Since Adam Smith wrote the economic bible 'The Wealth of Nations' (published in the same year as the USA declared its independence) the fundamental theories of modern investment have been engrained into the popular consciousness. Whilst not rocket science in principle, the prompting and exploitation of value creation can be in reality much harder, when much must be orchestrated at the appropriate time, as any Activist Investor or Board Member well knows.
Since “ timing is everything”, all important is the convergance of a firm and/or sector's discarded baggage and the ability to see untapped potential, obviously set against the macro-economic picture. Reading that moment and creating that routemap are the fundamental aspects of value creation.
So at a time when the American Auto-Sector, has shrug-off much of its fiscal drag with the transference of legacy commitments to union backed VEBA's even through there are certain undeniable headwinds, it could be argued that, with the shake-out and consolidation of the supplier base that the industry is getting back into shape to properly plan for the future.
Amongst Detroit's Big 3, beyond a privately held Chrysler and a resurgent Ford (on stock price and p/e basis) it is GM that comes under the spotlight for greatest attention given that:
- its US market share has hit an all time low of 20.5%,
- its stock hovers at a very low $17 (from a high of over $40 only seven and a half months ago & a massive decline to the late 1990s $80 price),
- the obvious correlation to general US economic well-being.
An ever increasing globalised world both offers domestic challenges in the way of competition (as we see), but also increased opportunity to ride the wave of international emerging market expansion. Now that's taken for granted as is the same case for many VM's, the problem for GM is sorting-out its home-life back in North America and fundamental questions regards future strategy must be asked.
Now at its centennial years it's easy to see how the corporation grew in the early years of America's automotive emancipation through Durant's raft after raft acquisitions of peer automobile makers, taken under the wing of his holding company GMC. Under Sloane's leadership the complexities and production costs of “a car for every pocket” were rationalised, and the 'span-all' corporation was to become eponymous as an object lesson in economy of scale, and unsurprisingly that set the tone for the next 75 years, the volume of generic parts the central pillar to operations.
As we know, the sector's historic process of rationalisation and consolidation saw the emergence of the Big 3, the common parts philosophy intrinsic to the corporate success of all, but for GM with the widest brand portfolio and an ethos of being risk averse (unlike Ford & Chrysler) common platforms was an entrenched idiom that the corporation was built from and it stayed. And as both a social satiator and fiscal generator – indeed becoming the national economic machine - “what was good for General Motors was good for America”.
However, even 50 years ago by 1958 the power of the companies central planning clearly positioning each brand as different customer propositions was, because of internal and external competitive forces, started to unravel, a stretching of brand ranges/pricing ladders creating overlap. Those forces endured through the 60s with the rise of compact cars and into the break-point of 1973 with the oil crisis and the surge of VW, Toyota & Datsun and Detroit's tardy retorts. But GM's product lows came in the mid '70s to 80s when the push for profitability (using not only common platforms but common skin panels across the various brands – differentiated through nose/tail, exterior trim and interior treatments) succinctly demonstrated that a Chevy and a Cadillac shared not just a bloodline, but an engineering father and styling mother. This allied with reliability/quality problems saw the migration of more discerning customers to Japanese mainstream and European upmarket vehicles. Cars that were designed as pure to the brand's core values and intentions and, critically, designed with commitment to be 'fit for purpose', whether a Toyota Corolla or BMW 3 series.
Through the mid to late 80s GM senior management recognised the foreign threat and witnessed Detroit Brethren raise the bar in reaction, and also so thanks to a 1990s rising economy, was able to set about 'de-commonising' and through SUVs stretching its vehicle range. But the post-9-11 down-turn, massive oil price rally, greatly hiked input costs and 3 quarters of deepening 'credit crunch' have left the work of all the Big 3's efforts unrewarded as bigger picture macro forces take hold.
Given its size GM has been perhaps hit hardest and must find a way to maintain traction that may have to go beyond the paradoxical, even ironic, campaigns such as the honorific “Mark of Excellence” chrome badging vs “Employee Discounts to All”. These were deeply troubling initiatives that clearly send out hollow mixed messages, and though they worked for a period in shifting stock, as the industry saying goes its “sold out tomorrow's order book” as buyers traded in early; helping the revenue base of the last 2-3 years but now facing the double whammy of a dried-up regular customer base, and because of the loss of sub-prime credit buyers, a loss of the 'extension' buyers – with the market looking its weakest in decades.
