General Motors Scraps Cruise, Alphabet’s Waymo A Big Part Of The Reason Why

Summary:

• GM exits the global robotaxi business, saving $1 billion annually, after investing $10 billion in Cruise since 2016.
• Competition from Waymo and Amazon, coupled with operational challenges, led to GM’s decision to drop Cruise.
• GM is focused on restructuring its BEV business, China operations, and returning cash to shareholders through buybacks and dividends.
• GM aims to achieve sustainable growth and parity with Chinese competitors, making it a Hold until restructuring shows results.

General Motors (NYSE:GM) has reportedly spent about $10 billion on San Francisco-based Cruise since buying the start up in 2016, including investments to develop robotaxi operations. With the announcement that GM is dropping out of the global robotaxi business, the automaker said it will save about $1 billion annually – more than peanuts, even for an automaker of GM’s size.

No one who has paid attention to Cruise for the past eight years should be surprised by GM’s decision. Founded in 2013, originally to develop self-driving kits for retrofitting cars, the startup evolved following GM’s acquisition in 2016 into a direct rival of Alphabet (GOOG) (GOOGL). Analysts have predicted that self-driving or autonomous vehicles could transform personal transportation while creating an opportunity of $300 billion to $400 billion of revenue by 2035, according to a McKinsey study.

Blue sky

GM CEO Mary Barra may be forgiven for speculating publicly just a year ago that Cruise might produce as much as $50 billion for GM and its partners in annual revenue by 2030- few knowledgeable analysts, journalists or investors took the projection seriously. I guess that it revealed what GM strategists calculated a national robotaxi fleet theoretically could generate, assuming everything went according to plan.

Of course, very little in life – not to mention the automotive business – goes according to plan. One stumbling block was the 2023 mishap in San Francisco in which a Cruise robotaxi was involved in a serious injury accident that reflected several technical shortcomings of the vehicle, as well as management delinquency. In November of this year, Cruise paid a $500,000 fine after agreeing that it filed an incorrect and misleading report of the accident – which also triggered a change in Cruise’s leadership.

A second big stumbling block was competition from GOOG’s Waymo subsidiary, which scaled more quickly and successfully than Cruise. With a $2.3 trillion market capitalization behind it, Waymo deploys exponentially more financial depth, experience and technological assets than GM, with its $57 billion market capitalization and relative inexperience in software development.

Per CNBC: Waymo now sells more than 150,000 paid rides per week via the Waymo One app across San Francisco, Phoenix and Los Angeles. Waymo’s next location is Miami. Waymo is far from profitability – still, the ability to operate driverless taxis on a commercial basis is an impressive milestone.

Multiple competitors

Amazon (AMZN), which acquired the Zoox self-driving startup in 2020 for $1.2 billion, also has been testing robotaxis in Las Vegas and Foster City, Calif. The company said it will begin commercial operations next year. Like Waymo, Amazon’s financial resources and digital expertise far surpasses those of GM.

Barra explained GM’s reasons for dropping Cruise Wednesday at a fireside chat with journalists in Detroit: Managing and growing a robotaxi business entails far more than simply creating a self-driving vehicle. GM, principally a designer and manufacturer of vehicles, realized it was ill suited to the business of serving the public with vehicles that would have to be stored, maintained, serviced, recharged and operated according to consumer preferences and legal requirements that are still evolving.

The automaker remains committed to personal self-driving for its vehicles, Barra said, and likely will retain some technology and personnel from Cruise as it winds down the subsidiary. GM hasn’t disclosed any information about an impairment charge – Microsoft (MSFT), an investor in Cruise, expects an $800 million impairment charge, which will be posted in the second quarter of 2025.

GM’s decision is prudent. The robotaxi business is a money pit that GM can’t afford and a contest it can’t win. The automaker has more urgent issues, namely the rationalization of its currently unprofitable battery-electric vehicle (BEV) business, restructuring of its unprofitable China operations and pursuit of the strategy announced a year ago to buy back shares and pay cash dividends in order to boost the value of GM equity.

China syndrome

Earlier this month GM said it expects the restructuring of its joint venture operations with SAIC Motor Corp. in China to cost more than $5 billion in non-cash charges and write-downs. Earlier this month, the automaker’s CFO noted its belief that GM could return to profitability in China next year. GM also this month withdrew from its 50% ownership of a battery venture in Lansing, Michigan.

GM had nearly 1.4 billion common shares outstanding at the end of 2023. At the end of this year, the company said it intended to reduce that number to less than 1 billion.

In November 2023, following a six-week strike by the United Auto Workers union that cost the company $1.1 billion, GM announced a $10 billion share buyback and a 33% increase in the cash dividend. GM share price has increased to about $52 from about $29 at the time of the announcement. Barra explained: “We are prioritizing returning cash to our shareholders.” Additionally, she said “we are reducing the capital intensity of our business.”

Last year, Barra noted that GM’s stock price was “disappointing to everyone.”

If the administration of president-elect Donald Trump follows through on promises to relax air quality and fuel efficiency standards, GM may be able to slow development, production and marketing of BEV models. The current standards, say automakers, will lead to big fines for non-compliance unless they can sell enough zero-emission BEVs. Selling EVs, however, also produces losses, while fossil fuel models such as GM’s Chevrolet Silverado full-size pickup are big moneymakers.

The president-elect has also discussed rolling back parts of the Inflation Reduction Act that provide incentives to consumers for buying BEVs.

Lack of discipline deploying capital got GM in trouble 20 years ago, contributing to its bankruptcy. GM clearly intends to avoid a repeat of that mistake.

GM has a chance to reward investors if it can identify areas of revenue growth. Barra has said services and software have potential, as well as exports of vehicles from the U.S. We’ll see. In the meantime, share buybacks and a retreat from businesses that aren’t producing a return could be a short-term opportunity for investors.

Longer term, GM’s most important mission is to achieve parity with its Chinese competitors, which are grabbing market share worldwide and are likely to arrive in North America despite tariffs and other efforts to exclude them. GM is a Hold until it demonstrates sustainable growth of earnings and revenue following the restructuring of self-driving, BEV business and China operations.

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