Policy changes present near-term headwinds to US EV sales but must not cede autonomous leadership to geopolitical rivals. Morgan Stanley see US SAAR >16mm supported by lower rates but higher competition with tariff hikes are an inflationary wild-card. Prefer dealers to suppliers and reiterate TSLA as Top Pick.
With 2025 ushering in a new administration, we refresh our 2025 auto forecasts, review key themes, and provide a scenario analysis to help investors frame the most relevant industry debates, including EV policies, onshoring/tariffs, China export expansion and the nascent emergence of autonomous vehicles. The US election result has extended the 'ICE is Nice' trade for a bit longer but keep on the lookout for hidden value in the EV ecosystem into the 2H. We recom-mend investors stay nimble and selective given the volatility of policy outcomes.
Reiterate Tesla Top Pick, increase PT to $400 from $310
Elon Musk's entry into the political sphere has expanded investor thinking around Tesla’s fundamental outlook – TSLA shares have since responded by rallying beyond our prior $310 price target. Is the re-rating temporary… or will Tesla begin to play a greater role in the US renewable/autonomous industrial complex? From our ongoing client discussions, we hear enthusiasm for all things AI, datacenters, renewable energy, robotics and on-shoring. Investors acknowledge the importance of the United States maintaining leadership in such technologies in an increasingly competitive and complex geopolitical environment. At the same time, based on our discussions, at least, Tesla is very frequently excluded from the potential paths of expres-sion in a portfolio. After all, 80% of the company’s YTD revenues are from core autos. As we look ahead to FY25 (and over the next 4 years), we expect to see TSLA’s TAM aperture expand to far broader domains, many of which are not included in buy-side or sell-side financial models for the company.
On the AV side, while a reassessment of self-driving policies at a national level could be inevitable in our view, we believe Tesla still faces significant hurdles to overcome in terms of technology, testing and permitting required for commercialization. However, we believe US states and metro areas will continue to have the greatest say on final deployment. We value Tesla Mobility (autonomous ride-share) at just over $66/share in our revised SOTP model. We do not implicitly assume mass deployment of autonomous vehicles in our Tesla Mobility forecast until beyond 2030.
It is indeed difficult to quantify whether, and how, Tesla could be affected by Elon Musk’s relationship with the Trump administra-tion. And there may be a number of risks (management time, distrac-tion, potential conflicts of interest, etc). Setting the United States on a course for EV/AV/Robotics/Renewable independence is going to involve government and industrial partnership on a scale perhaps not seen in many decades. Elon Musk’s emergence from a political ‘outsider’ to having a voice in potential policies may, at some level, accelerate Tesla’s journey beyond autos.
Risks to EV demand with less regulatory support: RIVN and LCID
While Tesla may see share gain long term even with a less sup-portive EV regulatory backdrop, smaller scale EV start-ups Rivian and Lucid may see greater risks to production into an uncertain demand environment; within a range of outcomes, the removal of EV credits may pull forward demand near term (1H25) but could create an air pocket thereafter (2H25). In addition, uncertainty around regulatory credit revenues (a function of emission regulations from the EPA and CARB) which has bolstered gross margins for many EV players (including RIVN and TSLA) create additional volatility to the outlook.
We raise our GM price target to $54 (from $46 previously) while raising our bull case to $80 ($72 prior), and bear case to $36 ($32 prior). Upgrade to EW. The target increase is driven by a higher assumption of normalized EPS to $6.74 (from $5.45 previously) as we roll forward to year-end FY25 share count and lower the effective tax rate (22%). In addition, our normalized forecasts back in improved annual losses from China JVs ($0.2bn vs. $0.5bn previously) and a lower expectation of losses at Cruise ($0.5bn vs. $1bn prev) due to expected strategic/structural actions to address losses in the unit. Our normalized earnings forecast assumes BEV margins of negative 10% (approx. $2bn of losses per year). At the same time, our normalized EPS assumption assumes sustainable 12% EBIT margins for GM's ICE trucks/full-sized SUVs and 5% margins for GM's ICE cars and crossovers. Our target PE multiple applied to normalized earnings is 8x which compares to the company's long-term historical PE multiple of 7.1x.
EV Policies
Potential Plans and Implications
Morgan Stanley summarizes their US Policy team's views about the potential tariff outcomes with the incoming administration:
10% Universal Tariffs. President-elect Trump has sug-gested 10% tariffs on all imports; specifics remain unclear but products currently subject to tariffs may see a step up in rate.
Targeted Tariffs. Tariffs directed at high-risk areas to support geopolitical "de-risking" have precedent across multiple administrations and have as a concept received bipartisan support. Our policy team envisions imple-mentation either focused on country of origin (i.e. China) or specific goods (high tech imports, for instance coming from China, Europe, Mexico, or elsewhere).
