Strong Global Push Means GM Likely to Succeed in the Long Run

General Motors (GM) announced on June 18 that it was delaying the redesign of SUVs and full-size trucks, which include the Chevy Silverado and Cadillac Escalade, as it undergoes a wider review aimed at building lighter, fuel-efficient vehicles.  The shift in focus would hit General Motors' North American profits and slow its revenue for at least the rest of 2008.  Looking at the auto industry right now, it seems that the leaders are finally beginning to "get with the times" and are ceasing what worked yesterday. The announcement follows a trend in Detroit of shifting from the higher margin light truck and SUV sales that have kept it afloat for so long towards lighter, more fuel-efficient vehicles.

 

I am going to go out on a limb here and say $4.00 for a gallon of gasoline will end up being better for the U.S. auto industry.  It will force the companies to lessen the dependence on SUV and light truck sales.  Additionally, with all the struggles and auto plant closures across the nation, General Motors plans to boost passenger car production in the coming months; other automakers are expected to follow suit.  Down the road, this shift will help the industry to become more efficient as models that are successful in Europe and Asia can be sold in America. 

 

Fuel efficiency is one way that car makers are now marketing vehicles, but models in the United States are still far behind the fuel efficiency of those in Europe. The following chart compares similar cars with a U.S. and a European engine. 

click to enlarge 

 

Politicians are scrambling to appease the masses and find ways to obtain cheaper gasoline.  However, it seems we have been down this road many times before; some don't want to drill offshore or open the Arctic Refuge, and others continue to say "not in my backyard." 

Is there a quick solution to this dilemma? Plain and simple, the answer is no.  Automakers have begun the process of shifting towards more fuel efficient vehicles, but it will take time to improve the efficiencies.  Until that time comes, Americans are going to continue to pay more at the pump and auto sales will remain weak.  However, compared to Europe, it appears that Americans still have it pretty easy when filling up their cars.  The following chart outlines the average price for unleaded and diesel fuel for countries in Europe as well as the United States.

 

 

This could be a generational shift in the auto industry from geographic segments into more of a global auto market.  Well a global auto market with similar cars in Tokyo, Paris, London, and New York still seems years away, but it would cut down on production and development costs.  The delays continue to tell the same story that the industry has been telling the Street for the past few quarters, it is going to get worse before it gets better. 

 

General Motors is our favorite in the industry due to its strong globalized push into international markets, and we feel that it has the most upside in the long-term scheme of things, but we also caution that the second quarter earnings figure will be a hard pill to swallow, and that weakness could drift into the third quarter.  

However, rest assured, the auto makers that emerge from this downturn will be stronger and more profitable for their efforts, but there still are plenty of speed bumps on the road ahead.

 

Disclosure: None

Comments

[Lappy]

Sorry, but this is wishful thinking and a piece of analysis that misses the critical issues.
GM's product portfolio, i.e. "technology"... is 5 years and tens-of-billions in engineering and retooling away from where it needs to be.
Now look at GM's balance sheet and cash-burn. GM does not have 5 years, nor does it have tens-of-billion of investable capital. GM has approximately 7 months before it runs out of excess cash.
Nobody in their right mind is going to give GM sufficient new capital without a massive restructuring plan, and the combined infusion/restructuring are going to nearly wipe out existing stockholders.
Will GM survive? Yes. Will existing shareholders benefit from that turnaround? No.

[WORRIED]

I hold XGM pref. for the fat dividend. Can it be that people have lowered its price because they think GM will go bankrupt? If that is higly unlikely, why aren't more folks bying the PREF. for the fat 12% dividend??

[Loeb]

Until I looked closely at GM's history I might have said that GM, its backers, and Americans generally believed all along that fuel resources were effectively unlimited, or at least so far from depletion that it didn't matter if GM adopted policies of conscious and conspicuous waste. But in fact the modern GM came into formation in the early 1920s, when there was a severe oil crisis. What, you say, an oil crisis in the early 1920s? Yes, it's true. So GM knew at the time it developed its policies that they would eventually cause what we now see, but it pursued them anyway because they were beneficial to GM. Along the way we all became so habituated to waste that we couldn't shake it, even when warned. After the 1970s we just went right back to it, and worse than ever. So none of the present dilemma is a surprise to me. It's the inevitable consequence of deeply engrained irrationality, and we won't be able to break ourselves of the habit easily. Perhaps reason (i.e., efficiency) will finally prevail, but only if people realize that the alternative is permanent damage to the American economy and the environment.

[billddrummer]

If you call a company that can still issue 8.25% preferred stock "well-capitalized... while its debt is rated junk then I'll park my 30 mpg Kia and buy a 12 mpg pickup.

GM is a classic example of a cancer patient that has had surgery, radiation, chemotherapy and medication, yet still has cancer. Now the doctors just need to make sure the patient is comfortable until he's dead.

[carey_jim]

GM is a case study for my on-going tongue in cheek dictum that "capitalism doesn't work." (Socialism doesn't work either, of course.)

Why GM didn't start making a line of very energy efficient cars, a very long time ago, is one of the deep mysteries of American capitalism and The Free Market.

Beats me.

[leh]

$30 billion of debt and the inability to turn a decent profit on small cars makes a GM turnaround here look very unlikely. Ford and Chrysler don't look much better since they were all hooked on the same fat margins of the pickup trucks and SUVs.

And historically it helps to recall that at about the same time GM was crushing its EV1 electric car and starting up the Hummer line, Toyota was pushing hard to get its first Prius to market--and this when oil was still under $20/barrel. Guess which company the market is rewarding for its prescience and innovation?

[Mister Jimmy]

GM, Ford, and Chrysler: near bankruptcy. Toyota, Nissan, Honda: flush with cash and gaining market share. How did ALL 3 American companies fail, and ALL 3 Japanese firms win? Yes, the American industry made mistakes and was burdened by much higher labor costs, but it was ultimately the victim of a U.S. government policy to give the industry away to our largest creditor: The New Empire of Japan.

[Pfloyd234]

Hey Lappy. What balance sheet were you looking at. They have about 31 billion in liquidity. They are not going bankrupt in 6-7 months. They are also doing a great job with quality and they are making great progress with "green" vehicles. Read the recent article about GM in Barron's. Im not saying its a sure fire investment. It is very risky. But I think they will turn around eventually when they realize the benefits of the UAW deal. The stock is starting to look attractive. But its not there yet. Its gonna go under $10 probably.

[Pfloyd234]

I also think if they are successful with the Volt that will help things quite a bit. I think this oil thing was a blessing in disquise. I just hope they don't go Bankrupt before they realize the benefits of it. LOL

[User 214846]

God Bless the United States of Asia.