Today we learned (no surprise) that General Motors lost $6 billion in the first quarter. The company’s revenues dropped 47% in the quarter, to $22.4 billion, while industry revenues dropped “just” 21%.
While the lion’s share of the blame for the company’s troubles must go to management (and to the unions), I think a lot of people don’t realize that the U.S. federal government–now playing the role of rescuer with taxpayer money–was hugely complicit in steering GM and other U.S. automakers into trouble with its CAFE (Corporate Average Fuel Economy) regulations, which exempted “light trucks” and thus encouraged the development and overproduction of SUVs.
Thanks in part to this encouragement (subsidy), American automakers built the best SUVs in the world. But the big profits from these vehicles blinded management to upcoming demand for smaller, fuel-efficient vehicles–including hybrids–and here we are. What the world now wants, GM and Ford and Chrysler do not sell.
And thus the stocks are cheap. Ford is valued at $17.5 billion today, or 14% of the past 12 months’ revenues, while GM is valued at just $1 billion, less than 1% of the past 12 months’ revenues. These stocks might be good value-based “turnaround” investments today, but that’s not our style.
In the long run, the automobile business in the U.S. is shrinking. Foreign competitors with lower costs will always be able to under-price U.S. manufacturers given a level playing field, so if you’re interested in the auto business, I suggest you look overseas.
My favorite automaker story today is Build Your Dream, a little Chinese plug-in hybrid car company. You can’t easily buy the stock yet, but I’m intrigued by the fact that the company, currently the world’s leading producer of rechargeable batteries for mobile phones and laptops, is now charging into the plug-in hybrid car business. Warren Buffett bought 9.9% of the company last September.
There are other Chinese manufacturers, but none that you can buy easily. It’s still early. But I have great expectations that high local demand and low-cost manufacturing, combined with a freedom from legacy costs and legacy thinking, will make some of them big winners in the years ahead.
The European companies, Volkswagen (VLKAY) and Daimler (DAI), are suffering like the Americans, though less badly. And while I drive a German car, I find no attraction in their stocks.
Honda (HMC) and Toyota (TM) look better. They suffered less in the bear market, and they’ve recovered well. Their Relative Performance (RP) lines are looking healthy, too. And they pay decent dividends, 1.9% and 3.1%.
But all these manufacturers are big old companies, and thus offer far less profit potential than smaller and faster-growing companies in industries like technology, health care, entertainment, etc.
There is, however, one auto stock that’s intriguing. It’s Tata Motors (TTM) of India, with $9 billion in revenues over the past 12 months. Tata acquired Jaguar last June, and we were impressed to read early this year that the top marques in the J.D. Power quality rankings were Jaguar and Buick. And now Tata’s come out with the $2,500 Nano, a car designed for the masses of India that has the potential to succeed like the original “people’s car,” the Volkswagen Beetle. Tata has already received 203,000 orders, including deposits of–brace yourself–77% of the selling price. The first cars will be available in July. And Tata pays a dividend of 4.5%
Furthermore, Tata (TTM) has an attractive chart. After the market bottom of early March, the stock bounced from 3 to 8, and over the past four weeks it’s built a very nice and tightening base under 8, apparently building steam for a breakout into new-high territory and another advance. I think the odds are pretty good.
Overproduction of SUV’s was not what did them in.
Unlike in sedans and small cars, the Big 3 have a valued brand in SUV’s and trucks. Their only competitive advantage is in this category, and on a unit basis, these are very profitable.
What killed the Big 3 is actually the small car, where they are not profitable on a unit basis. The public simply will not pay the same price for one of their sedans or compacts when the brand of the foreign automakers and reputation for quality is vastly superior. So they must actually compete on price, a winning strategy only when you are the low cost producer. However, since since their cost of production is higher due to their unionized labor (haven’t even factored in legacy costs as this point), this will never work. It is not as much an issue in a higher-priced SUV where labor is so much smaller a percentage of the cost.
Their competitive advantage exists only in trucks and SUV’s. That is simply because 1) their brands are valuable in those categories, and 2) their labor cost disadvantage is muted by the higher selling price.
As far as fuel efficiency, in times of high fuel prices, US consumers naturally seek out more fuel efficient cars and that hurt the Big 3 severaly in 2007 and the first part of 2008. However, that is hardly the issue now. The hybrid, the most fuel efficient vehicle on the road, is seeing its sales drop every bit as bad as SUV’s. The current issue is affordability, not fuel efficiency.
Consumer tastes in this country all else equal have always been in favor of large, powerful, versatile cars and trucks. The level of demand will fluctuate with gas prices, in the same way it will for small, fuel efficient cars.