General Motors Company (NYSE:GM) J.P. Morgan 2023 Auto Conference August 9, 2023 9:35 AM ET

Company Participants

Paul Jacobson - Chief Financial Officer

Conference Call Participants

Ryan Brinkman - JPMorgan

Ryan Brinkman

Okay, it looks like the clock is ticking down, which means the webcast has begun. So we'll get started now with our next presentation, which is a fireside chat with Paul Jacobson, the Chief Financial Officer of General Motors. Paul, thanks for joining us.

Paul Jacobson

Well, thanks for having me, Ryan. Thanks everybody for coming and for everybody tuned into the webcast.

Question-and-Answer Session

Q - Ryan Brinkman

Great. You know, I thought to start by asking about the interesting and somewhat surprising, but perhaps also telling investor reaction as measured by the negative share price reaction to 1Q earnings this year, in which you beat Bloomberg consensus by $800 million while also raising the full year by $500 million.

And again, a negative reaction to 2Q earnings in which underlying EBIT, excluding one-time unanticipated Bolt recall costs, surpassed Bloomberg consensus by an even larger $800 million and consensus or full year guidance was raised by an even larger $1.5 billion.

So it seems like investors may either doubt your ability to achieve the stronger full year outlook this year, perhaps worried about, I don't know, the ability of the consumer to continue to support such strong industry price and mix levels over the back half the year, or I wonder if, and I suspect based on my conversations, investors might instead more doubt GM's ability to sustain the strong profits beyond this year, perhaps as the industry changes and electrifies.

So where do you think the disconnect may be? And what would you say to those investors worried about GM's ability to sustain clearly strong first half profits over the balance of the year and strong profits in ‘23 beyond this year?

Paul Jacobson

Well first, let me thank you for starting with such a softball question. Exactly, this is a question that's obviously been on our team's minds a lot. But, one of the things that I'm a big believer in is that, the market can only ignore fundamentals for so long. And when you look at whether it's the earnings profile, the margin trajectory that we've been on, the decisions that we've made to not only take that performance and improve upon it through cost reduction efforts, through taking CapEx out, driving the business for even more free cash flow, is one that, is a consistent message that I think we've been doing well.

Really kind of for the last six or seven quarters now, we've been caught in this loop where, a lot of the speculation is that it's coming to an end. This was a great quarter, and we've seen that for each of the last couple of quarters.

And, and I think we've tried to thread the needle between being cautious in our outlook, but also very optimistic in our performance. And what I mean by that is, obviously there's been a lot of macro headwinds out there. You hear it in every earnings across industry, a little bit of caution.

And when we started the year, we said we were coming out on a 15 million unit SAR, and we expected some moderation and incentives, but – and we said this after Q1, we said this after Q2, that in the event that we see consistent performance, we expect to significantly outperform these projections.

That approach I think, where we saw the market is kind of over indexed on some of the statements that we made about the potential for normalizing. And we were very careful I thought, to not classify that as expectations, but merely as this is a projection, because when we're in the type of cycle that we're in right now with heavy investment, we want to proceed cautiously. Because I want to make sure that under every circumstance, even if we start to see a slowdown, we can fund the business and the capital requirements on the accelerated journey we're on, and still drive the type of free cash flow performance that we expect.

So that's the way we set up coming into the year, and it's played out much how we thought, where we've seen significant outperformance, both in Q1 and Q2, and that's what's allowed us to raise our guidance.

In Q2 I think, we probably could have done a little bit better job explaining some of the things that we did. It's kind of difficult when you get into a very short, compressed time frame, but we announced another $1 billion of cost reductions. We announced that we were taking our capital projections down $1 billion. That's not slowing down; that's not fear; that's continuous improvement and that's what we're meant to do. And as a result of that, we've taken up the free cash flow guide pretty significantly from where we were in the beginning of the year, and that's what we're driving toward.

So I think it's a concept that historically cost reductions, capital reductions were done out of distress. This is something that's really being done proactively in an effort to continue to improve and drive more free cash flow.

