GM Excites Investors With Brutal Action To Resize.
Investors Love The Move, Seen As Anticipating Trouble.
GM Embraces New Technology; Puts Pressure On Ford To Act.
“Jawboning” Trump said GM should stop making cars in China and make them in the U.S. instead”.
General Motors shock move to shut up to 5 North American factories, fire 15,000 workers, and dump some iconic nameplates spurred President Trump’s ire, but was well received by investors who lauded GM’s pre-emptive strike.
Investors saw the decision as brave because it was taken on the crest of a wave. In the past such remedial action would have been delayed until the depths of a recession and as losses threatened to overrun the balance sheet. The decision was also seen as forging the way to the huge changes presented by electrification and autonomous driving, not to mention a defensive action against an oncoming weakening of the market.
Investors also reckoned this put big pressure on Ford, which has been talking about the need for big changes for more than a year, without actually doing anything.
Investment bank Morgan Stanley was impressed.
“Aggressively reducing capacity while earning 10% North American margins at the top of the cycle? This just doesn’t happen. What does it mean about 2019 and the future of the auto industry? Can other (manufacturers) follow GM’s lead?” said Morgan Stanley analyst Adam Jonas.
GM said it would close up to 5 plants in North America and two elsewhere. Some big name vehicles would no longer be produced after 2019, including the Chevrolet Cruze, Chevrolet Volt (hybrids are so yesterday), Buick LaCrosse, Cadillac CT6, Cadillac XTS, and the Chevrolet Impala.
GM said this would save $6 billion by 2020 – $4.5 billion in cost reductions and $1.5 billion in lower capital spending.
Rapid change
“The industry is changing very rapidly. We want to make sure we’re well positioned. These things we’re doing to strengthen the core business,” GM CEO May Barra told reporters.
It may well lead the way to new technology, but GM runs the risk of being too early. There’s not much point in being ready with electric autonomous cars before everybody else, that nobody wants to buy.
The United Autoworkers union said GM’s plans would not go unchallenged. Contract talks are scheduled for 2019.
President Trump, reviving the old presidential tactic of “Jawboning”, said GM should stop making cars in China and make them in the U.S. instead. “Jawboning” describes the bully pulpit occupied by the president, in which he can persuade companies to succumb to his will, even though he doesn’t have the actual power to make them do anything. President Lyndon Johnson revived the practice in the late 1960s.
Morgan Stanley’s Jonas said GM has accomplished something truly unprecedented by eliminating significant excess capacity from a position of strength before the market downturn. GM was making room for a new world.
“Has global auto production of ICE (internal combustion engines) peaked? GM’s elimination of its hybrid platform (the Volt) comes on the heels of VW’s decision to eliminate its plug-in hybrid offering from its European vehicle line-up. Is GM seeing a pace of deflation in battery packs that is pulling forward the point of cost parity with ICE sooner than the market currently thinks?” asked Jonas.
Lowers GM breakeven point
Barclays Equity Research also liked the plan.
“We see taking these kind of cuts well in advance of a potential recession as a positive for GM, as it lowers the company’s breakeven point and reduces the time lag that it would take to launch these cuts in a sales downturn,” Barclays’ analyst Brian Johnson said.
“Moreover, the shift to more profitable products and reallocation of capital is yet another indication of strong operating management. So while these actions will lead to a re-evaluation of GM, we’re nevertheless inclined to believe that investors will be slow to recognize the positives and instead focus on 2019/2020 earnings and what this means as a potential late-cycle signal,” Johnson said.
Johnson said at a minimum, the move provides a potential upside to profit margin expectations starting in 2020.
The Wall Street Journal’s Heard on the Street joined in the cheering.
“Car makers in general are lowly valued because investors assume their profits will disappear in the next downturn. GM’s latest action plan is aimed squarely at dislodging this assumption. Odd as it may sound, Ms Barra’s forward thinking will likely only be vindicated when U.S. vehicle sales finally veer off the road,” Heard on the Street columnist Stephen Wilmot said.
Some applause was almost embarrassing.
“Imagine an auto company which cared deeply about capital allocation. Imagine an auto company which didn’t keep repeating the same investments. Investors, in particular generalists, may be amazed to learn that such an auto company exists. It is called General Motors. As part of (the) announcements, GM sees free cash flow (FCF) increasing by $4.5 billion, which could get GM to a 15 to 20% FCF yield We remain buyers of the stock,” said investment researcher Evercore ISI.
Masterclass
Morgan Stanley’s Jonas praised GM’s foresight, as it attempted to change from being a company tied to the past, to one that embraces the future.
“GM is conducting a masterclass in how to manage a portfolio of increasingly obsolete businesses. Mary Barra’s leadership strength and strategic acumen are proving to be a valuable asset to shareholders. The GM team’s combination of awareness and action (vision and execution) is an example for (manufacturers) globally that must guide these extremely large, complex, and frequently culturally entrenched organisations into new markets while dismantling parts of the business with potentially negative terminal values,” Jonas said.
If you’re a GM shareholder, best keep your fingers crossed that the company doesn’t find it’s the most ready for the new world, about two decades before the public is.
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