Thus GMNA faces a truly onerous task of putting its house in order. It is of course in a transition phase, endeavouring to wean itself off of SUVs whilst still purveying trucks and new (probably diesel-centric) technologies for the most-part playing a critical role - even if 'plug-in' hybrids are vaulted more highly. [GM is far behind even Ford and woefully behind Toyota in the hybrid sales race as of Q108]. But with a shrunken, lightened vehicle-line plying better MPG and CAFE measures, there is a natural re-bound to be had...but will going through the same ol' same process as before be enough? Previously execs wore 29% badges indicating that would be their defended market-share base; that dropped to 24% in H1'06 and now we see 20.5% in Q208 (vs Toyota's 17.4%).
From an stake-holders perspective (whether institutional investor or finance house) investment-auto-motives believes that GMNA may have too little left in the tank for such rebound , especially given the intensity of homeland competition and the large, inter-rival and often spurious, brand stable that soaks up heavy overheads. The extinction of Oldsmobile highlighted its market-disconnection, its own loyal band of older customers naturally expiring, not replaced by other 'grey-market' customers – in truth the brand had had its day, and new 'greys' had already been driving Camrys , Accords, Sebrings and Japanese X-overs like RAV4 for years.
So, in reality, what have GMNA's divisions become? The homeland market squeeze and search for new global frontiers in international waters demonstrates that the central propositions of many of the brands and vehicles have in effect become little more than alternatively badged commodity cars within their respective sectors, value-deal led and carrying too much intrinsic feature-based cost as opposed to clear design-led, cost-conscious proposition. Of course common platforms impose a level of engineering envelope constraint, but as VW demonstrated with its A4 platform in the 1990s spawning everything from a Seat hatchback to an Audi TT, and as GM-Holden demonstrates with its flexible (now VE) Commodore large car platforms, much can be done to extract different wines from the same grape.
However, even with a renaissance of engineering intelligence, the real problem may be the need to manage so many vying brands, because even a highly modular platforms base will ultimately inadvertantly create overlap products as each division chases eachother's sales. On the production side, scheduled closures of what have become over-capacity, loss-making truck and SUV plants in Ohio, Wisconsin & Oklahoma, car plants in Tennessee and Michigan and parts factories elsewhere , will certainly ease redundant heavy fixed overhead and variable parts costs.
But even with these actions, that long promised rebound could take far longer than desired. And that is why alternative divestment schemes should be fully assessed to create a broader scope of re-couperation, break-even and postive profitability – much sought after the Q108 loss announcement – the heaviest in America's corporate history.
So, just as we see with Jerry York's & Tracinda's call for Ford to divest of Volvo due to its mis-alignment to Blue Oval and intrinsic open market value, so shouldn't GMNA be assessing the commercial value of each of its divisions? The commissioning of a boutique consultancy allied to the M&A division of an investment bank would be able research and recommend upon a range of commercial options, from the open-market worth (to intrinsically gauge the elasticity Goodwill) to the licensing off design-rights and tooling.
So of the present NA stable (Saturn, Chevrolet, Pontiac, Buick, Cadillac, GMC & Hummer) which have room for improved re-bound if not operationally dragged back by lack-lustre performers, and which of those lack-lustre brands could be better served through alternative sale or licensing arrangements?
The domestic slow-down of Buick (down over 45% since 2002), countered by its high-flying Chinese success, would seem the obvious candidate for a re-structure of business operations. As its stands it looks like its headed for an Oldsmobile-like extinction path with discontinued product not buoyed by new cars, so something must be done to both help it serve itself and unburden the operational focus of GMNA. To date, heavily intrinsic, but informal operational links span the US, China and Australia, fair enough in developing the Chinese offering, but now is the time to start to shift responsibility away from the US and operate an quasi-independent management, design and production framework, putting the Centre of Gravity firmly in Asiana.
This scenario opens up the dialogue about which brands should find natural new owners and possibly regional homes. We believe this would streamline GMNA operations and re-balance the natural powerbase of GM worldwide. When that finds its balance, why not then actually look at each of GM's international divisions (GMNA, GME, GMAP & GMLAAM) to assess the viability for individual independence, with GM itself as a hub-like entity maintaining a powerful share in each newly separated and value-creative spin-off regional divisions.
The point is that GM and its investors should look to see how GMNA could start a process of operational re-configuration to set out a new path, one beyond the historic boom and bust created by the thrust and drag of North America.
Durant pulled together those separate brands to create a new whole, but under today's and tomorrow's much changed, eastern emergent world, now at 100 years old, it may be time to
seek value through de-construction and re-construction.