Ryan Brinkman

That's great to hear. Thanks. Next I wanted to dig into what the proof points for investors might be in terms of their gaining increased confidence in GM's ability to be competitive in the market for battery electric vehicles. You've laid out some aggressive plans for ramping EV production volume in the first half of ‘23 to the back half, and then into ‘24. Could you maybe revisit some of those targets, and what gives you the confidence in your ability to hit them?

It would be great if you could maybe address the question from a couple different angles. Firstly, what gives you the confidence in the demand side of being able to hit the targets? For example, the attractiveness of the vehicles, the launch vehicles, the appropriateness of their price points. Maybe you can share what you can from a reservation list perspective.

But then also secondly, from the supply side of the issue as well, because you've had some very attractive products already in the marketplace. The Hummer EV pickup is fantastic. That launched back in late ‘21 though, with a huge reservation list. And then also you got the beautifully designed and competitively priced Cadillac LYRIQ, which has been in production for over a year, but it seems like you're still attempting to scale both of those vehicles. So it'd be great if you could address the reasons to be confident, both from a demand and a supply perspective.

Paul Jacobson

Yes. So if we start on the supply side, I think we talked about it on the call. We've had some startup challenges, that in particular, with a supplier around the technology around module creation. So this is taking cells from cell to module to pack. That's created a little bit of a bottleneck in the process.

The good news is we've identified that, we've attacked it; we've sent manufacturing engineering resources to the supplier; we've sourced alternate. We've set up manual stacking lines in an effort to drive that volume and we've seen that take hold.

So we delivered over 1,000 LYRIQ’s in the month of July, and we're really sort of driving that volume up as we go from 50,000 to targeting 100,000 and ultimately beyond that. So the supply side is taking hold, and it's probably – it’s been certainly slower than we wanted it to, but one that we've identified.

I think any type of startup has some growing pains, and we certainly haven't been immune to that. But the good news is the vehicles are performing really well. And on the demand side of the equation, again, our biggest challenge is we haven't been able to produce them fast enough. But that's getting corrected.

So I think in a lot of ways, we've been able to rise above a lot of the price discussions that are going on and the pricing actions that are going on, because we feel very, very strongly that the production is matched to the demand of the vehicle and is going to continue to be that way for a couple of years as we work through the demand lists that we have.

And we haven't raised prices on customers who have had orders, and we're not using dynamic pricing, which if you're a vehicle buyer at the end of the day, it causes you to either sit on the sidelines and wait for the next sale or potentially fill you with regret, because you just bought a vehicle. You could have gotten it cheaper. And now your residual value is impacted because there isn't any consistency there.

So we've been able to rise above that and we feel very, very good about the demand set for what's coming to market, not just the Hummer and the LYRIQ, but in the Equinox and the Silverado fleet, which is also launching.

So, this has been very deliberate from our standpoint. We talked about going out and doing this Ultium battery platform, because it was the right way to build EVs. And while it's been slower than some of our competitors, certainly I think we have the foundation to be able to hit the targets that we've identified and ultimately get to low to mid-single-digit profitability by 2025, which is our public goal.

Ryan Brinkman

Well, that really leads into my next question about those kind of out-year EV profitability targets, because I just wanted to kind of gauge the sort of continued relevance and achievability of them. And then I realize that they are before IRA benefits, but just given that you introduced those targets, before Tesla began this price war. Lowering the price of their vehicles 15%, 20% kind of across the board, and Ford's backed away from their near-return profitability on that, but they haven't revisited their 2026 targets.

But it seems a tough bridge and just wanted to get your thoughts on how maybe the outlook for EV profitability might have changed since you first introduced those targets. And if you're not backing away from them, then are you digging deeper to find additional sources of savings or I mean, it is a tougher road to get there, right?

