The Business Case for General Motors
GM will thrive when automotive restarts
The entire automotive industry essentially is closed for business due to COVID-19 as states have enacted stay-at-home orders to fight the virus. Many vehicle assembly plants around the world are shuttered, eliminating much of the revenue automakers derive from vehicle production and shipments to their dealers. IHS Markit is forecasting global vehicle production to decline by 18.8 million units versus 2019 levels. Global vehicles sales are projected to decline by 18 million vehicles, worse than the 2-year sales decline seen during the global recession of 2008 and 2009. In the U.S., vehicle sales fell 54 percent during the week of April 12 according to JD Power. This is an unprecedented contraction in the industry over a very short period of time. Some automakers will be severely damaged from the strains of this contraction. Other automakers can use this crisis as an opportunity to exit this period in a position stronger than competitors. General Motors is one of those automakers positioned to prosper post-coronavirus.
Not Your Father’s General Motors
The foundation for GM’s opportunities were laid years ago. Matthew DeBord wrote a compelling piece in October 2018 for Business Insider highlighting how GM had become one of the best managed automakers in the world. As DeBord explained then, the company had generated billions in profits over the past ten years, while executing the biggest strategy changes not seen “since the company rose from the ashes of bankruptcy.” Industry historians have to point to the General Motors era of Alfred Sloan to find a period of more fundamental strategic changes at the company than what has occurred post-bankruptcy.
Wall Street will be convinced that today’s GM is a better GM only after the company shows it can thrive both during and after a major recession
Today’s GM leadership team led by Chairman and CEO, Mary Barra, have made numerous strategic decisions important for driving profits today and positioning the company to thrive in a rapidly changing industry future. GM has exited many unprofitable businesses and markets, invested in popular and highly profitable pickup trucks and large SUVs, while also accelerating the development of electric vehicles and self-driving technology designed to lead the company into a new world of mobility solutions. Wall Street has yet to reward the company for this strategy, however. In fact, GM’s stock price is lower today than its $33 IPO stock price in 2010. This, in spite of the fact the company has generated over $53 billion in net income since 2010. The company even made $6.58 billion in 2019, a year that also included a 40-day labor strike costing the company sales of 191,000 vehicles. Wall Street will be convinced that today’s GM is a better GM only after the company shows it can thrive both during and after a major recession. That time is now for General Motors. This is the period for the company to show that it’s one of the best automakers in the world today, as well as a company positioned to thrive in the rapidly changing automotive landscape of tomorrow.
The Power of the Pickup Truck
GM’s North American operations earned $8.2 billion last year, with the primary source of profits for North America coming from the company’s pickup trucks. Between the Chevrolet and GMC brands, According to Automotive News, GM sold slightly over 800,000 full-size pickups in the U.S. in 2019. Reuters has calculated that GM’s full-size pickup trucks generate at least $17,000 per vehicle in pre-tax profit. Sales of the company’s pickups are holding up well even during this current period of severe industry sales contraction. In the first quarter, GM grew its full-size pickup truck sales by almost 28 percent. However, combined pickup truck sales for all other full-size truck competitors fell by 7.2 percent during the quarter. This suggests better resilience in GM’s truck sales versus their full-size pickup truck competitors. This GM truck sales strength suggests inventory of GM pickup trucks will be lower once assembly plants are able to restart. Low levels of pickup truck inventory mean GM will be able to produce their most profitable vehicles as quickly as possible to replenish dealer inventory. This puts GM in the best position to generate the most revenue faster than competitors.
72 percent of GM’s profit in North America are attributed to full-size SUVs and pickup trucks
General Motors dominates the industry in another highly profitable vehicle segment — the segment of full-size SUVs. These vehicles are the Chevrolet Tahoe and Suburban, the GMC Yukon, and the Cadillac Escalade. While competitors have eaten into GM’s market share of full-size SUVs over the past few years, GM still commands 54 percent share in the full-size nonluxury SUV segment. To maintain or grow market share in this segment, GM will introduce all-new version of these vehicles this year. While several GM vehicle programs under development are being delayed due to COVID-19, the company recently announced these SUVs will go on sale as planned this year given their importance to the bottom line. According to a Barclays estimate, 72 percent of GM’s profit in North America is attributed to these full-size SUVs, along with the company’s full-size pickups. This represents a substantial competitive position for the company as automakers strive to generate profitable revenue as quickly as possible coming out of the coronavirus-driven shutdown. And with the newest full-sized SUVs in the segment coming this year, GM stands to grow their share of this segment while generating the substantial profit these vehicles bring to the company.
