For Thursday, August 13th, it's Brew Markets Daily and I'm Anne Barry. General Motors, ticker GM, the 117-year-old automobile OG, currently in a moment where it's creating options for where to drive its business next. From subscription software services to insurance products, defense applications to energy storage systems, GM has a lot more to it than just its famous internal combustion engine cars. So to break it all down, we invited onto the show Paul Jacobson, GM's chief financial officer. Well, Paul knows a thing or two about navigating industries that are prone to shifting global forces. Before joining GM in 2020, he spent over 20 years at Delta Airlines, weathering everything from the financial crisis to COVID. Well, now Paul is helping to steer GM through another period of enormous change. From a reversal in EV tax credit policy in the core US market to managing the supply chain through new tariffs. We dig into all of that, plus GM's growth vectors, Paul's approach to breaking the CFO-no stereotype, and what he's learned from working alongside legendary CEO Mary Barra. It's a conversation you won't want to miss and that I absolutely loved having and it's coming up in just a moment. This episode is brought to you by Charles Schwab.
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Now, my conversation with Paul Jacobson, chief financial officer at General Motors. Paul, thank you for joining me on a very warm, slightly stuffy New York day here in studio. I'd want to touch before we get into the numbers and the good stuff. I want to talk about your background. You joined General Motors as CFO in December of 2020. So, we're talking about COVID and you've joined a company that has since gone through tax credits for EVs being reversed and tariffs. Before that, before joining GM, you were the chief financial officer of Delta Airlines and you were there through the worst of COVID. Don't you want an easier life than being in the auto industry and in the airline industries, two notoriously difficult industries for eking out margin?
Yeah. Well, for sure. And thank you for having me. It's a pleasure to be here. And I live in Atlanta, so don't worry about the heat. This is still pretty mild. But the idea of leaving Delta, where I spent 24 years. I joined there as an analyst out of business school, was a tough one. I love Delta. I love the people of Delta and had an amazing time there. But from the earliest stages of my career in that airline industry, it seemed like it was crisis after crisis because it was 9/11, then it was bankruptcy, then it was a merger, then it was the financial crisis, then ultimately COVID. It was very much a labor of love, but it taught me a lot about resiliency. And as a CFO, I think CFOs tend to be very skeptical, but I've tried to coin the term of I'm an optimistic skeptic. And that is I've been through enough to see that it works out in the end and try to be a little bit of a calming force in the midst of all that change. So when the GM opportunity came, I remember actually I have a TV in my bathroom and I always tune in to business news as I'm getting ready in the morning and it was August 11th, 2020. I remember it like it was yesterday that I saw that the GM CFO had left and I had by that time had enough of a network of CFOs that I remember thinking that's a great job. I wonder which of my friends is going to get it. And through the process and the opportunity to meet Mary Barra and to learn from her, to work for her, to help support her, to think through really strategic challenges with her has just been amazing. So, while you might look at it as turmoil and a lot of volatility and so on, I've looked at it as an amazing experience to just learn a ton about the highest levels of business and it's just been an amazing opportunity for me. And as much as I missed Delta, I've never looked back.
Well, never a dull moment in your industry. Not at all. And this is a strange question to ask, but I think it's pertinent that GM is coming up to its 118th birthday. That's going to be next month in September. But I have to ask from a strategic perspective, what does GM want to be when it grows up?
You know, I think that's a question that's been around for decades and decades.
Exactly. And you look at it because it's been so many different iterations, but one of the funny things is when you look at the articles of incorporation and the bylaws of the company, it actually mentions electric vehicles in there. It mentions electric power plants and that tells you that it's always been a forward-thinking company and I think it's had its highs and its lows, but when we look at where the situation is today, I think we believe we're operating with the best vehicle portfolio for customers that we've ever had. It certainly shows up in the financial results and in the share and where the vehicles are. But we're probably even more excited about tomorrow and what that looks like because despite record profitability, we know we can do better on warranty. We can do better on electric vehicle profitability. We've got a growing business in digital services. And you think about the power of the brands underneath General Motors, the size of the car park, and you combine that with the future of where software connectivity can go and digital revenues and subscription services. I think the best years at GM are way ahead of us and I think they're going to be really outstanding.
Let's break down the business if you don't mind, Paul. Revenue for fiscal year 2025 was about $185 billion. So, just rough math. What proportion of that would you put in the traditional vehicle bucket? Then what proportion was EV? And then keep going warranties, right? Batteries because you've got an evolving portfolio. Just paint the picture if you don't mind of sort of a split because many people would just think of GM and a specific kind of car, but there's more going on.
