Market Share Doesn’t Matter; GM Mortgages Its Future

Speaking of the follies to the U.S. car industry….

The front page of the WSJ had a story on GM’s (GM) shrinking market share that is a classic story of businesses being more concerned with symbols than actual reality. The story is a pretty old one (by now): GM is losing ground to Toyota (TM) and is pulling out all the stops to halt the sales declines and regain market share. It’s worth noting that GM’s latest sales push is probably more about general desperation to generate sales then it is about protecting market share at this point.

From the WSJ:

On the verge of ceding its crown as America's best-selling car company, General Motors Corp. announced further production cuts as well as sweeping new incentives on many 2008 models -- a reversal of recent strategy and a fresh sign of how badly rising gasoline prices are slamming auto makers.

GM, Ford Motor Co. and Chrysler LLC have been trying for over two years to back away from heavy incentives, which eat into profit margins and tarnish brands in the eyes of some consumers. But a worsening of the slump in car and light-truck sales this month is forcing the Detroit companies to go all out to halt sales declines.

Through the first half of June, normally a strong period, U.S. auto sales were running at an annualized rate of about 12.5 million vehicles, according to J.D. Power & Associates. It was the lowest level for June in decades and a huge drop from the year-ago rate of 16.3 million vehicles.

For GM, the June swoon has an added peril: Without a sales surge in the next few days, it risks losing its U.S.-sales crown to Toyota Motor Corp. for the month. That would be a first and a powerful symbol of Detroit's long decline.

I wish GM and the business media would abandon their fascination with market share and focus on the core issue: GM’s ability to sell cars efficiently. As I’ve said before, the idea that GM is the world’s largest automaker has been false for several years now, due to the fact that Toyota (and other smaller competitors) exceeded them on a profitability basis a long time ago. In fact I’d argue that it’s ridiculous to even speak of GM being “#1” when they’re unable to generate more profits than a significantly smaller company like Honda.

For instance, over the course of 2004-2005, GM had roughly 4X the U.S. market share as Honda (HMC); in 2004, GM earned $2.8 billion dollars while Honda earned about $4.5 billion; in 2005, GM lost $10.6 billion dollars and Honda earned about $4.1 billion.

What exactly has GM’s huge market share edge over Honda done for the company when it comes to the bottom line? Using market share as a metric is pointless when a company can have 25% of the market share of a much larger competitor and generate significantly more profits; if you want to measure the size or relevance of a car company, you should use the only metric that truly matters: profitability.

Efficiency is the only thing that the media and Detroit need to be focused on, because if GM was half as efficient as Honda it would’ve earned huge profits in 2004 and 2005.

As for GM’s plan to use big incentives to generate sales, I have to wonder if it’s their goal to generate a sale at any case or to generate profits. Large incentives work if you want to generate sales, but they’re counterproductive if you want to generate profits and build up your brand. Considering that GM’s main focus needs to be increasing profit per car sold and strengthening its brand, I see the incentives as nothing more than GM mortgaging its future.

I’m also skeptical about the incentive’s ability to generate SUV sales as the customer’s problem with SUVs isn’t the cost of the vehicles; it’s the cost of putting gas in them, and lowering the sticker price won’t change the consumer’s aversion to $100 fill-ups.

If GM wants to survive it needs to abandon strategies that are counterproductive and that fail to address their core issues, a money losing company deciding to sell cars at a loss in order to protect market share is patently fatuous. Investors looking for signs of GM beginning to turn around should look for GM to abandon the market share chase, and begin focusing on building its brand and making profitable sales as opposed to a making a sale at any cost.

Sources:

• The WSJ: “GM Slates Sweeping Rebates As Toyota Closes In on No. 1” -- JEFF BENNETT, NEAL E. BOUDETTE and SERENA NG
• General Motors Inc, Investor Relations, Financial Highlights
• Honda Motor Company, Worldwide Investor Relations, Financial Highlights   

Note: Honda’s financial numbers are reported in Yen and were converted to dollars based on year end exchange rates.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article.

Comments

[Gumby]

Markham
You wrote GM rubbish on past statistics... GM had undergone vast changes in finances during past year or so. Yet, the realized savings would not start coming until after 2009 per UAW specifications. What you are seeing and hearing about GM is not the new and changed GM yet... While you are at it, I would encourage you to start buying GM shares while it is a screaming cheapie!

[Rick S.]

Gumbie: The "new and changed GM," as you put it, has been coming now since at least the 1970s. It never seems to arrive. Unless you count the Hummer debacle. That was indeed new and changed, or at least newer and bigger.

With their pal Rep. John Dingle preventing meaningful gas mileage standard upgrades in Congress, U.S. auto makers have behaved like alcoholics. They keep talking about changing for the leaner and better. However, it's always going to happen sometime in the distant future, never today, tomorrow or even next year.

John Keynes put it best: "In the long term we will all be dead." You go ahead and buy that long term screaming cheapie. I'm thinking short term and investing in today's performers.

[billddrummer]

One of the problems with the U.S. automakers is the overhang of legacy costs that placed the companies at a competitive disadvantage for decades.

Now, as Gumby pointed out, the legacy costs remaining will drop in 2009. But I don't believe that will be enough to allow the Big Three (or little three, since Toyota and Honda are grabbing market share) to begin making profits on smaller vehicles. In short, the cost structure put in place back in the 1970s has doomed the companies to continuing losses for the next two years.

[Markham]

While I did use past numbers they were being used to illustrate the mathematical fact that market share doesn't necessarily equate to earnings, in the same way that efficiency does. Furthermore GM's changes to cost structure will have to be rather significant just to make the company profitable, let alone enable the company to earn a similar profit per car as its Japanese rivals.

[Glenn Mercer]

I would agree but take this further: note that when OEMs fret about market share they measure it in UNITS. A Maybach is the same as a Mazda is the same as a Mini. Toyota passed GM in revenue long before it did it in units, and no one even noticed that. As long as OEMs target vehicles rolling out the door they will be hard pressed to think rationally about profits..let alone revenues. If units matter so much, how can Porsche afford to take over VW, and Ferrari be worth more (usually) than Fiat?

[notsosmart]

i left gm when it cut its dividend.sold@$22,took my loss.american car management should first of all invest in hearing aids.they havent heard(maybe glasses also) or seen the light in years.is gm a buy now? i dont know.hopefully all the smarties on this site will guide me.