Paul Jacobson

Well, there's no doubt it's a tough road, but the notion that there's a competitor out there that has a significant and sizable margin advantage in this space is not a surprise, right. So you've always got to be prepared for what a strong player in a competitive industry is going to do, which means strengthen your foundation. That's the number one thing that we can do going forward, and we've been in tune with that.

So, the goals that we put out there, we're in anticipation of a lot of different things possibly happening. It's not that these things happen in a vacuum. It's not that they're surprises from that standpoint, but the journey isn't over when we hit that goal in 2025.

Our goal is to be a leading, profitable, leading margin producer of electric vehicles, while we continue to drive the performance in our ICE portfolio. And I think what we've done is demonstrate that the resilience of the company, whether it was through COVID or whether it was through the semiconductor challenges, whether it's through a higher interest rate environment, all you see is really strong, continuous performance.

And we didn't use $5 billion of inflationary pressure as an excuse in 2022. We didn't use chips as an excuse in 2021. And we're not going to use pricing as an excuse to not hit our goals in ‘23 and beyond. So we're going to continue to drive to that performance, focus on margins, focus on making sure that we're producing quality vehicles and driving the free cash flow that we're expected to.

Ryan Brinkman

Great. Thanks. Maybe I'd like to ask on your thoughts on the China market. GM's competitive position and strategy within the China market. Obviously, you've got really great traction when it comes to these low-priced EVs. At the same time, the Buick and Chevrolet and brands have lost quite a bit of share to brands like BYD for example, with more electrified offerings above the lowest price entrance.

Just curious what the rollout of EVs looks like for those brands in China and maybe speak to the profitability too. It was kind of running $500 million a quarter for a long time, then it was kind of $200 million a quarter, and then it was kind of $100 million a quarter. And maybe it's not the needle mover that North America is, but what do you think the profitability potential of that business is once you address, better address the current headwinds?

Paul Jacobson

Yes well, look, China continues to be a strong and important asset for us. The one thing I think I'd be remiss if I didn't say is my hat's off to the team in China for what they've dealt with, whether it's COVID or the changing consumer dynamics, the macro factors that they are dealing with, and the fact that they've actually continued to manage to keep the business profitable, I think is one that's actually really strong testament for what they do.

So no doubt profitability is down, but it's down for pretty much everybody who isn't a new entrant there on a growth trajectory. So we're going to continue to work through that. We've got a good franchise model, both between the ICE and the EVs going forward. There's no doubt that ICE isn't going to be the same as it was, ever again probably, but there's still healthy demand and we still do really strong business there.

And then the growth of the EVs coming to market, we have some good products. We're also having to adjust a little bit to the changing dynamics of the industry. So allowing consumers on the LYRIQ for example, to choose content more gives us an opportunity to lower the price for those people who want a cheaper option, but for people who want to spend a little bit more, we can add features, we can add charging, we can add capabilities to it to package that up.

So just making sure that we're responding to the changing consumer patterns, I think is going to allow us to be competitive there and to continue to have a good presence.

Ryan Brinkman

Great. Thanks. And maybe sticking with international operations, but pivoting over to the consolidated business, which operates in your markets like Brazil and Korea. It seems like you've made some solid progress there on profitability in recent years. What's been behind that improvement and what do you think the outlook is for this part of the business going forward?

Paul Jacobson

Well, I mean this started several years ago and even before I arrived. It’s one of the things that actually attracted me to come to GM and to take this opportunity, was because what I saw was a leadership team that was committed to making some of the hard decisions and the restructuring work that went on, particularly in the international organization.

It wasn't easy by any means, but what that's facilitated is a $2 billion turnaround in that entity. And when we see the type of performance that we have there, I think it's a good case study in making sure that we're executing well those things that we can do really, really well.

And you look at the share gains that we've gotten in South America and the profitability, the pricing tension that we've gotten everywhere. It's been a really remarkable story and I think one of the diamonds in the rough inside the GM global operation has been the performance of that international team outside of China.