Yeah. So, the business is heavily concentrated in North America. So, first to think about it geographically, we've got strong international presence in a lot of countries throughout the world. But Mary a decade ago when she took over cleaned up a lot of the underperforming businesses. So, we exited a big manufacturing footprint in Europe. We exited India, kind of exited Australia and went with a much more capital-like approach and that was the foundation for a lot of the financial performance, to get out of those areas where we can't really perform sustainably. So North America is concentrated. We have a big historical business in China. We were one of the first US companies to operate in China. Historically that business made $2 billion a year for us. It's much smaller today but the team has done an amazing job of restructuring that to make it work amidst the competition of more than 150 manufacturers competing for the Chinese customers. So that business contributes profitability. It's self-sustaining so we don't have to send a lot of capital over there to do it. It's a good enterprise, but the overwhelming concentration of the profitability in the business is in North America and of that it's really the internal combustion engine still. So EVs comprise about 5% of the market in the United States right now. That peaked at 12 with the $7,500 tax credits and a lot of the government regulatory push towards more EV adoption. The current administration has pulled that back. And with the lapse of the $7,500 tax credits, we've seen demand go back to what its pre-subsidy levels were of that 5 to 7% range. So, it's still predominantly internal combustion engine vehicles. Right now, I would say about three-quarters of our vehicle capital is in internal combustion engines. We've paired back the EV capital because we're not creating new products. We're focusing on making our current products better, more features, better cost efficiency, battery technology, etc. because we know the future is going to be electric vehicles.
You do know that you're absolutely convinced that that's the case.
I think certainly anecdotally when I talked, and I told Mary in the interview, she said what do you think of EVs? I said I think there's a future for them. I'm going to be a slow adopter because I like the big powerful cars. I like the Corvettes and things like that. But I've driven EVs. I purchased an EV. The capability, the functionality, the ease of everyday driving is off the charts.
It's so funny you say that because I literally sitting in your seat in a prior interview had the interim CEO of Lucid and I remember we had this conversation and he said, 'Anne, you know, the mistake that the EV industry has made has been focusing on the environmental aspect as opposed to the performance aspect of it.' And what you're saying seems to corroborate that.
Yeah, absolutely. And I'm a believer. The regulatory environment was what it was and it was extremely punitive if we didn't push a lot of EVs out. From that standpoint, the current administration has really kind of been encouraging choice. So, I don't think it's necessarily anti-EV, but it's let's not force EVs on consumers or subsidize that the way it had been done before. And so I think EVs are going to win people over the old-fashioned way, which is my neighbor got one. I was really afraid of it, but I got a chance to ride in it. It's smooth. It's got all kinds of great features with the software connectivity and the capabilities of the vehicle. They are quick. They are great rides and not having to go to the gas station and charging it in your garage is great from that standpoint. So I think that demand wins over people the old-fashioned way, which is just experiencing that. There's still a road trip deficiency and a lot of Americans especially, where I live, like to take long road trips, like to take three, four-hour drives. There's a deficiency in the charging infrastructure that's coming. We've seen that, we've seen more ubiquity of it. We see more uniformity in charging capabilities with us going to the NACS platform and opening up Tesla charging network to our customers as well. So I think that's going to come over time and we need to be ready to do that. We haven't made EVs profitably. I think everybody is struggling in America, even Tesla, to produce profitable electric vehicles and to adjust to where we are in the current environment. But that's going to come and what we want to do is get the structural costs out, get the battery technology there to make it easier for customers to buy them in the future so that when adoption does increase on a different trajectory than it was before, we're there to meet customers where they are, whether it's an internal combustion engine vehicle or an electric vehicle.
It's interesting you say that because the outside-in preconception, just very high level, was okay, the tax credits gone, GM is focusing on the internal combustion engine. I think there's this assumption that R&D has kind of stopped when it comes to some of the electric vehicle pieces of it. I'm hearing that's not the case.
We certainly pivoted on our capital expenditures. So, for the last several years, we've been focused on creating new vehicle programs and new vehicles because we needed a large swath of products to offer to customers at various points, whether it's size or its brand, to be able to get to the 50% standards that the administration had applied. We've got that vehicle platform out. Now what we're able to do is pivot our capital to say let's look at the behind-the-scenes structural architectural things that we can do to lower the cost of EVs because number one that'll help us produce them profitably but number two as we scale up and bring the cost down even further that'll open it up to even more opportunities for consumers to buy them by coming in at lower and lower price points over time. So I think there's a great road map there, it's just going to take some time.
So to go back to my original question which is what does General Motors want to be when it grows up? Let's roll forward five years from now. What proportion of your revenue perhaps do you think would be coming from EVs?
I think it's whatever proportion the consumer wants. Right. So what we want to do is we want to be in markets and we want to be there with great products and great brands that the customer desires whether it be in powertrain differentiation from ICE to EV or in trucks all the way down to small compact SUVs. And I think that's one of the big things that is really underappreciated about the GM story is it used to be we made all of our money in trucks and SUVs and couldn't make money in anything else. Now we've got a great portfolio of small crossovers. The Chevy Trax, which starts at a price of about $20,000, is an amazing vehicle. And we can do that profitably. So structurally GM is much more sound than it's I think ever been historically. And that allows us to meet customers where they are and I think that's what the future of GM is.
