Dan Akerson Bullish On GM - Why He's Wrong

Jun.18.12 | About: General Motors (GM)

By Ralph Baker, executive director of the New York Shock Exchange

In the first quarter of 2009 when Chrysler and General Motors (NYSE:GM) requested $22 billion in bailout funds (in addition to $17 billion already received), as a quid pro quo, President Obama demanded that the automakers deliver a realistic operating plan that would ensure their survival. When that operating plan was not delivered to his satisfaction, President Obama forced the resignation of GM CEO, Rick Wagoner. Post-Wagoner, GM has gone through two additional CEOs -- Fritz Henderson and Ed Whitacre, Jr. Its current CEO, Dan Akerson, took the helm in September 2010. Since, the auto industry has undergone major changes. Domestically, the industry is no longer the "Big Three" and is now the "Big Seven," with GM, Ford (NYSE:F), Toyota (NYSE:TM), Chrysler, Honda (NYSE:HMC), Nissan (OTCPK:NSANF) and Hyundai (OTC:HYMTF) leading in market share. Yet despite less volume in previous years -- 2011 auto sales were 13.0 million as compared to 17.4 million in 2005 - automakers are spilling over with profits. The recession of 2008 caused industry participants to become leaner, slash inventory, and wean themselves off of margin-eating discounts.

Globally, GM has grown its worldwide market share from 11.6% in 2009 to 11.9% in 2011, while maintaining profitability. Meanwhile, it earned net income of $4.7 billion and $7.6 billion in 2010 and 2011, respectively - a sharp contras to its net income losses during the financial crisis. In a June 2011 interview with Fortune, Akerson represented that GM's product lineup and strong market positions will allow it grow profitability over the long-term.

I'd rather be the most profitable in terms of margins. To produce the most cars - quite frankly, that'd be pretty easy. Overproduce and no margin. That's not the game we're trying to play. So hats off to them [Toyota]. I think they're [Toyota] a great company, and I think we're doing fine. The resurrection of General Motors has been centered on great products, and the product lineup we have is what's really important to our success … You've got to play for the long haul. One of the things that was surprising to a lot of people when we were on our IPO trip 15 or 16 months ago was that we have good, strong market positions in the BRICs [Brazil, Russia, India, and China]. In the two biggest markets in the world, China and the U.S., we're the leading market-share holder. I think that portends good things for General Motors.

It is also China that poses the biggest risk for GM. In December 2011 China reshuffled the list of industries in which it wants to attract foreign investment. It de-emphasized autos and encouraged foreign investment in alternative-energy cars, electrical machinery, and internet equipment. It re-ranks key industries every few years based on categories such as "encouraged," "allowed," and "restricted." The last re-rating occurred in 2007. In 2009 China surpassed the U.S. as the world's largest auto market with 13.6 million autos sold. Yet China's domestic auto manufacturers have the lowest market share in their homeland of any domestic auto makers in the world. Experts saw China's reducing the auto industry sector from "allowed" to "restricted" status as a ploy to prop up domestic manufacturers - "Slowing auto sales growth in China, to about 3% in 2011, from about 32% in 2010, has particularly affected local auto brands, and this has driven authorities to direct more support to domestic auto makers, said Namrita Chow, senior analyst at HIS Automotive. 'We're expecting that there will be more laws that come in to facilitate greater technical know-how flow toward Chinese companies.'" The government's decision could hamper global auto makers looking to crack the Chinese auto market. Yet it also exposes GM, whose Wuling Sunshine -- a JV between GM, Wuling and SAIC -- was China's best-selling vehicle in 2010 with 597,000 sold. Along with its Buick and Chevrolet brands, GM leads China in auto sales and the market accounts for 24% of GM's worldwide sales. In 2009 GM and its Chinese partners sold 1.8 million vehicles there - an estimated 13.4% market share. That said, China's shift away from foreign automakers can only be negative for GM, and its profit margins.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.