Wednesday, 24 November 2010

Company Focus – GM – IPO: Re-Creating the Mighty Economic Cog.

Last week saw the long-awaited return of 'New GM' to the capital markets. As previously mentioned, the timing of its return and that of the drip-fed $600bn stimulus announcement appear - on the surface at least - to demonstrate the US government's willingness to partially stage-manage events to ensure that GM was – and will be implicitly well buoyed.

The post-Chapter 11 process of renewal has seemingly gone 'swimmingly': the speedy restructuring effort witnessing an (incredible $27bn) abolition of creditor rights, a re-alignment of UAW expectations to 'real-world' levels, capacity reduction to suit the peak to trough loss of 6m TIV units (thus profitable at 10.5m production), the shrinkage of the supplier roster to gain volume efficiencies, 4 legendary but poor performing brands/divisions either sold or moth-balled, inventory slashed, dealership numbers cut to promote local profitability, etc etc.

In short, the necessary formulaic strategic and operational business revision required across the board in North America, aspects of which should have taken place in an ordered controlled manner over the preceding years to provide an over-bloated inefficient company with the ability to right-size itself as macro-economic headwinds demanded.

The argument that it was purely the unexpected dramatic loss of sales and loss of access to wholesale credit that felled old GM is far too simplistic. [NB General Dynamic noted the need for US industrial change back in the early 1990s, and though the profitability of the 'SUV era' obviously post-poned the necessary re-structuring shock, the very basic premises of “Who Says Elephants Can't Dance” was always a very basic set-play template for old GM. One it chose to ignore].

However, “the past is another country” as they say – a phrase that is all too prosaic to the average American – and so GM has been re-born into what seems a very different place to that of 3, 5 or 10 years ago, where the US's ability to set the industrial global agenda has been diminished. Yet as a global company, GM obviously operates across all continents and nigh on all nations. Whilst it light-heatedly reports its dominant 85% market share of Kazakhstan's small market it does so to try and highlight its acceptance in EM, EM+ and developing nations; even though such individual successes maybe more accordant to US foreign-policy efforts.

This historical military-backed and capital-markets assisted 'soft-power' that helped GM's rise in the 20th century for nigh on 80 years. However the US is unarguably loosing its dominant grasp across the world as EM(+)(+) economic growth garners independent confidence and such nations use their own political positioning between the US and China for their own ends. Hence without that level of 'direct' previous politically aided dominance, GM will have to fight for its share of mind and market increasingly by its own efforts.

But perhaps not quite yet!

Since the renewed GM gains from additional political leverage in the short and mid-term. A combination of the recent $600bn US QE2 stimulus measure announced will continue to erode the US Dollar – even in the face of momentary reversals caused by volatility in other currencies; as seen with the Euro recently and possibly the S. Korean Won if cross-border hostilities continue.

This in turn of course buoys both US exports and continues the US$'s role as a carry-trade currency (given its near zero percent interest rate) which when 'recycled' in turn provides speculative uplift to the multi-material commodity trading market. Recent days have seen this uplift falter as 'risk-off' activity is swayed by Chinese slowdown concerns, and so provide an excuse for profit taking; but the fact that so many commodity types are both physically and derivatively traded in US$ (given regional $-pegs etc) suggests that the 'risk-on' mode will return.

The drip feed stimulus of course assists all US 'home-players' as they benefit from the $600bn powered expansion of wholesale credit markets for corporate use, and its feed-through into the retail credit market via both captive finance houses (ie Ford and Chrysler) and those 'associated' (ie GM with Ally).

This also provides the Detroit 3 (and GM especially) with global commodity purchasing power, able to counter-act the last few year's trend for primary and secondary sector players (typically miners and processors) to call the pricing shots based on then short-supply materials.

Thus the new Obama package allows the US domestics renewed credit vigour relative to their home market and a type of 'pincer movement' at both ends of the supply chain on the global stage. The aforementioned 'commodities grab', plus critically either the ability to enact a 'pricing-power' fight in ROW regions given the devalued US$, or maintain localised pricing and benefit from an tailwind of FX improved repatriated income from its ROW operations.

