Car Feature Subscriptions in the Automotive IndustryAs part of its 2021 investor presentation, General Motors provided a detailed plan to double its annual revenue to $280 billion from a rolling...

1 answer below »






·








(4 marks) Is the fixed vs. variable cost structure fundamentally different between the “new” businesses and the existing revenue streams to justify such higher


margins?









·








(3 marks) How would the existence of these new revenue streams impact firm-level operating leverage?








·








(2 marks) Would the expected operating margins of 26.5% for new business be realized before 2030?





Car Feature Subscriptions in the Automotive Industry As part of its 2021 investor presentation, General Motors provided a detailed plan to double its annual revenue to $280 billion from a rolling average of $140 billion and to expand its operating margins from 7.9% in 2020 to 12-14 percent by 2030.1 Mary Barra, the CEO, stated that much of the revenue growth is to come from its new and service-based businesses, with “moderate growth” from its traditional vehicles and operations. GM said revenue from software and new business is expected to have a compound annual growth rate (CAGR) of 50%, reaching $15 billion by 2025 and $80 billion by 2030. The software and new business category include Cruise, a self-driving car service; BrightDrop, a line of electric commercial vehicles; GM Defense; and software-enabled services. By 2030, software-enabled services are expected to account for between $20 billion and $25 billion of GM revenue from a projected 30 million connected vehicles. In 2021, GM’s subscription services generated $2 billion in revenue and EBIT margins above 70% primarily through OnStar, the industry’s leading connectivity platform.2 Despite the excitement, according to a recent Cox Automotive survey in the United States, 75 per cent of respondents said they were not willing to pay an annual or monthly subscription fee for most items on their next vehicle. Rather, they expect most features and services to be included in the upfront sales price. GM, like other automakers, are hoping that software enabled services, which provide recurring revenue, can alleviate the boom-and-bust profit cycles inherent in the automotive industry. Additionally, given that the electric vehicles account for a growing share of the global car market, and that electric vehicles typically require less maintenance, automakers need to identify new after-sales revenue streams.3 EVs don’t require oil changes, transmission repairs and other services. A 2019 report from AlixPartners estimates that dealers could see $1,300 less revenue in service and parts over the life of each EV they sell.4 At a recent investor conference, Steve Carlisle, President of GM North America, said that the automaker has 50 value-added products and services to be available in connected cars over the next 36 to 48 months.5 Internal research from General Motors suggests that customers are willing to pay up to $135 a month for the right mix of products and services. These could include enhanced map services, data 1 https://news.gm.com/newsroom.detail.html/Pages/news/us/en/2021/oct/1006-investor 2 https://www.theglobeandmail.com/investing/markets/stocks/GM-N/pressreleases/9290193/why-wall-street-loves-this-new-car- option-that-drivers-hate/ 3 https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/a-turning-point-for-us-auto-dealers-the- unstoppable-electric-car 4 https://www.cnbc.com/2021/06/13/gm-ford-are-all-in-on-evs-heres-how-dealers-feel-about-it-.html 5 https://www.reuters.com/business/autos-transportation/gm-plans-50-new-digital-features-services-by-2026-executive-2022-02- 24/ ( Page 1 of 7 ) analysis for business owners who run fleets of GM (and non-GM) vehicles, and software-enabled performance upgrades that boost acceleration.6 The new digital products and in-vehicle subscription services will be supported by GM’s Ultifi software and Vehicle Intelligence Platform (VIP).7 VIP can be thought of as the smartphone and Ultifi as the operating system.8 Like software on a smartphone, Ultifi can provide regular updates and let customers choose from a variety of over-the-air upgrades, personalization options, and apps. The vehicle's electronics systems will deliver services or features via software for a monthly fee. Through software as a service, GM like other automakers, are shifting the buying process so that instead of buying the features and packages you want when buying a new car, features will be provided on a subscription program.9 From a manufacturing perspective, rather than having to make vehicles with various options, automakers can make one model with all of the options, which can be locked or unlocked at the discretion of the consumer. Therefore, while there is more complexity in the car, there is less complexity in manufacturing which should reduce manufacturing costs.10 Furthermore, different features can be unlocked by subsequent owners of the vehicle. 6 https://www.wired.com/story/subscriptions-automakers-mimic-netflix/ 7 https://www.gm.ca/en/home/company/canada/pdc.detail.html/Pages/news/ca/en/2022/may/0510-redhat.html 8 https://cleantechnica.com/2021/10/04/gm-previews-new-ultifi-software-platform-ahead-of-investors-day/ 9 https://www.caranddriver.com/news/a42296660/bmw-subscription-menus-cars/ 10 https://www.caranddriver.com/features/a37419225/on-demand-options-automakers/ Assignment: Familiarize yourself with the 2022 GM Annual Report. Use the articles referenced in this assignment to your benefit. You are not limited to these documents and are encouraged to supplement your research with other articles and resources. Part 2: Cost Structure and Financial Statement Impact (9 Marks): From slide 17 of its most recent earnings deck, GM is predicting the following by 2030: · Total revenue to be $275B-$315B · 50% CAGR in software and new business · Cruise revenue of $50 billion · Core auto business CAGR of 4%-6% · New business operating margins in excess of 20%. · Overall margin expansion of 12% to 14%. For simplification, based on the above and other facts presented, the subsequent “guidance” is created: Revenue Sources 2022 2030 Automotive (5% CAGR, 8 Years) $143,975 $212,716 GM Financial (5% CAGR, 8 Years) $12,760 $18,852 Cruise $50,000 Software-enabled services $25,000 Other New Business $5,000 Total Revenue $156,735 $311,568 Operating Income $10,315 $37,388* Operating Margin 6.58% 12% *the Operating income was computed using the lower range of the overall margin expansion estimate. While not perfect, if the operating margin of existing revenue (i.e., automotive and financial) remains at approximately 7%, the implication is that the operating margin on new businesses would be 26.5%. While increased delivery of electric vehicles may increase the operating margin of automotive sales, the difference in margins would likely remain material. Required: · (4 marks) Is the fixed vs. variable cost structure fundamentally different between the “new” businesses and the existing revenue streams to justify such higher margins? · (3 marks) How would the existence of these new revenue streams impact firm-level operating leverage? · (2 marks) Would the expected operating margins of 26.5% for new business be realized before 2030?
Answered Same DayMar 22, 2023

Answer To: Car Feature Subscriptions in the Automotive IndustryAs part of its 2021 investor presentation,...

Sandeep answered on Mar 22 2023
27 Votes
Ans 1
These software and new business will clock a CAGR of 50% (unheard of in the Autocar industry) with
help of Ultium (key enabler in launching high-volume EV products ) and Ultifi (Assist in opening up $20B-$25B in annual software and service revenue by 2030).
    New Software enabled Subscription service
    Traditional Auto & Financials business.
    Revenue stream-50 new-age value-added digital, products and Software enabled in-vehicle, subscription services to minimize the acquisition cost of vehicles.
    Constant revenue stream in form of Oil changes, part replacement, transmission, repairs, and other ancillary services at the workshops.
    Fixed Cost – Will be negligible unless R&D cost incurred to develop innovative services
    Fixed Cost – Immense in form of Office Rent, Huge investment in manufacturing facilities and assembly line for producing, different models as per specific requirements.
    Fixed costs in the form of patents, IPR, Royalty Payments, cost of acquiring competitors, and disruptive technologies to beat the...
SOLUTION.PDF

Answer To This Question Is Available To Download

Related Questions & Answers

More Questions »

Submit New Assignment

Copy and Paste Your Assignment Here