General Motors is in midst of transitioning into a leaner company with lower capital spending expenditures. One of the key initiatives to achieving that objective is decreasing organizational complexity by consolidating the amount of vehicle platforms and extending their lifecyles. The long-term initiative to decrease capital outlays will, however, require the firm to increase spending in the short term.
According to GM President Dan Ammann, the automaker is planning to increase capital spending to roughly $9 billion per year through the 2019 calendar year, an increase from $7 billion laid out in 2014, which translates to 4.4 percent of revenue. Between 2016 and 2019, capital spending will rise to between 5 percent and 5.5 percent of revenue, as the automaker makes investments in dies, welding machines, and other kinds of tooling for manufacturing.
|Capital Spending (% of revenue)
A prime reason for the increase in short-term capital spending is the updating of GM’s Arglinton, Texas factory that produces full-size SUVs — the Chevrolet Tahoe and Suburban, GMC Yukon and Yukon XL, and Cadillac Escalade and Escalade ESV. The vehicles are notorious cash cows for The General, and the automaker is believed to be facing production constraints for the vehicles as demand outstrips supply.
After the increase through 2019, capital spending will decrease closer to the 2014 levels as a share of revenue, enabling the automaker to direct it to new priorities such as autonomous vehicle technology, offering new kinds of services into vehicles using the high-speed in-vehicle internet connections, and new business opportunities such as ride sharing.
In January 2016, the automaker finalized a $500 million investment into ride-hailing start-up Lyft. A few weeks later, it launched its own car-sharing service under the Maven brand and then moved to reorganize all autonomous and electric vehicle engineering and development efforts under one executive so as to speed development of those technologies.
Many Wall Street investors, who have typically been bearish on GM, are expecting Chief Executive Mary Barra to deliver the promised long-term cost savings. The expectation is noteworthy since the automaker mostly failed to contain capital investment and engineering expenditures over the past three decades.