Demand for GM vehicles remains ‘very strong’: CFO

GM CFO, Paul Jacobson, joins Yahoo Finance to discuss the factors contributing to General Motors' raising its 2021 outlook after posting Q2 earnings, the company’s push to be a leader in the EV market, and how the company is adapting to the chip supply shortage.

Video transcript

BRIAN SOZZI: GM shares remain in focus after sliding 8.9% following earnings on Wednesday. While the company showed an impressive quarter for profits amid the boom in car demand, investors were rattled by a cautious outlook for the balance of the year. Joining us now is General Motors CFO Paul Jacobson. Paul, good to see you this morning here. Let's get right to the stock market's reaction to the quarter. Like I mentioned, impressive quarter in terms of profits. But I think investors were a little rattled by the second-half outlook in terms of cautiousness. What are you seeing in your business over the next six months?

PAUL JACOBSON: Well, first, good morning, and thanks for having us today. It was a big day for GM yesterday. We got to celebrate with the team their tremendous accomplishments in the first half of the year. And despite challenging circumstances around the semiconductor, around COVID, they delivered incredible results. And we're seeing in the business what we've been seeing, really, from the very beginning, and we've talked about publicly, which is we're just exercising a lot of caution in the future.

When you look at where the semiconductor challenges are-- particularly, we highlighted COVID in Malaysia that's closed a lot of facilities. That is restricting the flow of semiconductors temporarily as well as the spread of the delta variant. We thought a cautious tone was appropriate for the time. And we've always been focused on making sure that we're putting numbers out that we know we can deliver to the Street.

BRIAN SOZZI: Within that guidance, the second-half outlook, how much inflation have you baked in?

PAUL JACOBSON: So we've got about $1.5 billion to $2 billion of commodity inflation that we really saw beginning, really, from the start of the year as part of the original COVID recovery. We've actually seen prices come down off their peaks a little bit, but there's a lagging effect. And so when you look at the first half to the second half, we've got about $1 billion to $2 billion. The good news for us is demand remains very, very strong for our vehicles.

And when you look at the success that we've had with our new line of full-sized SUVs and full-sized trucks, we can't build them fast enough for our customers. So that's helped the top line for us and helped to drive some of the outperformance we saw in the first half of the year.

MYLES UDLAND: And Paul, it's Myles here. And relative to that, you guys mentioned on the call that the average transaction price up 14% going to that model mix you talked about, also highlighting some of the customizations there. How do you think about that kind of a number going forward? Certainly, demand is there for vehicles. But is that the kind of-- is that the top-line growth on the vehicle side that you are thinking about as sustainable, or is that maybe a shorter-term thing?

PAUL JACOBSON: Well, thanks, Myles. I think there's certainly an element of this that we believe is sustainable. Certainly, prices have gone up as a result of lower inventories and strong demand. And that's what we've got to keep an eye on. But when you look at the trim levels and the mix of the vehicles that we've been producing, it's clear that customers are showing a desire to have some of those higher-end trim models, which is great for us, because we're particularly good at delivering style and value to the customers. And this is one of those areas that we can show it. So we're very optimistic about the quality of the vehicles and what customers are going to ultimately opt to buy.

MYLES UDLAND: And then on the inventory side, talking about low inventory into and through 2022-- now, we talked to one of your competitors last week who said they're thinking about a different kind of model for just how much inventory they want to have in general. Are you guys thinking that long term and in terms of company-wide levels that might sustain after this, or are you just trying to get through this COVID-related supply crunch?

PAUL JACOBSON: Yeah, well, there's obviously a lot going on in the here and now. But there are a lot of lessons that we're learning through this and applying to the business. And I would say the inventory question comes up quite a bit. We've launched digital tools to help give dealers visibility up into the stream so they can see the vehicles that are coming and proactively contact customers, which has helped their business model as well. And they're a very important partner in this equation as well. And I believe that a lot of those lessons will apply to the future.

As for the inventory levels, what we've said is that we certainly believe that we need more inventory than what we have today. We have a number of dealers that have empty lots. And vehicles, in a lot of cases, are selling as soon as they're coming off the truck at delivering, which is great but for the fact that we need to have vehicles on the lots for customers who drive in and want to drive off with a new vehicle. But I think we're certainly learning some lessons about carrying less inventory than we have historically. And we'll look to apply those. But considering where we are with demand and the ability to produce, I think it's going to be a little while before we're actually able to build inventories off these levels.

BRIAN SOZZI: And Paul, not many folks picked up on this on the earnings call-- and frankly, I'm quite surprised-- you are trying to get into the auto insurance market. Where are you now, and what will that rollout look like over the next 12 to 18 months?

PAUL JACOBSON: So we're enjoying some good success in the test markets and going through the process of making sure that we've got the appropriate licenses to do business wherever we need to. So I would say it's in the growth phase right now, very early stages. And we're going to have more information about that and our other adjacent businesses that we believe the new platform of vehicles and the connected vehicles that we're going to be producing in the future are ultimately generating revenue and strong margins. We're going have more information about that on our investor day on October 6 and 7.

BRIAN SOZZI: Staying on that investor day in October, Paul, will you be able to reach a 10% operating margin in North America next year given where things are with inflation and given where things are with semiconductors?

PAUL JACOBSON: We believe so. And one of the things that's unique about us-- and not all of our competitors are in the same position-- is our North American profitability also includes a lot of R&D expense for electric vehicles and other things that we're doing to invest in growth businesses as well. So we feel confident that we'll be able to hit those numbers. And the business is performing well and allowing us to fund, and even, as we announced, accelerate our journey towards electric vehicles and autonomous vehicles.

MYLES UDLAND: Yeah, and Paul, I wanted to ask a little bit about that. You guys coming out with a joint statement with Ford and Stellantis just within the last day or so about that 40% to 50% annual sales mix by the end of, I guess, this decade. It's already 2022, basically. And you think about that that you guys have announced as well with the CapEx. Have you started at all to think about what the investment could be in the back half of the decade towards that goal, or are you guys mostly focused just on getting through the 2025-- I think it's a $35 billion figure now?

PAUL JACOBSON: Yeah, that's absolutely right. And I would say we're focused on the initial phase. We've obviously got plans out over the next decade. We've got our own curves. And the customers are ultimately going to determine EV adoption, and we want to be positioned to be leaders in that space. And we believe that we can have a leading North American market share in this space over the decade. And as we are in the process of launching now over 30 electric vehicles that we'll be producing by 2025, I think we're going to be uniquely positioned to meet demand in all sectors of the economy.

BRIAN SOZZI: Paul, this is our first time talking with you. You were the longtime CFO at Delta. You joined GM late last year. What are you driving now that you are part of GM? Are you a Corvette guy, a GMC truck guy? Talk to us.

PAUL JACOBSON: Well, you saw my reaction. I'm definitely a Corvette guy and enjoying the new mid-engine. It's a beautiful car. And as I tell my wife, it's the most head-turning car I've ever driven. And she just rolls her eyes at me.

BRIAN SOZZI: Well, to be fair, I'm still getting used to the mid-engine Corvette, but it is a nice vehicle for sure. GM CFO Paul Jacobson, good to see you. We'll talk to you soon.