Ryan Brinkman

Very interesting. Thank you. I heard you on the last earnings call talk about looking at selectively reentering some European markets. Mary has given some interviews where she's discussed contemplating an all EV strategy in Europe. Where do you stand in that process? Are you able to size up the potential opportunity for us? And we're talking about exports, I presume, right? And we're not going to have unionized plants in Belgium and whatnot, right, without a real fixed cost base in the region. Would that then be a profitable business for you?

Paul Jacobson

Well, it is an export strategy, and it's one that we've looked at and said, with the products that we're bringing in an advanced EV market, there's an opportunity to be competitive there and bring some of our products there. But we've been very, very careful about making sure that we do that in a balanced way.

So you're not going to see a lot of infrastructure investment. You're going to see a very disciplined sort of cost leg in to make sure that we're driving the business for margins and profitability. And there's a little bit of costs that have to front run to get distribution set up, to get consumer facing opportunities set up. But it's being done in a very, very disciplined way.

So I think it's got big potential. I think it's too soon to tell ultimately where it's going to go from that standpoint. But with the products we have, we think that there's an opportunity for good reception in that market.

Ryan Brinkman

Great. Thanks. And is there an update that maybe you can give us on the BrightDrop electric commercial vehicle business? Where do you stand with regard to BrightDrop sales, reservations, customer interest or profitability? And then how should investors be thinking about the plan to consolidate all of GM's commercial vehicle operations to what you're calling involve?

Is this more of a customer-facing, go-to-market kind of branding strategy or does it signal a shift in focus or opportunity for example, to drive more higher margin aftermarket services or software sales? And could this business ever be split out separately from a P&L perspective in the way that Ford Pro is for example?

Are you managing it that way internally or what is the potential for BrightDrop and Envolve, do you think?

Paul Jacobson

Yes, so BrightDrop, we continue to believe has a tremendous amount of potential going forward. I think some of the challenges in starting that business up have been sort of part of this module challenge that we've had going forward. But the customer reception to the products and the new Zevo 400 that we're bringing, which is a little bit of a smaller entry that our customers have told us they love.

I mean, they helped us design this, so we see a lot of potential and a lot of upside for BrightDrop, not just as a vehicle producer but as a solutions provider to those ESG distribution companies, etc.

On the Envolve side, this is actually a great story. I mean, the fleet business at GM has been very, very strong. But what we've seen is the opportunity and the need to really bring in multiple solutions sets to our customers. So it's more than just fleet. It is digital solutions. It's fleet management. It's a wide array of products that we can bring to customers to help solve their solutions. And we thought that the involve concept, where people have a single point of contact into the company, is going to be one that's going to ultimately lead to better solutions orientation for our customers going forward.

So for the time being, it's going to continue to sort of report up through North America in the financials. There's no need to change that, because what we're really focused on is driving the business and creating value within the businesses rather than sort of having the right scorecard. But we'll continue to provide the data that's important for our investors going forward.

Ryan Brinkman

Very helpful. Thanks. I thought to ask around Cruise too. You know, what's next for that business? Can you remind us of the markets you intend to roll out into and over what time frame? Last year, you put out a target for $1 billion of revenue in 2025. How do you feel about that opportunity currently?

And then maybe looking beyond revenue to the P&L or cash impact, I remember back at the Investor Day in ‘21, you talked about margin for GM's combined new business portfolio, of which Cruise was expected to be the largest part. It could be in excess of 20% by 2030, by which time its revenue potential could be $50 billion annually, it was said.

How are you thinking big picture about profitability or cash milestones along the way? So for example, what level of revenue is required at Cruise, do you think or what level of revenue does expansion start to lessen the losses as opposed to be considered kind of an investment? And how much capital might need to be required before it can breakeven standalone on a cash flow basis? GM's most recently been increasing their investment in Cruise, buying back shares from SoftBank or employees for example. How are you thinking about its capital needs?

