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GM Demise Would Add $24 Billion Plus To Global Profit

Ford Big Winner In U.S., VW In Europe.

General Motors and Chrysler’s competitors could gain pre-tax profit of more than $24 billion if the companies are forced to dramatically downsize after some kind of bankruptcy, according to a report from Bernstein Research in London.

$14.5 billion of that would accrue from U.S. operations and $10 billion if GM’s Opel and Vauxhall brands were forced to close down in Europe, Bernstein Research’s Max Warburton said.

Warburton assumes that Fiat of Italy’s plan to take a stake in Chrysler won’t work out.

Ford would be the main beneficiary in the U.S., followed by the Japanese, and Germany’s Volkswagen. If Opel/Vauxhall was forced into liquidation, VW, Ford Europe, and the French companies Peugeot-Citroen and Renault would be big gainers.

Warburton said he has assumed GM and Chrysler shed 30 per cent of their product lines and market share in the U.S., falling from 33 per cent in 2008 – 22 per cent GM plus 11 percent Chrysler – to 23 per cent.

“If the Fiat deal doesn’t work out, and our suspicion is that the U.S. task force would rather not recommend that Detroit continues with 3 automakers, we would assume that Chrysler will be dramatically downsized and probably integrated into new GM,” he said.

Warburton expects GM to close Saturn, Pontiac, and exit parts of its Chevrolet small car business and parts of its Chevrolet and GMC truck business. He has also assumed that much of Chrysler is closed, leaving just Minivans.

This would be good for the profits of the manufacturers left standing.

“GM has been a deflationary force on pricing – both in the U.S. and Europe for many years. Having historically refused to reduce manufacturing capacity, product offering and dealer density, GM has always resorted to aggressive pricing. GM has been the leading exponent of oversupply, cheap financing and deflationary strategies,” Warburton said.

“The reality is that GM and Chrysler buyers are most likely to defect to Ford, followed by Japanese then European cars. This varies by product and segment – with the greatest opportunity for the Japanese in Minivans and small SUVs and for the Europeans in medium sedans. The biggest European beneficiaries will be Renault (via its affiliate Nissan) and VW. In the near to medium term, there will be few benefits for BMW and Mercedes,” he said.

Warburton concedes that short-term, bankruptcy would initially disrupt suppliers, but benefits would accrue to those left standing.

Neil Winton – April 15, 2009

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