Can you talk about the program that was announced in June which was to increase GM's vehicle-to-grid capabilities? It's been a headline grabber. It's also one that's increased comparisons of GM to Tesla because that has been a strategy that that company has leaned into. What's going on with this product and service area?
Yes. So this is actually a really exciting area of where I think things go in the future. And when we were talking earlier about the capabilities of electric vehicles, one of the things that a lot of people don't understand is having an electric vehicle can lower your power bill. So the ability to plug your vehicle into your garage and not just charge it, but also send electricity back to the house. So you can run off your vehicle during peak energy times and lower your electric bill. Or you could even potentially supply energy back to the grid and get paid for supplying electricity because your vehicle is providing that power in and then charging at off-peak times. That's some of the exciting innovations that are ahead and what we can do with our GM Energy subsidiary that's going to be there with all kinds of additional new technologies to meet customers at points they don't even think they know they need right now, but it's going to be a great opportunity.
So, what's adoption looking like? What are the early signs from some of this?
It's still early. Like I said, it really centers around the EV. And I think one of the unfortunate aspects of the American consumer is I think EVs got politicized. And it shouldn't be a political issue. It should be one that hey, do you like the features? Do you like the capabilities? And there are more and more coming out as the technology continues to improve. It's still even with the advent of everything that Tesla's been able to do, it's still changing really rapidly and that's where I think there are opportunities whether it's the home charging or the vehicle-to-grid or the software capabilities of the vehicle. It's going to continue to grow.
Can we talk about your margin profile? Remind us Paul on the sort of average margin of your core vehicle product and then let's talk about some of the higher margin businesses that have been coming up which are the subscription services that you offer and some very interesting sort of new digital products that have been coming out.
No, I'm glad you asked that because I think this is one of the underappreciated aspects of the GM story. Number one, the ability for us to adjust. Back in 2021, we did an investor day that most people have largely forgotten. It was discounted at the end, but I think it was meant to be a sign of a different way of thinking at General Motors. We gave 10-year targets and we talked about doubling revenues, and we talked then about Cruise and robo taxi. We've since abandoned that business, but embedded in there are a lot of really good nuggets of information like software. We talked about software being an $11 billion business. This year we'll approach almost $7.5 billion of deferred revenue on the balance sheet from a million new subscriptions approaching 16 million subscribers.
And describe that software. Describe what that's doing for...
So it starts with the OnStar platform that's been around for a long time. It's the infamous blue button in your car that historically people used for directions. You can still do it there, but it's got all kinds of safety features attached to it. Crash recognition, crash response, things like that. And what that allows us to do is to establish connectivity with the customer. So whether it's safety features, security features for your vehicle across the board, data features for being able to draw Wi-Fi off your vehicle, entertainment as we get more and more screen technology into the vehicles, and so on. It's really trying to provide value and service for our customers in ways that they historically hadn't expected. That's going to only get better with AI capabilities to make your life easier inside the vehicle, much the way a phone has in your pocket or your purse. So, I think the future is really bright. This is growing at a double-digit clip for us. It is a high margin business and one that it's hard to treat as a growth entity inside of a $185 billion revenue enterprise, but it's there and it's going to have a meaningful impact. So in 2021 we talked about our margins going to 8 to 10%. Then as we got EVs to profitability and grew that at the same time we were growing share in ICE that could take us up to 10 to 12. And then the digital could take us up to 12 to 14. So we haven't really updated that guidance. But I say that because directionally there's a lot of momentum behind the business.
And remind people where you are now.
So, we're inside of our 8 to 10% margin range, which we had achieved a couple of years ago. And then people started to discount because we got hit with $3 billion of tariffs. We've been able to overcome that in about 12 to 18 months, get back to where we were. And that's really the execution of the team. So 8 to 10% but as we just told the investors today and on our earnings call announcement, we've talked about we're not executing the way we need to on warranty. We can do better with quality. So you look at some of the challenging incidents, some of our incidents around the L87 engine, we haven't had our best moments but what we've really done is focused on making sure that we minimize customer disruption wherever we can even to the point of reducing capacity and production capabilities by diverting engines and parts to our customer care department. That's historically things that wouldn't be done. It was always prioritizing manufacturing. So being able to be there at the customer, getting those quality issues resolved. I think working deep through the supply chain because I think they've experienced a lot of turnover with the local job markets and how it's changed since COVID. I think we've got to get back to where we are across the entire supply chain. Technology can be a part of that. Good old-fashioned discipline, in terms of bringing quality engineers in and monitoring the supply base, monitoring our own quality, better. We think we can bring that down. We talked about a billion to a billion-and-a-half dollars improvement this year, and we've recently talked about how we think that can be a tailwind for 2027 and 2028 as well.
