Investors have been circling like vultures hoping to swoop up shares of both General Motors Corporation (GM) and Ford Motor Corporation (F) which have been trading in the $22 and $8 dollar range for the past few months. All of the negative press revolving around these Detroit automakers who have been suffering from the burden of healthcare expenses, market share losses, shifting customer demand, elevated gas prices and fierce competition from Toyota (TM) and Honda (HMC) paints a precarious picture for the novice investor. The goal of the savvy investor is to identify the catalysts that will revive the struggling auto manufacturers. The following piece reviews some of the major factors that will contribute to General Motors success or failure moving forward.
GM made front page news with its recent announcement to cut 30,000 jobs by the end of 2006. The layoffs will coincide with a combination of nine assembly plant and factory closings by 2008. GMs reasoning points to its healthcare expenses and attractive low wage manufacturing that is available in China and India. GMs healthcare related expenses totaled $5.2 billion dollars in 2004 for its 1.1 million employees and their families in North America. In effect the health care expense added $1,500 to the cost of each vehicle GM manufactured in North America. GM currently employs approximately 324,000 people while rival Toyota employs just over 265,000. The layoffs will help GM bring down the price of its vehicles towards remaining competitive in the industry.
Labor Negotiations with UAW
Richard Wagoner, CEO of GM, has been walking on egg shells with the UAW (United Auto Workers) union in efforts to avoid a costly strike. In October of this year Mr. Wagoner negotiated with the UAW for lower hourly wages and increased healthcare expenditures from employees in 2006. According to Mr. Wagoner successful negotiations with the unions and the job layoffs could translate into savings of $7 billon dollars for GM in 2006. Bargaining with the UAW resumes in 2007 when the current GM contract expires.
GMAC (General Motors Acceptance Corporation) is the financing arm of GM. GMAC is composed of three services:
|1. Auto Financing
2. Mortgage Loans
In 2004, GMAC earned a record $2.9 billion in net income, approximately 80% of GMs earnings, caused by increases in financing charges and insurance income. While GM North America lost $4.8 billion during for the first 9 months of 2005, GMAC carried the torch and made a profit of $2 billion dollars during the same time period. GM has been shopping for an investor to buy a majority stake in the GMAC unit. The expectation is that the sale of GMAC will free up cash and lower GMs cost of capital. Along with the current "Red Tag" sales promotion and future incentive programs GMAC will continue to increase revenues and build its loan portfolio despite a recent retreat in net income from home loan mortgages. Even if GM decides not to sell GMAC, the loans in its portfolio can still be bundled and sold as we have seen in recent deals with Bank of America (BAC) and Scotia Capital who have agreed to purchase $55 billion and $20 billion in automotive assets respectively.
At the end of 2004 GM had increased market share in every market except North America. In Korea GM has 50% ownership in GM Daewoo along with a joint venture in China named Shanghai GM. During the first nine months of 2005, GMs market share in China increased to 11% from 9.1% during the same time period in 2004. The five million total cars sold by all manufactures in China in 2004 offers GM hope for a future outside of the North American market. Further evidence can be seen below.
GM Vehicles Sold Jan-Sept
GM vehicles sold for the first nine months of 2005 show significant increases in GM Asia Pacific (GMAP, 21%) and GM Latin America/Africa/Mid-East (GMLAAM, 19%) from 2004. GM North America sales volume decreased 10%.
The Kirk Kerkorian Factor
Kirk Kerkorian, the fascinating billionaire financier, who began acquiring shares of GM back in May of 2005 has amassed 10% of GM stock. Initially Kerkorians reasoning for the purchase was strictly for investment purposes. Kerkorian has since been actively pursing a seat on GMs Board through his private holding company, Tracinda Corporation. A shake up of GMs Board is long over due. After all, it was the Boards decision to continue GMs focus on gas guzzling high profit SUVs while delaying the R&D necessary for the development of popular fuel efficient vehicles. While Kerkorian, who is currently the majority owner of the MGM Mirage (MGM), has been unsuccessful in the past in acquiring a seat on the Board of Chrysler (DCX), it can be argued that his interest and persistence has the GM Board working harder than ever to move GM into the black.
Now, is healthcare or foreign competition the real reason for GM's loss of domestic market share, which currently stands at a depressed 26.4%. No! GM's biggest problem has been its inability to see the change in the market. The greatest advantage investors have right now with GM is that the deluge of negative press being feed to us daily by the media keeps us aware of GMs new marching orders. While these are difficult times to invest the savvy investor, must look beyond the headlines of today and think about tomorrow. GM is actively cutting cost, renegotiating with its labor unions, refocusing its product lines and expanding overseas. The true measure of success will be scene when the negative press fades away and turns into positive silence.