The Detroit Auto Show featured a General Dynamics infantry squad transport vehicle as Ford Motor Company (NYSE: F) and General Motors Company (NYSE: GM) seek new growth drivers outside their primary operations. If history repeats itself, investors may ultimately regret the automakers' ventures into unrelated fields. Could this time be different?

In May of this year, Ford officially launched Ford Energy, its grid-scale energy storage business unit, supplying backup power to AI supercomputer service providers and utility companies. In the weeks following the announcement, Ford's stock surged 45%, adding nearly $23 billion in market value. The stock has since pulled back but remains over 20% higher than when the energy business was unveiled. Simultaneously, Ford re-entered the defense sector, recently securing a contract to produce tactical trucks for the U.S. military. Following General Motors' earnings call, where it raised its full-year guidance and disclosed details on its new defense and grid storage ventures, the stock has risen 16%. GM CEO Mary Barra stated on the call that these new businesses could boost overall profit margins and reduce the company's reliance on cyclical automotive sales. However, investors must temper expectations: while the outlook for these sectors is promising, concrete results remain unproven; the history of automaker diversification is a mixed bag of successes and failures.

Where to begin?

Even with robust core auto sales, Ford and GM have sound reasons for diversifying. Both companies have benefited from strong sales of high-profit SUVs, leading to their second upward revision of annual earnings forecasts this year. However, automakers are acutely aware that such favorable conditions are unsustainable. The threat from Chinese electric vehicle (EV) manufacturers is intensifying, currently held at bay only by import tariffs. The long-term outlook for the traditional auto industry is bleak: fewer young people are obtaining driver's licenses, new car prices are unaffordable for many Americans, and vehicles are lasting significantly longer than in the past. RBC Capital Markets equity analyst Tom Narayan commented, "The entire auto industry is on a downward trajectory," adding that auto parts suppliers are also pursuing diversification. The current situation for U.S. automakers closely mirrors the mid-1980s. Back then, U.S. tariffs temporarily blocked Japanese carmakers, and an economic boom allowed Detroit's automakers to generate substantial profits, which they then used to fund a wide range of side businesses.

A history of failed ventures

In the 1980s, Ford acquired multiple financial institutions, including First Federal Bank and Associates Financial, believing the financial business would provide stable cash flow. General Motors bought an information technology company to automate its factories and acquired defense contractor Hughes Electronics to create cutting-edge automotive products. GM spent over $40 billion on factory automation. However, this round of diversification ultimately failed. A 1990 Los Angeles Times article cited industry analysts who noted that Ford's capital was spread too thin, leading to underinvestment in its core business and causing its engine technology to lag behind Japanese rivals. Research by UCLA scholars Marvin Lieberman and Rajiv Dhawan showed that during GM's massive transformation in the 1980s, its factory productivity actually declined. More recently, both Ford and GM took massive asset impairment charges after their heavy investments in electric vehicles.

Why just 10 ASX 200 shares?

Bullish arguments for the current transformation suggest that the companies are not investing heavily, and the new businesses remain within the realm of automotive manufacturing. However, in the near term, these new segments are unlikely to provide a material boost to overall performance. For example, Ford's grid storage business involves converting its Kentucky EV battery plant, with a total investment of $2 billion from 2026 to 2027, representing about 10% of the company's planned capital expenditure during that period. General Motors' military infantry transport vehicle is built on an off-road truck platform, with most components sourced from mature commercial suppliers. GM also plans to partner with Lockheed Martin to expand into weapons manufacturing, though details are limited. The company emphasizes that it will enter these complementary industries with a cost-efficient model. The long-term potential for these emerging sectors is significant: geopolitical conflicts are driving up global defense budgets, and Morgan Stanley data shows that the U.S. energy storage market could grow at a compound annual rate of 38% through 2030, with federal subsidies available for domestic manufacturing. Morgan Stanley equity analyst Andrew Percoco noted that automakers have a natural advantage in energy storage, with excess battery capacity, an established supply chain, and experience in mass production. Furthermore, valuation multiples in the defense and storage sectors are significantly higher than those for traditional automakers. The S&P 500 defense stocks trade at a forward price-to-earnings (P/E) ratio of 30 times, while storage-related companies like Fluence Energy and Tesla trade at even higher multiples. In contrast, Ford and GM trade at forward P/E ratios of just 7.8 and 6.2 times, respectively.

A small impact on the bottom line

Despite this, a major re-rating of automaker valuations is unlikely in the near term. GM Defense is expected to generate $700 million in revenue this year, a fraction of GM's estimated $186 billion total revenue for 2026. GM forecasts that the defense unit will grow at a compound annual rate of over 30% for several years, with double-digit profit margins. Even if GM Defense grows at a steady 35% annually and achieves profit margins comparable to major defense contractors, its contribution to operating profit would still be less than 1.5% by 2030. Ford Energy has secured its first customer and plans to deliver its storage products by the end of 2027. Morgan Stanley's Percoco estimates that Ford Energy's operating profit could reach $588 million by 2029, representing about 5% of Wall Street's forecast for Ford's total operating profit that year. While this growth is respectable, it is not enough to fundamentally change the company's outlook. To significantly increase this business's profit contribution, Ford would need to continue building more factories.

The real risk

The real risk is not the automakers' intent to diversify, which is logical, but their tendency to react passively. Ford and GM often enter popular sectors late, habitually seeking new paths outside their core business. The push into electric vehicles was essentially a response to capital market trends. Edgar Faler, an analyst at the Center for Automotive Research, noted that the diversification wave of the 1980s was largely driven by the prevailing corporate trend of the time. History's risk is reappearing: U.S. automakers may once again miss the timing of a trend, or their side ventures could divert resources, ultimately harming their core auto manufacturing business.

Conclusion

Predicting the future has never been a strength of U.S. automakers. For this reason, investors should approach these shiny new ventures with a healthy dose of caution.