Paul Jacobson

Yes. So I mean, Cruise is a story that obviously you can see a lot of excitement in the company about when you look at the miles that they've been able to track and their trajectory from 1 million miles to 2 million miles to 3 million miles. And over each of the last, I think it was six months, they've seen a 15% reduction in costs.

So we're really sort of in that stage right now where as we're scaling up, we're seeing the costs come down. Largely solved a lot of the technology challenges and now it's just improving every single day across the board. So we are awaiting permits in San Francisco to expand where we can charge. We're awaiting decisions from NHTSA on the origin. All those are coming up soon. And we see that there's a lot of momentum in the business.

We have not backed off the $1billion in 2025 and I know there's a lot of skepticism about that. I can even hear it in the way you asked the question about some of the skepticism about that. But we continue to keep our head down. We continue to execute and this is I think one of the most amazing stories about what GM is becoming and where we're becoming, because we have vehicles out on the road driving pure level four by themselves with no drivers. And some of our largest competitors don't even have that, but get a lot of valuation credit for it.

So this is an opportunity I think you're going to see come to fruition pretty quickly, because it's – what I would say is it's time to start putting up the numbers. If we're going to be at $1 billion of revenue in 2025, you're going to see a pretty different trajectory over the next four to six quarters leading up into 2025.

So we're very excited about the trajectory and where it's going and how we're heading. We're in a big phase of operational expansion. I think we have on average more than 400 vehicles on the road now at a time in different cities, so a lot of excitement to come. We're at a conference in September where Cruise will present and we'll have more color investor day in November as well. But stay tuned for much, much more exciting things about Cruise coming up.

Ryan Brinkman

Great, thanks. I wanted to ask about capital allocation. Of course, the answer is always, to reinvest in the business, to support industry change and electrification. But I mean, you are investing heavily in electrification and even after all of those investments, you're still throwing off $10 billion etc. of automotive adjusted for cash flow. So what opportunities does that excess cash flow beyond the dividends sort of leave GM and how would you rank order those opportunities and how you intend to deploy that cash?

Paul Jacobson

Well, you know, I think if you look at our capital allocation, which we've been very public about, it's invest in the business and we need to do that. We don't need to do that blindly. We need to invest in the business at a healthy ROIC going forward and I think you've seen a pretty consistent trajectory from us over the last few years on ROIC, which is really strong.

But, even when we look at our investment cycles, as we've said $11 billion to $13 billion, and then we came off that by $1 billion. That's our way of constantly sort of driving the business to free cash flow, making sure we're prioritizing, making sure that we're driving efficiencies in those capital targets as well.

So where we can unlock more free cash flow on the capital investment side, we're going to do that. And I think this is back to your first question, an area where the market may be misinterpreted. What we were doing is saying, okay, we're backing off EVs or we're slowing down. No, we found efficiencies to be able to do that and to reprioritize.

So, it's our commitment to driving that cash flow in the business, because it all starts with driving operating cash flow, investing it wisely, being good stewards of the balance sheet, and the balance sheet's in really good shape. I think there are some opportunities out there as interest rates have gone up, to try to trim the balance sheet and continue to make it healthy. And my philosophy on that is, we need to make sure that we're in a position where we're always comfortably investment grade.

I don't think that there's a lot of reason to go to AA ratings, AAA ratings, etc. for a company the size of ours. But at the same time, we've got to make sure we're immune from a shock that's going to disrupt GM Financial's business, etc. So where is that range? Strong BBB, in single A territory is probably a good target to aim for, to give us that cushion that we need going forward and we're not far from that.

When you look at our metrics and our performance, we're almost performing in that level, but I'm not naive. I think we probably need to overshoot on those metrics a little bit to drive the ratings consistently, and we have really good dialogue with the rating agencies. So we're going to continue to do that.

But then it's return capital to shareholders. I mean, they are the ones who are invested in our success. We have no aspersions as to who we work for. And making sure that our investors are getting a return on the capital dollars that they are putting in, both intangible in terms of growth trajectory where we're headed, but also tangible returns.

