General Motors Braces for a Tough 2012
It's no secret that the rate of auto sales in the U.S. -- currently projected to total about 13 million in 2011, give or take -- is running well below pre-economic-crisis norms. Back in those heady pre-2008 days, annual sales rates of 16 million or more were commonplace.
Tightened household belts (and to some extent, tightened financing) mean that it may be several years before we see sales get anywhere near that level. But while some analysts have sounded a hopeful note for an uptick in 2012, at least one influential voice thinks those hopes are misplaced.
A pessimistic note from a hard-nosed realist
General Motors (NYS: GM) CEO Dan Akerson sounded a relatively gloomy note in a recent interview with Automotive News when he predicted that U.S. auto sales would be roughly flat in 2012. That's a dimmer view than some analysts have been taking recently, but even that projection was qualified: Akerson is (rightly, I think) worried that the European debt crisis could drag down economies around the globe, and expressed concern that should the crisis' effects spread, an economic retreat here could drag auto sales down further.
The good news, though, is that GM should continue to make money unless things become dire, thanks to its carefully managed break-even point. The positive effect of GM's painful restructuring is that the company expects to make money as long as the overall level of auto sales in the U.S. stays above 10.5 million -- a rate not approached in decades, except during the very worst moments of the economic crisis.
GM's chief goal during its recent labor negotiations was to preserve that break-even point, something management now says it was able to do successfully. But GM's prospects for profits during a downturn have also improved thanks to a U.S. market share that has risen from 19% in 2010 to 20% through the first three quarters of 2011. Much of that gain is attributable to the supply chain troubles affecting Toyota (NYS: TM) and Honda (NYS: HMC) in the wake of the March tsunami in Japan, but Akerson is optimistic that GM will be able to retain those gains -- despite suggestions that the Japanese giants will resort to heavy incentives spending to boost their sales.
Can GM really hold its market share gains?
Akerson thinks GM will retain and maybe even expand on its recent gains in market share without having to resort to heavy incentives spending, and gives two reasons for his optimism: First, the yen's appreciation has squeezed margins at all of the Japanese makers, particularly on cars exported to the U.S. from Japan. Toyota executives have said that currency appreciation has cut profits by an average of $4,000 per car, which seemingly leaves little room for discounting. Simply put, Akerson feels that the yen's strength makes it unlikely that Toyota will be able to sustain an incentives campaign.
Akerson also points out that GM's product line is stronger and more competitive than it was a year ago, particularly when it comes to the smaller, fuel-efficient models that are Toyota's and Honda's bread and butter. The compact Chevy Cruze is consistently ranked with the class leaders by reviewers, and early reviews of the new Chevy Sonic subcompact have been similarly positive. With Honda's current offerings in particular looking uncharacteristically weak by comparison, this may be a major moment of opportunity.
Why GM should be optimistic
The Sonic, a small car that (like the Cruze and the upcoming Chevy Spark) was designed largely by GM Korea, will compete directly with the Honda Fit and the Ford (NYS: F) Fiesta, but with an interesting distinction: It's the only car in its class that is built in the United States. The Fiesta, designed by Ford's German arm and built in Mexico, has won new customers for Ford in areas that are traditional import-brand strongholds, like Southern California. Like its larger Focus sibling, much of the Fiesta's success is attributable to its German roots. Like many small cars sold in Western Europe, the Fiesta is trimmed and accessorized more like a luxury car than like the Spartan, small cars one expects to rent at airports.
That's a formula GM has used successfully with the larger Cruze. Americans are willing to pay more for a small car that doesn't feel cheap, it turns out, and that has allowed GM (and Ford) to make good profits on classes of cars that were historically marginally profitable for Detroit, if that. These small cars are part of a broader product renaissance unfolding at GM that, so far, looks just as impressive as the one driving Ford's tremendous success over the last couple of years. And that, as much as any other factor, is a good reason for Akerson to be optimistic about his company's prospects.
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At the time this article was published