Rethinking the Great Auto Industry Recovery Story
For the better part of a year there have been many assertions that the auto industry was on the road to recovery with optimistic projections of sky-rocketing vehicle sales as consumer demand was to return to pre-recession levels. At the time of General Motors' IPO less than a year ago, many reports circulated implying that the stock would be a sure win. One major financial TV network even started a campaign to have all taxpayers "benefit" by being allowed to participate in the IPO.
Not long afterwards Wall Street analysts, most with a vested interest in the IPO, initiated their coverage with rosy projections and price targets for GM shares that were in the $40 to $50 range. The Obama Administration boasted that taxpayers would get back all of their $50 billion that was sunk into the GM bailout at the time of its initial bankruptcy filing. Now, months later, we can look back and question why the predictions were so wrong.
Competition in the auto manufacturing sector has been intensifying for years. Newer players, like Hyundai and Kia, have begun building quality vehicles and can offer them to consumers at great values since operating costs are not burdened with UAW overhangs. Manufacturers like VW and Subaru have also improved over the past few years. An automaker has to be at the top of its game to compete and succeed through different economic cycles in this environment. For the period leading up to its bankruptcy in June of 2009, GM was unable to do so. It is questionable if they now can.
During strong economic times even weaker auto manufacturers like GM and Chrysler are able to operate profitably. Just a few years back, monthly reads of annualized light vehicle US auto sales were running at around 17 million per year. This number fell to about 9 million per year during the slowdown in early 2009. GM and Chrysler were unable to compete at these levels. In normal industry cycles, consolidation would occur and weaker manufacturers like GM and Chrysler would have to leave the industry or be absorbed by stronger companies. The industry as a whole would benefit as the best run corporations prospered. The decision by the Obama Administration to protect the politically influential UAW by throwing billions of taxpayer dollars at the problem without fundamental changes at GM was a short-sighted solution that upended over 200 years of capitalist free market philosophies and contract law.
When sources touted the great recovery of GM and the auto industry in general, projections were made that pent up consumer demand would drive vehicle sales closer to pre-recession levels. What was overlooked was the fact that these past levels of sales were unsustainable and highly correlated with the economic and housing bubble which drove the sales. Consumers were freely tapping into home equity lines of credit to buy themselves new vehicles as well as buying for the kids who were going off to college. Car loans were stretched out to six and seven years as buyers traded in vehicles that were worth less than what was owed on them with the balance being financed along with the new purchase. The current lack of access to home equity money and the fact that many car owners are still "upside down" and owe more on their cars than they are worth will continue to hamper sales.
Another assumption that will most likely be proven false is that auto manufacturers now have pricing power and can pass along higher costs to the consumer. The problem with this assertion comes back to the competitive environment. With ample supply of vehicles compared to demand, manufacturers are likely to increase incentives to gain market share, particularly during any slowdown. GM has a history of being one of the most aggressive auto makers when it comes to offering discounts. This fact has weighed on share price in the past.
The bottom line is that Americans and the US government have been borrowing and spending more than they could afford for many years now. It was foolish to think that in such a competitive market as auto manufacturing that sales returning to lofty levels would drive GM profits and share price. Granted, the lows for sales in 2009 were not normalized figures, but there is increasing realization that recent sales projections were too optimistic. And the risk of a double-dip recession adds even more uncertainty to the prospects for auto manufacturers like GM.
Now the big question is, was the GM and auto industry hype based on anything other than miscalculation? I have been warning about the risks of investing in GM since before the IPO. Shares are now down about 40% year to date. Since last month when I criticized Treasury's market timing decision to hold its stake in GM, shares lost over 20% resulting in a paper loss of about another $3 billion in that time frame for taxpayers. Did people like me really see something that high paid pundits did not, or did the vested interests of media sources and analysts influence the coverage? How much influence does the $3 billion that GM spends on ad revenue buy?
Some analysts are finally toning down their hype on GM. I stated months ago that much of the good news was behind GM (along with other risk factors); analysts' downgrades were inevitable. Statements out of GM itself have also been misleading. Individual investors who bought on the hype are suffering huge losses.
Investors have been mislead on a number of fronts regarding the prospects for GM. GM has given very optimistic opinions for China sales profits, Chevy Volt potential, and balance sheet strength. The statement by CEO, Dan Akerson, that there was $40 billion of "cash" on the balance sheet was not true. China profits and Volt performance speak for themselves. Forward looking statements and misrepresentations are the stuff that class-action lawsuit attorneys live for. It will be interesting to see if any actions will be taken if GM share price continues to fall.
The unprecedented GM story may bring about more unprecedented actions. Do TV networks that stated GM would be "printing money" or that "share price would either hover around where they are or take off" have liability? Statements like these along with the IPO participation push without disclaimers to seek professional advice before making investment decisions make you wonder if investors who based their decisions on the hype and lost money would have a case in court. At the least, some accountability should be taken by those who hyped the GM IPO and the Chevy Volt rollout.
There has been much to criticize throughout the GM bailout process. Perhaps these criticisms will die out if or when GM gets back on a path to success. Maybe the economy improves and GM turns things around. That notwithstanding, the current performance of GM and the losses being incurred by taxpayers and investors warrant debate and should not be overlooked by mainstream media.
Republicans who are in control of Congress also have a responsibility to question what happens at GM. Why hasn't more been done to safeguard the billions of dollars of taxpayer money being used to promote the Chevy Volt, which has limited or no benefits to the environment or foreign fuel independence? How much more will be wasted developing a Cadillac version of the vehicle? Perhaps only a grass roots movement can influence representatives to demand accountability for what transpires at GM.
There is a group of individuals that would not consider purchasing a new GM vehicle because of the tainted history of the bailout or because they fall into the group of individuals that were hurt by GM. In the very competitive auto industry, that may make the difference between success and failure for GM. Ignoring the issues facing GM will not make them go away. The mainstream media should have a "fair and balanced" debate on the happenings at GM, regardless of the ad revenue they receive.
Mark Modica is an NLPC Associate Fellow.