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Page 1 of 139 To Motor or to not motor – what will happen to GM and the US auto industry? Five years ago ( March 2003) I was lucky enough to attend the Geneva Auto show. I saw presentations from all the major auto manufacturers and the economy, although somewhat weak at the time, was staged for a rally to new growth. I remember noting the commotion surrounding the GM presentation as I was sitting at the back of the room. Most companies had 1 or 2 representative in attendance for their presentations. When it was GM’s turn, it was like watching an Asian create jobs task force. At least a dozen executives arrive (most likely all in private jets, no doubt). I remember clearly marking on a piece of paper that GM would be bankrupt in 5 years due to a very large outstanding pension fund obligation of $40bn but at the same time they expected quarterly earnings of $2.00 per share in the interim. I expected that that pension fund time bomb would be dealt with over the next 5 years and I was always shocked when GM stock rose, if only for a short time. I knew some who made money on the short term trade. When GM hit a 50 year low earlier this year, despite all I knew, I was shocked. I had never seen a stock hit a 50 year low. The market cap is now at an incredible level of 1.2% of sales. I have spent many years studying turnaround companies and have found that when there are no earnings or major structural issues, price to sales is the best ratio to use, providing debt levels are taken into consideration. Companies losing money generally trade below sales usually at 50%. If the industry or company appears to be in long term decline, the ratio can drop to 10% of sales or lower. Apple (most will not believe this now) was trading at 10% of sales in 1997. Now it trades at 4-5x sales, a remarkable recovery considering how much their sales have grown but it was teetering on bankruptcy at the time and things have improved dramatically since then. The food retailers in the US were trading at 10% of sales in 2003 when they were being attacked from all sides by competition. They have since recovered to 30% of sales and are now doing well having adapted to their new environment. It was clearly a buying opportunity for an industry in the midst of change. The auto industry price to sales ratios show how dire the outlook for their companies is perceived at this time: GM at 1.2% of sales, Ford at 5.6% of sales (this is after having tripled recently) , BMW at 21% of sales and the star of the industry is the mighty Porsche at over 100% of sales (remember they also make money in short squeezing the hedge funds). Of course, GM sales are expected to decline and earnings are a figment of the future. The great debt loads and future obligations will tax this company into the foreseeable future. Without structural change or dramatic restructuring of the obligations, there is really no hope for this company. Of course, in bankruptcy it can continue indefinitely operating producing cars which lose money but it is hard to be optimistic about the US car industry without it shedding its burdens of high cost production and long term obligations to its workers as well as an overstaffed and paid executive staff. Dramatic changes are required and will be painful. Then there is also the issue of when Chinese cars arrive on the market. We have not even begun to think of the implications of this future which is not far away. Japanese production is a mere fraction of what Chinese companies will produce once their car industry is up and running. The US needs to reduce its dependency on manufacturing in view of the threat from China. The UK lost its auto industry in the 1970’s. The US needs to lose its industry as well, at least in the way it is set up today. A new model must be employed that is leaner, more targeted and much smaller. It is unfortunate, but inevitable. Like the steel industry of the early 1980s and the airline industry of the 1990s, the model of growth without focus is obsolete and outdated. It will need to change to reflect the new reality of a world dominated by Asia and its prowess of low costs, innovation and marketing dynamics. What will happen to all the unsold cars? Where will they store them? For more than a year in Toronto, one has been able to drive past Downsview fields to see car after car parked there. Left outside in the extreme climates of Toronto, who will want these vehicles? This all needs to be worked out before the American auto manufacturers can move forward. The fact remains: there is too much capacity in the US car industry and in the car industry worldwide. This capacity relates directly to the steel industry and indirectly to everything that goes into cars. That means that industrial capacity must contract globally and that is what we are going through. Producing cars for the sake of keeping jobs is not an option going forward. Capacity must be taken out of the industry to get it back to health. The world does not need 2 French car firms, 3 US car firms and numerous Japanese ones as the Chinese and Indians enter the market with more efficient and cheaper cars. It needs products that provide customers with a sense of what they want. For those of us who are old enough, we have seen it all before. Chrysler went bankrupt several times before being bought by Ceberus recently and may still go bankrupt a 3rd time. I am reminded of a song from the late 1970’s and here are the lyrics which could be deemed almost repetitive now, actually it’s really interesting to note how many parallels there are from the late 1970s to now. We have seen it all before and will see it all again before it is over.
I'm Changing My Name to Chrysler by Tom Paxton Oh the price of gold is rising out of sight And the dollar is in sorry shape tonight What the dollar used to get us Now won't buy a head of lettuce No the economic forecast isn't right But amidst the clouds I spot a shining ray I can even glimpse a new and better way And I've demised a plan of action Worked it down to the last fraction And I'm going into action here today CHORUS: I am changing my name to Chrysler I am going down to Washington D.C. I will tell some power broker What they did for Iacocca Will be perfectly acceptable to me I am changing my name to Chrysler I am headed for that great receiving line So when they hand a million grand out I'll be standing with my hand out Yes sire I'll get mine When my creditors are screaming for their dough I'll be proud to tell them all where they can all go They won't have to scream and holler They'll be paid to the last dollar Where the endless streams of money seem to flow I'll be glad to tell them what they can do It's a matter of a simple form or two It's not just renumeration it's a liberal education Ain't you kind of glad that I'm in debt to you Since the first amphibians crawled out of the slime We've been struggling in an unrelenting climb We were hardly up and walking before money started talking And it's sad that failure is an awful crime Well it's been that way for a millenium or two But now it seems that there's a different point of view If you're a corporate titanic and your failure is gigantic Down to congress there's a safety net for you ©1980 Accabonac Music (ASCAP)
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