GM sold over 3 million vehicles in China
China is the by far the world’s largest automotive market with vehicle sales that have exceeded 20 million units since 2015 according to a McKinsey China Auto Insights study. Although vehicles sales in the country have declined over the past two years, 2019 sales still totaled almost 26 million vehicles (versus 17 million in the U.S.). China is also GM’s top-selling market, with the company selling just over 3 million vehicles in the country in 2019. China has become very important to GM as the company has eliminated operations in many other international markets. In fact, GM is the second biggest international automaker in China, only behind the Volkswagen Group. While North America still provides the majority of GM’s profits, the company still made $1.1 billion in China last year, even during a period where GM sales in the country fell 15 percent.
Electric vehicles will dominate China’s vehicle landscape
For global automakers, China is a key market for any company hoping to succeed in a rapidly changing automotive world. The Chinese government is mandating the introduction of electric vehicles over the next several years. According to Investor Business Daily, the Chinese government could require that 60 percent of vehicle sales in the country be electric by 2035. General Motors is well positioned to capitalize on this push toward electric vehicles in China and other areas of the world. GM will introduce 20 new electric vehicles globally by 2023. The company has a goal of selling 1 million electric vehicles in China and the U.S. by 2025.
Every GM brand will get new electric vehicles added to its portfolio.
In early March, GM showcased evidence of its plan to transform the company to a producer of electric vehicles during a presentation to investors and media. At that event GM’s President, Mark Reuss, described the effort as “the biggest opportunity ever for the company…and a chance to reinvent GM and its brands.” The company showed off its new electric vehicle architecture as well as new advancements in battery technology in partnership with LG Chem. Noteably, every GM brand will get new electric vehicles added to its portfolio of automobiles. Cadillac is getting two all-new electric SUVs as well as a flagship electric sedan. The Hummer name will be revived for the GMC brand using an electric sport-utility truck along with another electric SUV. Chevrolet will get a new electric SUV, an electric pickup truck, and a redesigned electric Bolt, as well as another larger Bolt vehicle.
A future of self-driving mobility solutions
And then there’s the Cruise Origin. Origin is GM’s best evidence of creating a world described by the company of “zero crashes, zero emissions, and zero congestion.” Origin was born out of GM’s 2016 acquisition of autonomous driving startup, Cruise Automation. Revealed in January, Origin is an all-electric vehicle designed to travel at highway speeds autonomously with no steering wheel or pedals. Origin has a large interior with seats that face each other. The seats are designed to accommodate the needs of each individual in the vehicle. Origin was not revealed as a concept vehicle. It’s a production-ready vehicle that will be produced at a Detroit-area GM assembly plant being converted to produce only electric vehicles. Origin is GM’s effort to capitalize on a future of self-driving mobility solutions. Dan Ammann, the Cruise CEO, recently stated that the mobility business that Origin represents will be an $8 trillion market opportunity. Many companies are investing heavily to develop solutions designed to profit from this multi-trillion-dollar industry. In the category of traditional automotive companies, however, there’s no automaker further along than General Motors.
General Motors is well-positioned to thrive in a post-coronavirus world. The company is prospering today while financing its future with profits from its pickup trucks and large SUVs. Its ability to generate substantial profit in 2019 while withstanding a 40-day labor work stoppage is evidence of a new financial discipline the company established after the period of its bankruptcy. GM was early to recognize a future automotive landscape which is now beginning to accelerate. The internal combustion engine will be supplanted by electric vehicles globally. Personal transportation will shift from individual vehicle ownership to transportation-as-a-service capabilities. These industry changes are no longer a matter of “if” they will occur, but “when” these business changes will take place. GM’s stated goal of zero crashes, zero emissions, and zero congestion is more than a slogan. It’s a goal being supported by major investments designed to drive GM from a profitable automotive company in today’s world to a profitable company in a new transportation world of tomorrow.
Written by
Randall McAdory
I own shares of General Motors stock as well as other companies developing electric vehicle mobility solutions.