And that's one thing I'm a big believer in, is to make sure that those people who entrust their money with us are getting tangible returns for that investment and for that conviction. And that's why you've seen us sort of lean in to the capital returns, reinstating the dividend, but doing it at a modest rate, because at the end of the day, we don't want that to tie away from flexibility.

Our number one responsibility is to invest and deploy capital in ways that our investors cannot, and using the tools and the skills that we have, and then we return the capital back to them. So a healthy balance between balance sheet, capital return between the dividend and the buyback is what you're going to see from us.

Ryan Brinkman

Great. Thanks. I just want to ask one more and I'll turn it over to the investors. And that's on the trend in non-commodity supply chain costs or non-commodity costs. I think commodities are sort of easy for us to follow, and maybe there's some nuance with lags and not totally coinciding with spot buys, etc.

But the non-commodity is a little bit tougher, and of course that really surprised negatively during the pandemic relative to electricity, natural gas, shipping, diesel, freight, logistics, etc. And of course, you have to touch on the largest of all of those costs, which is labor, right? And I know you've said before, you don't negotiate at investor conferences or in the media.

Paul Jacobson

It's just generally a bad idea.

Ryan Brinkman

Yes. And yet, there have been a number of headlines over the recent past. And I'm just sort of I think in the back of investors' minds, you know GM margin did very well during the pandemic, expanded from strong to even stronger. And in maybe a little bit of sense that maybe you benefited from inflation, at least initially you know, because the revenue reset quickly with the price of the vehicles.

But over the long term, does anybody really benefit? The cost will eventually catch up. Even your D&A will be higher, but it'll take 10 years when you completely replace all of the CapEx that gets depreciated.

I mean labor, labor while it steps up, it's not going to react to the inflation until the contract is due, right. So back in 2019 I think the UAW is making $28.50 an hour, and they still are costing you $3 billion plus because they wanted $32.23 an hour. But back in 2019, kids at McDonald's were making $7.50. Now they're making $15, $20, at least in New York, right.

So I'm just curious, if you can give any kind of dimension to headwinds on the labor non-commodity front or if you do have to entirely defer there, touch on all the other headwinds, premium freight, etc. that might be coming back down to earth, even if labor starts to hurt.

Paul Jacobson

That sounds like a roundabout way of asking me to comment on negotiations. But look, I mean, at the end of the day, we've got really, really great people that are producing great products, and we've got to find a way to make sure that we can work together, and I'm confident that we're going to be able to do that.

On the cost side of the equation is, cost uncertainty is part of doing business. I mean if jobs were easy, they wouldn't need finance departments. They wouldn't need people, business leaders, out there adjusting to the realities that we face. And I think what I want General Motors to be known for and what that team to be known for is one that's incredibly resilient.

And like I said, we didn't make excuses when our costs went up by $5 billion in 2022. We kept our heads down. We executed and that was against a backdrop of the sky is falling, the sky is falling, the sky is falling. And guess what? It didn't fall. We absorbed that. We were able to manage through the business. We were able to lead our way through that while maintaining and even accelerating our priorities going forward. So it's a team that can execute.

We're going to have to drive productivity in the business, full stop, whether that's through our supply base or whether that's through vehicle efficiencies, being able to produce faster, being able to produce at higher quality levels, increasing the yield and the throughput the best we can, while making sure we've got the right infrastructure to be able to do that and I think the inputs are going to change. Sometimes it's going to be commodities. Sometimes it's going to be labor. Sometimes it's going to be pricing. Sometimes it's going to be downturns in the economy. We can't use that as an excuse to not execute.

So I think what we've done is we've raised the bar on our own expectations, and I think that's been difficult for the market to understand and why I think for each of the last three years it's been against the backdrop of, okay well, the future's not going to be as good as the present. The future's not going to be as good as the present, and it's been chips, it's been COVID, it's been inflation, it's labor, it's a lot of different things that people are saying.

