GM Commitment To Self-Driving Revenue In Question With Ouster Of Cruise CEO (NYSE:GM)

The past several months have clarified the reality that U.S. car buyers are a lot less interested in buying battery-powered electric vehicles than automakers – General Motors Co. (NYSE:GM) prominently among them – have been counting on for the past several years.

Now, another leg of GM’s growth strategy appears shaky: Autonomous robotaxis, which were expected to help raise the company’s annual revenue to $280 billion by 2030 from the current annual run rate of roughly $172 billion on a trailing twelve-month basis.

A year ago, GM said it would be producing “thousands” of Origin vehicles for its Cruise subsidiary so the robotaxi company could expand operations in San Francisco, Austin and Phoenix and eventually other U.S. cities. That plan has been scaled back in the wake of safety concerns over Cruise’s self-driving technology and the forced resignation of the company’s CEO and co-founder, Kyle Vogt.

Look ma, no hands

Origin is an unusual vehicle in that it has no controls such as a steering wheel or accelerator – it’s designed to operate as a commercial passenger-carrying or package-carrying robot.

GM says it hasn’t given up on self-driving technology (or the robotaxi business) as its cross-town rival Ford Motor Co. (F) apparently did in October of last year when it shut down Pittsburgh-based Argo AI after massive investments in the technology looked fruitless or seriously delayed. Volkswagen AG also had been a major investor in Argo.

Though self-driving technology has progressed over the last decade with several major entrants globally, companies are struggling to deploy a reliable and financially sustainable robotaxi business that meets with the approval of regulators and safety officials. In GM’s case, its main operations in San Francisco lately are suspended following an injury accident in October involving one of its vehicles.

Waymo, formerly the Google self-driving project, operates a small number of robotaxis in San Francisco and Phoenix, with tests taking place in Los Angeles and Austin.

Whistleblowing

Safety problems with Cruise vehicles had been plaguing the company for some time. Last April, for example, an incident unfolded in which one of its vehicles was stopped by a traffic police officer for traveling at night without its headlights lit. Then a whistleblower claiming to be a Cruise employee complained to California regulators that the company wasn’t championing a “safety first” culture in response to pressure to deploy vehicles from GM management and investors.

The straw that broke the back of California regulators occurred in early October, when a pedestrian struck by a non-Cruise vehicle was then hit by a Cruise robotaxi and dragged for a short distance under the vehicle. The state subsequently suspended Cruise’s permission to operate its service to the public.

On Nov. 8, Cruise recalled 950 autonomous vehicles as a result of the pedestrian collision. Then the company, which employed 4,000, laid off an unspecified number of contingent workers who had supported autonomous vehicle operations. On Nov. 20, CEO Vogt announced his resignation from Cruise.

“While (Cruise’s) automated driving system mostly works, it still has some notable flaws, especially around path planning and routing,” said Sam Abuelsamid, principal research analyst at Guidehouse Insights. “The company has been trying to expand too far and too fast without really being ready in hopes of reaching a target of $1 billion in revenue in 2025.”

Abuelsamid was a passenger in Cruise robotaxis several times in the past year: “I didn’t really feel unsafe, but there were certainly a lot of questionable path-planning decisions” by the self-driving system, he told Automotive News. “I asked (Cruise) about it, and they did not really give me anything resembling satisfactory answers.”

GM finds itself caught in a financial predicament. With EVs an expensive disappointment, the automaker now must absorb big quarterly losses from robotaxi testing operations and shoulder more and more of the investment needed to develop Cruise after Softbank decided to withdraw as an investor in March of last year. GM bought Softbank’s stake and added more capital, investing $3.45 billion in the unit. GM bought Cruise in 2016 for $1 billion and brought other investors, including Honda Motor Co., aboard.

More green needed

Whatever she says publicly, GM CEO Mary Barra must be weighing the advisability of further spending on basic autonomous driving technology – as opposed to perhaps waiting for a rival tech company to achieve a breakthrough (as Ford has done) and then ramping up GM’s commercialization of Origin vehicles and robotaxi operations.

First of all, GM must name a new top management team for Cruise.

“The lack of CEO nomination in the recent Cruise executive announcements is significant: It shows that they are either going to look to hire an outsider, or someone very senior from GM and the negotiations are ongoing,” said Reilly Brennan, a partner at Trucks Venture Capital, specializing in mobility. “In my mind the next best person to lead Cruise would be Mary Barra, which would also symbolize how strongly GM is committed to backing Cruise over the coming decade.”

The negative developments for Cruise have been brutal for GM shares, down about 15% since mid-September. The good news is that GM maintains a strong balance sheet with a relatively small amount of net debt and a decent credit rating.

GM’s financial update scheduled for Wednesday should address the impact of safety and regulatory problems at Cruise as well any new insights with regard to the slower-than-predicted growth of the EV business. However, the stock price likely reflects these two issues already – what investors will be looking for is GM’s response to recent events and how much reassurance it provides.