General Motors Leads The Dow Down

The U.S. auto industry is facing one of its most difficult periods in recent history. The combination of a slowing U.S. economy, tightening of credit for businesses and consumers, and fluctuating oil and gas prices may have investors wondering if there's any good reason to cheer or hope for a recovery for U.S. auto makers Ford (NYSE:F) and General Motors (NYSE:GM), which are part of the fabric of Detroit and the nation.

GM Falls To New Low
On October 9, one year to the day of the Dow Jones Industrial Average's record high of 14,163, GM led the index down below 8,600 for the first time in three years. GM closed down 31.11% to $4.76 while Ford shares hit a 26-year low, closing down 21.80% at $2.08. Japan's Toyota (NYSE:TM), GM's chief rival in the U.S., finished the day down 7.21%. GM's new 50-year low makes it the least-expensive stock on the Dow, suggesting that even a bailout package from the government is not enough to curb investors' fear. (Since we are on the subject of automakers, an interesting article to check out is The True Cost Of Owning A Car.)

Bailout
In late September, U.S. automakers including GM, Ford and Chrysler received approval for a $25 billion low-interest loan as part of a larger $630 billion spending bill passed by the U.S. House of Representatives. The earmark is meant to help the auto manufacturers retool their plants to produce smaller, fuel-efficient vehicles versus its larger vehicle lineup of Hummers, Chevy Yukons and the Cadillac Escalades. The benefits of the loan will not be seen for a few years, but if the capital infusion can create more jobs in the short term, it's a great step forward.

The Future
Slowing sales in GM's largest market, the U.S., means future profits will continue to rely on growing sales in emerging markets. GM notes that its ability to gain market share in emerging markets including Brazil, Russia, India and China and the Middle East while controlling costs will be key to its survival. At the end of 2007, China represented GM's second-largest market with 1.032 million cars sold, giving it a 12.1% share of the country's auto market.

China's Affair With GM's Buick
GM's sales in China from 2005 to 2007 have grown more than 60%, due in part to the highly coveted honor of owning a Buick. The Buick is GM's entry-level luxury vehicle, making it within reach for a family of professional workers versus the more expensive luxury line of Cadillac vehicles. In China, owning or being driven in a Buick is a status symbol that attracts first-time car buyers and established business professionals who are interested in safety, comfort and style.

Final Thoughts
GM's efforts in retooling, gaining market share in emerging markets and limiting costs are positive steps, but the volatility in the market suggests investors should keep their guard up as the fight for survival in the auto industry is far from over. (For more reading on emerging markets, check out Re-evaluating Emerging Markets.)