platforms were shut down as part of separate investigations.

The investigation into one of them, Thodex, led to the detention on Thursday of six suspects, including the siblings of its chief executive Faruk Fatih Ozer, whom the Turkish authorities are looking for after his trip to Albania. Continue reading

Our standards: The Thomson Reuters Trust Principles.

International cash laundering watchdog retains Pakistan on terrorism financing ‘gray listing’

FILE PHOTO: The FATF (Financial Action Task Force) logo is seen during a press conference following a plenary session at the OECD headquarters in Paris, France, on October 18, 2019. REUTERS / Charles Platiau

KARACHI, Pakistan (Reuters) – The Financial Action Task Force (FATF) announced on Thursday that it would put Pakistan on its terrorist financing “gray list”.

Speaking at an online press conference from Paris, FATF President Marcus Pleyer said Islamabad has made progress but has not yet finalized its action plan to address shortcomings in the fight against money laundering and terrorist financing.

Reporting by Gibran Peshimam in Karachi; Adaptation by Hugh Lawson