60% Tariffs (or removing MFN status from China and/or others). Our policy team sees this case unfolding in one of two ways, either 1) the President-elect could impose 60% tariffs on all Chinese imports or 2) could attempt to revoke MFN status from China, reverting tariff levels to 40-60% (vs low-single-digit levels for MFN countries).
Relatively quick announcement and implementation. Historically, tariffs can be implemented on relatively short notice, in a matter of days or weeks between announcement and effective date. Michael Zezas and Ariana Salvatore expect that the President-elect can utilize existing executive discre-tion to ramp tariffs on China and product-specific tariffs on Europe in 1H25, with an effective 60% rate on China by end of 2026. They see tariffs on Mexico as a potential item of negotiation and believe blanket universal tariffs are unlikely in the short term, given potential legal and Congressional hurdles.
The ability of exposed OEMs to pass on incremental cost hikes will be challenging given a US consumer already facing average monthly auto payments near historic highs. In our opinion, OEMs would face the risk of either subsidizing the tariffs through lower margins or volume decline.
States of the World
The China Case: EV adoption progresses in the US with con-tinued dependence on a China-dominated battery supply chain. This is the least-likely scenario in our opinion.
The De-Risking Case: Our central case. A geographically diversified supply chain supports steady EV penetration fol-lowing a transition period. This will take significant coordination of policy action, capital deployment and innovation.
The Slow EV Case: A pull-back of EV incentives and impedi-ments to onshoring means slower EV adoption, while ICE vehicles maintain higher share for longer. This case would be relatively friendlier to legacy OEMs who can have more time to architect sustainably profitable EV strategies or to return excess ICE-derived cash flows to shareholders.
Onshoring/Tariffs
Over the past few decades, the US automotive industry has benefited by a continued cycle of labor arbitrage - shifting labor within the supply chain to low cost countries in-region. In the United States, the vast majority of final OEM assembly is done domestically utilizing UAW labor. However, a bulk of Tier 1 and Tier 2 auto suppliers locate production in nearby countries such as Mexico and in Central America utilizing lower-cost, non-unionized labor. With the exception of select products, such as EV batteries or semiconductors, the auto supply base is concen-trated in-region, meaning US auto manufacturing has relatively limited direct exposure to Chinese or Asian manufacturing.
In a standard year, the OEMs push their suppliers, many of whom sell more commoditized products, to give them gradual price-downs in order to support their own margins and offset rising labor and fixed costs. The suppliers sought to combat this downward price trend by 1) shifting their portfolios to less-commoditized, higher value-added product lines (ECU's, ADAS, adding heating/massage to seating, etc.); 2) increasing automation; 3) l abor arbitrage/moving labor to increasingly low-cost countries (US > Mexico > Central America, for example). However, even though these strategies have offset some of the impact from OEM price-downs and other cost inflation, most suppliers have seen their margins gradually contract over the past decade. Since 2016, the median US supplier has experienced a ~200bps EBITDA margin contraction.
Expect Mexico tariffs to be a topic of significant debate throughout 2025. The greater US auto industry relies dispropor-tionately on Mexico for parts/supply sourcing as a highly developed low-cost auto supply complex. According to the US Census Bureau, Mexico is estimated to export $143bn of auto-related products to the US in FY24 (out of a total close to US$ 500bn). This includes every-thing in the autos value chain (complete vehicles, parts and bat-teries). For reference, APTV has 35 manufacturing plants and 3 technical centers in Mexico (and is one of the country’s largest pri-vate employers), ~30% of LEA’s employees are based in Mexico, and ~40-50% of AXL’s revenue is generated out of its Mexican facilities. PHIN also discloses that 90%-95% of North American OE sales are produced in Mexico.
China Export Expansion
China's multi-decade-long growth engine has not stalled… it has reversed in terms of China profits flipping to losses and China pro-ducing nearly 9mm units more than it sells locally, a figure equal to 15% of non-China global volume. Even if these units don't end up directly on US shores, the 'fungibility' of lost share and profit by key US players adds pressure here at home.
Measuring the Impact of Rate Cuts on Autos
While there can be temporary 'relief,' we do not see rate cuts as a material driver of outperformance in the medium-term. All else being equal, rate cuts can be a positive for autos: lower consumer financing costs and pressure off leveraged balance sheets. However, the consumer outlook remains uncertain with autos still highly exposed to any cyclical turn in the economy. When looking at historical cycles, US auto stocks have modestly outperformed on average for the first 6 months following a rate cut with underper-formance in the 6 months thereafter.
We note that in looking at the prior 6 rate cutting cycles, 2001 stands out as a positive outlier… Excluding the 2001 cycle where the market was dragged lower predominately by inflated technology stocks, results are even more mixed, with underperformance on average following the first month after a rate cut. While every rate cycle is highly unique (historical average performance cannot be taken at face value), we do not see rate cuts as a material catalyst for near-term autos outperformance.
