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GM's Growth Is About More Than Just Electric Vehicles

Motley Fool - Sun Aug 28, 5:53AM CDT

The Chevrolet Bolt. The Hummer EV. The Chevy Silverado EV. The Cadillac Lyriq.

For the past couple of years at least, General Motors(NYSE: GM) has been pivoting from leadership in the production of full-sized, gas-powered pickups to production of a full line of high-tech, 21st-century electric vehicles like the ones listed above. It's these efforts (and plans to spend $35 billion on the projects) that have grabbed all the attention and reports about this automotive giant.

But EVs aren't the only enterprise GM is pursuing in its efforts to revive a stock price that's barely budged in five full years. It turns out GM is also trying to get back into the defense contracting business.

GM has a history of military dealings

Once upon a time -- during WWII, to be precise -- General Motors served as one of America's foremost defense contractors. Converting 94 stateside plants to military production, GM churned out thousands of Wildcat fighter planes and Avenger torpedo bombers for the U.S. Navy, and more than 850,000 trucks, transports, and M5 "Stuart" light tanks for the Army. As historian A.J. Baime put it in Arsenal of Democracy, "American soldiers were motoring into battle in GM tank destroyers, amphibious 'DUCK' trucks, and two-and-a-half-ton troop transporters, and they were firing GM-built submachine guns, bullets, and mortar shells."

Indeed, for more than 50 years after World War II, General Motors kept on supplying the Army with everything from medium-weight trucks to light armored vehicles to "Stryker" armored personnel carriers -- up until it sold its defense business to General Dynamics(NYSE: GD) in 2003. And yet, after more than a decade of pacifism, GM trumpeted its return to the military biz in 2017 with a reconstituted GM Defense division.

Uncle Sam wants YOU ... to build him some trucks!

In 2020, GM Defense notched its first big victory, winning a $214.3 million contract to supply the Army with 649 Infantry Squad Vehicles ($330,200 per ISV) based on its own Chevrolet Colorado ZR2 midsize truck design, a contract that could triple in size over time. And this week GM set its sights on an even bigger target, announcing it would team up with Germany's Rheinmetall to offer a new truck for the Army's Common Tactical Truck program, which is seeking a replacement for its "Family of Heavy Tactical Vehicles" fleet.

According to the companies, the Army is seeking bids to produce approximately 5,700 heavy trucks for the military -- a potential $5 billion windfall for the winner. GM and Rheinmetall will bid an "Americanized" model based on the latter's HX3 -- the HX3-CTT -- featuring "an advanced, interchangeable protected cab design, advanced driver assistance systems (ADAS), and drive by wire operation [and the ability to scale in size] from 4x4 to 10x10."

Competition and timelines

To date, GM's (and Rheinmetall's) bid is the only one I'm aware of, but the Army says it is seeking bids from at least three vendors -- so GM is not guaranteed a win here. Whether it's at least in the running to win, however, should soon be known. The Army sent out its request for prototype proposals in June, and it expects to award prototyping contracts in very short order -- by December 2022.

Then there will be a "runoff" in late 2023 as the Army puts the various prototypes through their paces. The Army will pick a single winner, with an official contract award and a promise of $5 billion in revenue following in 2025. The new trucks should then be ready for deployment in 2028.

Granted, even $5 billion in new revenue won't move the needle much for GM (which according to data from S&P Global Market Intelligence did more than $127 billion in business last year). But even this contract could be just the start of the good news.

As The Detroit News reported in June, with one big defense contract already in the bag, and another perhaps on the way, GM Defense is "going international" with a plan to start marketing its military trucks first to Canada, then to Europe, the Middle East, and Southeast Asia as well. Its partnership with Rheinmetall could help here as well -- while GM Defense has been out of the international market for a while, Rheinmetall has been very active. Indeed, the company boasts some 20 global customers already, running the whole length of the alphabet, from Austria all the way down to New Zealand.

Combined with GM's already global reach in civilian vehicles, this should be a formidable partnership, combining great economies of scale from supplying the world's biggest military buyer with established relationships to grow sales even further all around the world. That $5 billion could be only the beginning for GM.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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