The recession forced both General Motors (GM) and Chrysler into bankruptcy protection. Ford (F) suffered through with reductions in work force, plant closures and discontinued product lines. After the initial euphoria of not being dead yet wore off, automakers have faced turbulent times for the past two years. Survival of the past has been proven, but will the future bring the same?
American automakers long held a very high perch in American manufacturing. The economic meltdown of 2008 and the following years have presented glaring realities to investors that these companies are not impervious to economic slowdown and failure. Despite the domestic economy, the automakers have survived and moved toward profitability. The economic crises in Europe has added another layer of worry for this industry as demand has slowed and the resulting production overcapacity is forcing the industry to make some very hard decisions about plant closures and labor cuts. In North America, workers that made concessions during the recession are looking for some quid pro quo now that the companies are profitable. The Canadian auto industry has lost a third of its assembly line jobs and has had five plant closures in the last ten years as costs rose along with the stronger Canadian dollar.
A strike deadline of midnight, Monday the 17th was averted with the Canadian Auto Workers Union (CAW) when it was able to make a deal with Ford by the deadline. GM subsequently reached a deal with the CAW, Chrysler is still a holdout. Canadian labor costs are among the highest in the world. Chrysler, GM and Ford want to see those costs brought in line with those of U.S. autoworkers. If the costs can't be reduced, it is very likely that the big three automakers will stem further production and investment in Canada. The union made concessions in 2009 and takes the position that the automakers are now profitable and the unions deserve some payback.
The U.S. Autoworkers (UAW) and the automakers have used a two tier wage scale for the past several years to bring labor costs closer to foreign automakers. The automakers have not stated how they propose to bring Canadian labor costs in line with those of the UAW.
The differential in pay between Canadian Auto Workers and US Auto Workers with benefits including pensions, healthcare and overtime pay averages C$60 and hour in Canada, compared to wages in the U.S. of $58 at Ford, $56 at GM and about $52 for Chrysler. At today's current exchange, that looks bad. In the past ten years the Canadian dollar has been as low as $0.66 U.S. In the past five years it has been as low as $0.77 U.S. When the economy normalizes in the US, Canadian Auto Workers will again be earning less than their U.S. counterparts.
Ford has also had some difficulty in Europe where it will not give assurances that its Genk auto plant in Belgium will remain open. Europe's economic meltdown has seen excess production capacity, leaving that region open to plant closures and work stoppages. General Motors has also been indicating that it will lower its capacity to match that region's downturn in demand. General Motors has replaced the European unit's chief executive and minimized the hours of workers at a few European plants.
Japanese automakers have also struggled, particularly with issues related to the great earthquake and Tsunami of 2011. Forced plant closures, inability to make deliveries and costs associated with rebuilding affected all of the automakers manufacturing in Japan. Toyota (TM) and Honda (HMC) have introduced new or improved products in the luxury and low end of the market to make up for any interruption caused by natural disasters.
Volkswagen (VLKAY.PK) turned its attention away from Europe and its financial crisis and experienced an increase in global sales in the first half of 2012, crediting its move from its reliance on sales from Western Europe to improved sales in North America.
GM has total debt of $32.61 and total cash of $14.79 billion. The current ratio is 1.24 which indicates a good ability to cover current liabilities. The book value per share is $19.36. The company is 53% owned by insiders and 35.5% owned by institutions. The float is 5.8% short. The stock trades around its year high $24.77. It has a year low of $18.72. It has a price earnings multiple of 8.82 and earnings per share of $2.81. A big negative is its year on year quarterly earnings growth, which is negative at -38.3%.
Ford has $23.9 billion in cash and $99.9 billion in debt. The current ratio is 1.68 and book value per share is $4.47. The float is 55% owned by institutions. Ford trades around $10.50. The 52-week range is $13.05 and $8.82. The price earnings ratio is 2.39 and earnings per share are $4.40 and dividend yield is 1.9%. Ford has negative year over year quarterly earnings growth of -56.6%. DBRS ratings on both Ford and GM have improved recently. The agency believes that both companies are in good shape and can weather both the crisis in Europe and any labor interruption in Canada.
The market is not worried about Ford. It has $1.68 to cover every $1 of debt it currently has. A large section of its float is available to retail shareholders. It has made important concessions to the labor force in the U.S. and appears to be more amenable than the other automakers to do so in Canada. It has cut manufacturing costs and is focusing on hybrid lines to consumers to meet the demand for more energy efficient vehicles as fuel costs spiral out of control.
The negative earnings growth is an indicator that the industry as a whole is still in the doldrums with respect to achieving any meaningful growth. Insider holdings in GM probably had a lot to do with the settlement of the strike action with the CAW. It was in the company's best interest to avert job action if there is to be any value attributed to shareholdings.
I'm going to make an unpopular call here. I disagree with the ratings agencies. Despite appearances, the auto industry is still on very shaky ground. I don't believe that any of the automakers can survive any labor action in Canada or abroad. I think that the ratings agencies really underestimate the will of the autoworkers to strike and remain so until demands are met. I don't believe that Ford or the other automakers can survive a prolonged work slowdown. The U.S. might be creeping out of a recession, but Europe has another two years to go, barring any more catastrophic natural or man-made events. Fewer people are buying cars as fewer people have access to credit. With workers on the street, not only will there be fewer cars, there will be considerably fewer people to buy them.