In the meantime, we're going to keep our heads down. We're going to keep executing. We're going to keep driving the business and that's what we've got to do. That's what our shareholders pay us to do.

Ryan Brinkman

Great. Why don't we see if there's any questions in the audience. If you raise your hand, we'll run a mic to you. There's one over here. One second.

Unidentified Analyst

Hey Paul. Different thread. Should be easy for you to answer. GM Energy. It was great to see that announcement, nice to see some competition for Tesla out there. Question on what are your targets for GM Energy and what's your distribution strategy?

Paul Jacobson

Yes, we're going to continue to work and develop on that. This is a business that has a lot of promise and a lot of different players that are out there in different aspects of this. I think we bring a lot to the table in terms of the battery, the capabilities of the vehicle, and the brand penetration of the vehicle as well.

I think we see this as a good opportunity to not only sort of supplement where we are on vehicles. And you've heard us talk before about the OEM of the next generation is not beholden to just the point of wholesale to drive the revenue performance. There's so much revenue opportunity going forward in various aspects, whether it's AUTOnomy or even in the GM Energy space.

So I think where we need to be focused on is where we can bring those advantages to the consumer. And I think one of the steps that may not be sort of directly attributable to it, but I think it is an important one, was the decision to adopt the North America charging standard going forward. Because now what this does is it brings a level of industry economies of scale where you're not building two chargers on every street corner, you'd only need to build one. Or you can drive the efficiencies of building two of the same model, etc.

So deploying the capital effectively where it can make a difference is one of those important things. And I think that was a big step for us as a company and I think it shows and demonstrates where we think the capital has a higher value, and there's much, much more to come on that consumer space. But really excited about what that opportunity can bring and we'll continue to share more as we go down our journey.

Unidentified Analyst

Thank you. Hi, Paul. A bunch of the public dealers over the past couple quarters have made comments about incentives maybe returning or sort of publicly asking for incentives to return. How do you think about that? Can you give us some more insight in kind of how you're thinking about that over the next sort of six to 12 months? Thanks.

Paul Jacobson

Yes. So we've spoken pretty consistently over the last several months about potentially incentives normalizing. Although, I think it's probably a new normal rather than where it was before. Because if I listen to a lot of the public commentary, it's we're going to have lower inventory than what we've historically captured, etc. We're tweaking our distribution models to make sure that we can get vehicles to market when it matters, so that it's there for consumers and we streamline that process and take some of the complexity out of it going forward.

I think what you've seen year-to-date, and this even continued in July, was that the pace of GM incentive increases is significantly lower than what we see across the industry. And I think that's a testament to the quality of the products that we're producing, the demand for our products going forward, that we've kept that discipline. And you've seen that in the average transaction prices, as well as the PIN numbers going forward, and I think we're going to continue to drive that, as long as we can drive the margin in the business and maintain it, that's what we're called to do.

So I think we've seen demand continue to – it ebbs and flows a little bit, but it's sort of continued on a much stronger trajectory. SAR is up quite a bit from the $15 million that we assumed, and trending a little bit closer to about $16 million. And that demand has not necessarily translated to significantly higher incentives, which I'm really proud of the team in terms of driving for that margin performance.

Unidentified Analyst

Expanding upon the dealer comment, the overall cost of sales and marketing is rather a disadvantage compared to Tesla. Can you talk about how you're thinking about the future in your cost in sales and marketing and where you see the puts and takes you're going to adjust?

Paul Jacobson

Yes, it's a great question. It's an area obviously we're really focused on. You heard us say in – hopefully you heard us say in the second quarter earnings call that as part of our cost reduction efforts we've taken $800 million of marketing spend out, as a way to help streamline that process. Where we see demand for the vehicles, we saw that there was an opportunity to reduce that marketing spend across the board and not miss a beat with demand.

So I think we're continuing to do that. We've got a new Chief Marketing Officer who, excuse me, just started, Norm de Greve. Really good opportunity here to take a fresh look at how we go-to-market with vehicles going forward.