Thus GM (and Ford & Chrysler) have in reality little to complain about, whilst their international competitors (and international politicians) very probably see the implicit Washington interventionism for what it explicitly is!

Macro global dynamics demonstrate that the RoW EM regions are on a one-way upward trajectory and have been for a decade, so GM's task is to hold and ideally grow its individual nation market-shares in EM regions as their economies give a rising tide to all credible automotive manufacturers.

Thus, the IPO floatation was almost designed around the fact that all boats will be lifted by continued though slowed EM market growth. Its timing aligned to the stimulus announcement and drip-feed to provide a 'kick off the starting blocks'. This will be readily recognised by leading institutional & SWF investors, and investment-auto-motives believes, was a major reason as to why the natural demand-base of GM stock-buyers switched from being foreign 'long-range' funds and SWFs to primary demand stemming from domestic US institutionals.

[NB Saudi Arabia's 'Kingdom Holding' run by Prince Alwaleed bin Talal well recognising the impetus of Dollar mutuality between its own national resource base and GM's 'kick-start'; hence its $500m holding of GM, representing 1% of the new subscription].

Yet, ultimately important investors will want to see GM master is the ability to not just match, but beat the EM region TIV rise. Done so with competitive new product, hard-line UAW re-negotiations in 2011 (to which it should hopefully continueto accord), new levels of customer service provision etc; so that when combined with a new 'trim' business mentality it can offer rebuoyed global presence, good unit margins and so ideally leading mainstream producer ROIs. Thus an ability to not just out-muscle Detroit's Ford & Chrysler (as it has always done) but critically against the Japanese powerhouses suffering from Yen strength, and the South Korean brands still globally-bound by their high exportation levels. And importantly to try and be seen as a true competitor to Volkswagen given its pre-eminent position in China and South & Central America.

[NB as of 24.11.2010 VW PfD sits at around E119.00, whilst GM Co sits at $33.48. VW benefited from a rocketing ride over the last 12 months, up 108% in a sector that on average saw only a 27% rise. GM Co is up just 48c from its debut price last week, and as stated in previous posts is set to trade flat until the stimulus monies work through the capital markets and starts the GM price lift].

GM has to yet prove it's renewed 'global' ambition is not simply a 'rising all boats' default of inherited regional presence in China, Latin America, SE Asia and the Middle East. Efforts such as the new Cadillac city-car concept seen at the LA show (the Cadillac Urban Luxury Concept) typify the GM 'show-boating' that it has always under-taken on the PR front to present itself as a contemporary brand, but the reality is that presently in its home market it is not even represented in the top 5 of most popular models sold – coming in at number 6 with Malibu: destined to slide as it ages.

With so much expectation abound from the expanded range of stakeholders, new GM cannot let itself simply 'drift' on the back of: 1) the multi-aspect stimulus 'piggy-back' that exploits the supply chain and international markets, and 2) the fat of the EM+ lands.

Presented at $33.00 to the markets, GM Co must prove that it is worth its relative (pricing-metrics) 'super-valuation' to its obvious counter-part Ford and the myriad of other auto-sector players, old and new.

Almost poetically, the GM Co IPO was preceded by, an NYSE listing of a Chinese-based on-line car dealer-price comparison site, and was followed by Aeroflex Holding Corp which deals in high-value micro-electronics systems. By virtue of their appearance, these two 'neighbours' serendipitously illustrate the importance of GM's own future ability for self-control: to both be master of its higher integral-value product design process, and its handle on what is still a very transparent and price malleable vehicle market-place.

GM has had its enforced 'weight-reduction' regime, and has had its 'push-off-the-blocks'; now it must show its corporate 'muscle-building' potential to all, but especially so those US and foreign entities who have financially backed the General, and by virtue assisted re-couperation of the US economy. The heart of the GM wealth-creation engine is seen throbbing, and the cogs of the financial transmission mechanism meshing, now it needs to prove its previous 'market torque' to show it has a truly bounce-back corporate rubber soul, since many heads of industry, finance and government are looking on after providing record assistance.