Rate cuts can marginally improve affordability... but we believe price/mix needs to decline for more significant relief to US auto consumers. For every 100 bp rate cut, we estimate the average monthly car payments should decrease ~$20 (off of $735 current average level). That's less than a 3% reduction. There is only so much interest rates can do to address unaffordability. We expect to see the trend in higher incentives (including deteriorating vehicle mix) as important to attract that marginal auto consumer.
Capital Discipline: Autos Catching a Re-Rating?
While 2024 has shown some promising early signs of moving the needle on capital discipline, questions remain for 2025 on whether this trend will continue. Entering 2024, we argued the auto industry could be handsomely rewarded for pulling back on bil-lions in collective EV/AV spend in favor of returning cash to share-holders and responsible organic investment. Since then, a number of companies have announced reductions to capex outlooks and corre-sponding increases to buybacks. As of 3Q24 earnings, 8/11 Suppliers & OEMs have cut their outlooks (a median of 8%) for FY24 Capex since their initial targets in 4Q23. However, the corresponding impact to LTM Sergio (Mkt Cap / (Capex + R&D)) or Mkt Cap / Capex ratios has yet to be seen as broader weakness in industry volumes have weighed on auto stock performance throughout this year.
Going forward, we believe a major industry-level 'step change' on spending may need to be catalyzed by greater industry pressure/weakness. In 2025, we would expect modest incremental adjust-ments to investment spend in the event of further volume deterioration or other industry headwinds. However, over the medium/long term, we still see the potential for significant share-holder value creation from autos companies re-thinking capital spend in the way of more strategic adjustments to core business strategies (Greater partnership with startups/China, Greater capital austerity, De-emphasizing non core businesses, etc.).
Global Auto Forecasts Update
Sales by Powertrain Forecasts- Hybrids Higher, BEVs Lower
BEVs: Our 2030 sales mix forecast is unchanged at 20%, representing a 17% unit sales CAGR from 2023. However, we slightly reduce our penetration assump-tions over the next few years. We now model 2025 BEV penetration at 8.5%, up from 8.0% in 2024 and 9.0% prior. For 2026, we model 9.2% penetration vs. 9.8% prior.
Hybrids: We increase our 2030 PHEV sales mix forecast to 10% from 7.5%, representing a 29% unit sales CAGR from 2023. Our HEV forecasts are unchanged, with 20% penetration in 2030.
ICE: Our 2030 sales mix forecast is decreased to 50% from 52.5%, representing a -5% unit sales CAGR from 2023.
Sales by Level of Autonomy Forecasts- Reducing L4 & L5 Penetration Assumptions
L0/1/2: Forecasts are largely unchanged. We forecast the sales mix of L0 vehicles declining to 0% by 2030. We forecast the mix of L1 & L2 vehicles to moderately increase y/y to ~87% in 2025 from ~85%, followed by a gradual decline through 2030 to ~77% and a more rapid decline through 2040 to effectively 0%.
L4: We forecast ~1,700 vehicles sold in 2024, largely representing commercial vehicles used for Waymo, etc. By 2030, we forecast that ~138,000, or 0.8% of vehicles sold are L4, with the mix steadily rising through 2040, peaking at ~78% before declining into 2050 as more advanced L5 vehicles experience rapid growth. While our estimates for 2040-2050 are unchanged, we now incorporate a later ramp in L4 penetration. We previously estimated that 8.5% of vehicles sold in 2030 were L4.
We assume that the early versions of Tesla Robotaxi are defined as L4 given the likelihood for geofencing and/or option for some level of human override.
L5: We forecast the first L5 vehicles are sold in 2035 at <10,000 vehicles. This quickly rises to 15% of sales in 2040 and 95% of sales in 2050 as consumers/OEMs are quick to adopt more advanced technology (Note, L4 autonomy would be relatively mature at this point). We previously assumed the first L5 vehicles were produced in 2028 with a more steady ramp to 15% in 2040.
We assume that to be L5, vehicles must have zero required human interaction (no steering wheel or other controls) and are able to navigate a diverse array of routes/geographies with no geofencing.
Risk Reward - General Motors
Our $54 PT is based on a normalized earnings analysis. We assume GM normalized at~3.0mn units (ex-China) at an ATP of $45.0k, with $15.8bn of ancillary revenues. Assumes6.1% normalized adj EBlT margin, $0.2bn normalized China JV losses as well as $O.5bn of Cruise/AV losses, at a 22% tax rate. We assume $6.74 of normalized EPS and 8.0x normalized PE multiple.
Further supported by SOTP
Risk Reward - Tesla Inc
Our PT of $400 is comprised of 5 components: (1) $94/share for core Tesla Auto business on5.4mm units in 2030, 9.0% WACC, 14x 2030 exit EBITDA multiple, exit EBlTDA margin of16.5%. (2) Tesla Mobility at $66 on DCF with ~139k cars at ~$1.8/mile by 2030. (3) Tesla as a3rd party supplier at $52/share. 4) Energy at $62/share,& 5) Network Services at $127,15.8mm MAUs, $180 ARPU by 2030, 50% discount.
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