The stock market is, as ever, a milieu of mixed opinion. It's that very fact that creates capital markets, a fact that over the last 11 days or so been the illustrated beyond doubt through the dominance of 'shorting', a much debated tri-part, tri-opinion trading strategy that speculatively injected the latterday major turmoil that further undermined the US financial sector.
The Fed and SEC stepped-in after the collapse of Lehman Bros and effective collapse of AIG to try and halt the blood-bath, effectively telling Capitol Hill of its actions after the event instead of seeking prior approval, as would be the norm.
A major aspect was of course the temporary and indeterminate prohibition of 'Shorting', the consequence of which wiped billions off of investment banks' capital values, and a threatened to continue as a trend amongst other theoretically less vulnerable sectors...such as industrials and autos.
As a safe measure, and recognising the acute contagion that could result, the regulatory authorities took a step-back to draft a list of those large companies that it considered essentially 'at threat' . General Motors, though of a relatively low market capital value compared to other 'high-value' corporations industries, is through its own propping-up of Delphi and other up and down-stream interlinks obviously still critical to the national economy and as such had to be protected.
But of course where the capital markets cannot short, investor sentiment will be evident enough in the rise of company stock sales, and GM's recent 11% plunge only adds to the pain of a 53% 12 month slide and noted as the worst performer in the Dow Jones Industrial Average Index.
Detroit is of course in the process of endeavouring to secure the initial $25bn low-interest loan from Congress and ironically as GM's price slides and it's rate of valuable cash burn increases (drawing on the final tranche of its final $3.5bn revolving credit line) so the need becomes more evident and incontestable from Congresses.
Though we agree with a Citi note that this doesn't yet demonstrate financial distress, GM having approximately $19bn cash at hand at end Q208. Yet equally it can't be denied that in these presently frozen financing conditions accompanied by declining global vehicle markets, that the corporate cupboard is being quickly depleted, even if not bare.
Most recognise that it will be the availability of corporate liquidity that will act as core- sustainance in the journey ahead, for however long that takes - a lesson was well learned by Japanese companies over the last low-growth 15 years. Not that the US is expected to experience such pain, simply that at such cash-critical times the need for an imminent $8bn to assist hefty operating costs is far more preferably achieved via Congress. This is undeniably a far more ameniable source compared to high cost bond issuance since Fitch re-rated GM onto “CCC” (6 grade into 'junk'/'high yield) or indeed running the risk of failing to ensure the underwriting and full market acceptance of additional equity issuance.
[NB. that rumoured/appropriated $8bn being unsurprisingly approximately one-third of the $25bn (initial) sum sought by Detroit's Big 3].
As things stand, the markets appear to be awaiting that critical Federal assistance and in the meantime rationally drawing down the price to both:
a) gain on the upswing of a very probable Fed announcement, and conversely
b) appropriation natural decline to have the stock find a natural p/e bottom to reflect what would be disappointing earnings outlook.
The biggest investor concerns are of course net income levels and the rate of 'cash burn'. Although Q307 & Q407 had hefty and record $37bn losses, the vast majority of that was due to deferred taxation and elected use of working capital, thus were seen to a degree as extra-ordinary factors unreflective of ordinary operating profit . However, although far smaller the Q108 and Q208 losses of $3.25bn and rapidly formed $18.7bn appear to be pure operating losses with Net Cash declining, Q107 at -$1.59bn and Q207 at -$2.2bn; down heavily from what were (in comparison) buoyant late 07 figures. Analysts and investors know that losses have been incurred on the back of an ever sickly North American home market, they are keen to see that the company retains enough cash to ensure it gets through this biting (now recognised) recession....and onward to 2011 to enable exploitation of an eventual US consumer upturn mid/end 2011.
However, over recent weeks the 'cash burn' question has grown more prescient given the the fact that the 'fiscally assistive' overseas EM markets (BRIC particularly) are now contracting rapidly. Although still in comparative growth mode, the level and speed of economic slow-down is concerning. Once confident Chinese, Russian & Indian consumers have, due to cultural impetus and lack of credit reliance, reacted quickly to the financial turmoil eroding domestic stock markets and so subsequent economic outlook. Only Brazil stands at best static, better than nothing, but of little effectual consequence relative to a large global corporation such as GM. Although market leaders in China and Russia their size and exposure to highly elastic, promiscuous and now cost conscious buyers will be problematic.
As margins in China have been squeezed over the last year due to the intensity of competition, so we'll see the same effect in Russia, though note not to the same degree. Just how it plays out it terms of model mix market demand and VM's reaction we'll have to see. But whereas slowdowns invariably boost small car sales – as seen in US and W.Europe – consumer's status-orientation is a dimension of emergent car markets that shouldn't be under-estimated, so careful regional planning will be required to balance production and costly import volumes of local portfolios.
Thus at this juncture, GM (like its Detroit brethren) faces yet another headwind. Unlike the former mid-stream UAW & legacy costs, or the upstream problems of price-spike oil and accordant massive input-price inflation, the focal concern at present is demand and profitable output. The adjustment of region EM demand will undoubtedly be required, and may halt EM projects to conserve cash, but equally important will be the need for GM to replicate its negotiational skills abroad (as seen with UAW, Delphi & now Congress relationships) to broker new business bases that suit the potentially dramatically changed commercial environments within the critical 4 EM regions. Even if BRIC growth is simply a 'hiccup' as some suggest, all the better to use this period to ensure improved margins at the earlier up-turn.
Speedy, large scale cost-savings across the board is what analysts will want to see to 'right-size' each regional division to suit the near and mid term, ie 2009-2011, so as to see GM pick-up across the globe post-2011.
But the biggest question remains, that today at the the company's centennial year, what shape should a 21st century GM take - structurally, operationally and fiscally?
Given the intrinsicly low profitability delivered by a traditional capital intensive mid-20th century business model, now better suited to Asian economies as seen by the Auto's C of G shift, in which direction should GM be moving? Importantly what is the routemap for getting there?
Yes there is the showcasing of the plug-in 'Volt' and the promise of a new world automotive dawn to combat energy price and security issues, but that will take many years to become the norm given technical, manufacturing and infrastructure headwinds. Thus even if the mechanical engineering that supports GM stays largely conventional (bounded at mild and mid hybrids), why should its operational/organisational structure remain the same?
Yes electric vehicles promise improved profitability when the technology with an inherent reduced BoM is enabled for mass manufacture, and efforts must be kept going But why stop there? Couldn't the nervana of profitability be extended further still by re-engineering the company as a whole, step by step by step? Effectively adding a commercial business model 'range-extender' of its own.
For even heavily regulated capital markets will want to see new realms of value extraction and those actions need not stop at the product, or indeed traditional operational activity. In a much changed world of consumer-corporate symbiosis, value extraction through philosophical transformation will be key, it should be part of a corporations own profit maximisation agenda and be intrinsically woven into CSR ideals.
For the moment, the future seems a long way off, nonetheless, GM investors – especially the 'large-slice' funds – will want to see how the pragmatic reactions to today's demands are aligned within the scope of long-term ambition.
Investors and Congress will not want to GM simply take another skip around the same old mulberry bush with private and tax-payer's money. Both deserve to see and recoup from far more.