On the dealer side, at Investor Day we talked about an opportunity to take $2,000 out of that friction. That's not necessarily coming out of the dealer's pockets. It's really – it's not – I wouldn't think about it as necessarily a zero-sum game. There's an opportunity to be more efficient.

So whether it's with the digital system, the digital retail system that we've got, the opportunity to use data, to make sure that we're building the configurations that sell. So the polka-dotted, you know, over-contented vehicle that sits on the lot for a long time that nobody wants, we don't have to do that, because we have the data on what's selling.

We also talked a lot about the regional distribution centers that we're going to employ. This is going to actually take more of that inventory that's available for customers and keep it on our balance sheet a little bit longer. But this is an opportunity for us to be able to meet customers where they are, meet dealers where their demand is, and be able to get vehicles to market quickly to match that demand flow.

All of that's leading to a bunch of synergies where we're going to benefit, the dealers are going to benefit as well from that, and work on solving that together. But we do think that the dealers are a very strong asset for us, especially as we get to multiples of market share on EVs versus ICE.

Customers are going to need help with that transition. They are going to need places they can service those vehicles, and our dealers provide a really good sort of trusted neighbor in their local market to be able to partner with on that journey going forward.

So, being able to streamline it, make sure that it is not as big of a frictional cost against some of our competitors, but still utilizing the best of what it can bring to our consumers is our strategy, and so far the team's executing it well.

Unidentified Analyst

Hi, I'm going to go back to AUTOnomy and ask you about Cruise. Cruise is expanding at a breakneck pace. You're destroying your competitors for all practical purposes. You're getting first mover advantage in markets. Two questions, one, how are you managing the cost of expanding Cruise. You're doing really great there.

Kyle talks very publicly about the ML breakthroughs that are happening allowing you to expand. And then what advantages do you have? I mean, you went into Dallas first, you went into Houston first, you went into Miami first, what does that give you from a competitive advantage standpoint?

Paul Jacobson

Well, I prefer to say we're competing really strongly with our competitors, as you might imagine, but thanks for that question. This is really what has always been, and what will continue to be a tech story, is also emerging with a very big operational prioritization, and that's where my good friend Gil West, who I spent years with at Delta, I think is a bit underrated in the tech space as to what his value is to Cruise.

Because when you think about going to different cities, you need a very strong, operationally minded individual to focus on reliability, to focus on optimizing resources, how many vehicles do you need, where do you need charging locations, how do you maintain them, how do you clean them, how do you make sure that you've got a really good customer experience, and Gil is really doing a phenomenal job with the team that he's building there.

And I think the expansion does two things. I think number one, it obviously provides a platform and a foundation for the technology to get better faster, and that's where growth comes in pretty strong. Number two, it provides scale faster than you could in a local city in terms of driving costs down, and I think the cost performance is something that we've got to lean into, because as we've said before, we started with let's solve the technology and bring the cost down, because we think that's a faster path than solving for costs and bringing the tech up, and I think the team has demonstrated that quite well.

The third angle is for customer receptivity. People get excited when that's coming to their market, and I think we're already at a point where we start to see cities asking, say, can I be next? Can I be next? And that's the type of momentum that you need if you're going to hit the $50 billion in 2030 of revenue going forward.

So the capabilities of the vehicle in terms of the speed, the comfort, all that is rising at the same time that we're getting broad distribution across the board. We've got to be able to execute that operationally, and we've got to make sure that we keep riding down the cost curve, because that's what prevents you from escalating disproportionately on the cost side as you're starting to scale up the business.

So ideally now what we do is we start to put a cap on some of that unit cost as revenue is increasing, and that's where you'll see as we get into the sort of 2025 and beyond where we start to see the margin performance start to become meaningful alongside that revenue growth. So lots of exciting things to come. I appreciate you asking me about it.

Ryan Brinkman

And with that, unfortunately, we are out of time. So please join me in thanking Paul for all the great color and insight he shared today.