With the price of oil being so high, you would think car companies like General Motors (NYSE:GM) might be heading for bankruptcy, or at least rethinking traditional strategies. However, car companies are doing very well right now, and General Motors' new sales strategy might be a little shocking to people who pictured it playing out differently.
General Motors made the headlines this week, but not in a good way at all - GM cut its pension scheme by a few billion dollars to reduce liabilities at its own end. As you can plainly tell, people had a whole lot of feathers ruffled by the announcement. Investors are not happy about this action, because while this may look like a smart move on GM's part, effectively cutting out $26 billion from pensions, it will need $4.5 billion more to pay for its new program. Investors are antsy about these things, as who knows how effective this might be; you already have retirees complaining about it, and it could potentially blow up in GM's face if handled incorrectly.
Moreover, it is not as if this $26 billion reduction in liabilities is going to make it any more attractive as an investment option because of that huge cash payout it is going to have to make to pull off this move. Moody's still deems the company below investment grade and remarked that GM's "obligation would still be larger than any company within the S&P 500". So, what has this move achieved? Well, potentially nothing positive as of yet - but there is something that you can be glad about, if you are an investor, but not necessarily an American patriot.
You see, one of the biggest strategies that General Motors is currently pursuing is building up assets outside of the country. This is primarily because raw materials and labor are definitely cheaper and the cost of exportation still is relatively cheaper than manufacturing in America. At home, it has to deal with unions and CBAs, which cost companies a lot of money.
In fact, such is GM's commitment to building overseas that it is doing more and more business with China that it now has 11 of its assembly plants there. It is also aggressively trying to sell its cars there, and succeeding, because it reported a 21.3% increase in sales from last year. This should make investors happy, yet the national economy should be a lingering concern: if GM decides to pull out all American plants that could mean many people at the unemployment line. Even if its Tennessee plant is back on line, how long until it decides it is far too costly and shuts it down again. Only time will tell.
Meanwhile, many competitors are not idling as well. Toyota (NYSE:TM) has made a breakthrough again in sales, as its Prius model is the third best-selling car in the world in the first quarter of 2012, following its own Corolla and the Ford Focus. Any time you have two of the top three most bought cars in the world, you are definitely doing something right, so no worries for investors there.
Nissan is giving the US market competitors a run for its money as well. It just reported that it has had a 20.5% increase in sales from the previous year with its American unit, with more people becoming fuel conscious and models like the Versa and Juke that Nissan offers become attractive for their ability to effectively conserve fuel.
Another company that has its eyes set on trying to take the automotive industry by the neck is Volkswagen. It has been on a proverbial tear this past few years, buying up the Audi, Bentley, Bugatti, Lamborghini brands to name a few. It is in prime position to take the market because of its diversity, but one of the things possibly setting it back is the fact that its cars are not that reliable. Who wants to buy a car that breaks down every so often? Investors might want to get more involved, but only if Volkswagen manages to keep its gears in check.
Competitor Honda (NYSE:HMC) just earned the EPA's most efficient fuel rating ever. Its new FIT EV car surpassed all cars currently on the market with an estimated highway driving range of 82 miles per gallon. As oil prices continue to empty wallets at the gas pump, new consumers may find the new fuel rating more attractive than ever. Honda may have scored itself a big win with the car and competitors like GM should be looking to improve upon the new fuel rating standards.
Ford Motor (NYSE:F) and Microsoft (NASDAQ:MSFT) are in a partnership for the SYNC in-car connectivity platforms, promoting them in the Computex Taipei 2012, offering customers the ability to use Mandarin voice commands to control their phones and music players. When two big companies work together like this, the results can only be positive. This also serves as its foray into the Chinese markets, possibly competing with GM and the other brands out there, trying to get a slice of the pie for themselves.
Speaking of General Motors and Ford, GM is making a fuss about the whole non-compliance of Ford with the new truck test procedures and have released a statement saying that it will not comply until all parties have decided to do the same. Call that a smart move or a dumb one, but that might mean that both companies will take a hard stand on the issue and nobody will get to see final numbers, which might or might not affect sales for both parties.
General Motors certainly has some controversy on its hands right now, but that shouldn't sway anyone away from not buying into GM. The company is only expanding internationally and its bottom lines should keep healthy, as should its stock continue to rise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.