Big Three face scrap yard
The US has for decades ceased to be a manufacturing economy
GENERAL MOTORS, the world’s largest motor vehicle manufacturer, is on the point of collapsing. The United States Congress and Treasury are considering various plans to save this icon of American manufacturing – probably from its own folly over the past five or even 10 years.
Americans call companies “zombies” that have to be saved by the state in what’s now developing into the worst financial crisis in world history. GM – as well as Ford and Chrysler, the other two members of the trio that dominated the US motor industry for so many decades – is on its last legs. Ford’s money will last slightly longer; and Chrysler is hoping it will be taken over, after Daimler gave it back to the Americans free of charge a few years ago.
Americans “consume” around 15m cars/ year. For 2008/2009 that figure will fall to 13m and that decline will be the final nail in the coffin for those three former US giants. In fact, they should have disappeared a long time ago: the US has for decades been a consumer economy and not a manufacturing one. The contribution of its services sector to gross domestic product (GDP) is already around 80%, compared with manufacturing’s less than 20%.
GM’s price has fallen over the past decade from US$32 to the current $3/share. Sometime last week the giant manufacturer’s market capitalisation fell to below $2bn – thereby officially acquiring the status of a small cap share.
As an icon of the US’s manufacturing sector, it’s still one of the 30 shares included in the Dow Jones industrial index. Incidentally, AIG – the massive insurer that folded earlier this year and now heads the list of zombie companies – was also part of those 30 Dow shares. Remember to follow the S&P 500, an index of Wall Street’s 500 biggest, rather than the man-made Dow Jones. That’s just by the way.
However, GM isn’t the only vehicle manufacturer that has suffered. Even Toyota recently warned of a possible 73% drop in profits. Over the past year Toyota’s share price fell by 45% and its market capitalisation is now only $103bn. But that’s still considerably more than the total of the US’s big three, which are now having difficulties staying above $5bn – especially since the unlisted Chrysler probably already has a negative value.
Volkswagen is now the world’s largest in terms of market capitalisation. However, VW’s market value of around $200bn doesn’t tell the full tale. The far smaller Porsche – with a much smaller market cap of just more than $10bn – is keen to expand its interest in VW considerably to almost 75%. That caught a number of short sellers of VW shares on the wrong foot and its share price took off, so much so that for a few days VW was the world’s largest listed organisation in terms of market capitalisation. VW’s correct market value is probably somewhere between $25bn and $50bn – smaller than Toyota but bigger than Mercedes-Benz.
As children in the Fifties and Sixties, like all children at the time, we spent many hours arguing about which was the better car: Ford or Chev, the latter being GM’s top seller. Many of those arguments among small boys were resolved by resorting to fisticuffs. The world’s investors, as reflected by share prices, are now involved in a different kind of fight – deciding who is the best and who will survive.
Use the table showing the market values of each of the world’s leading manufacturers and the fall in their share prices over the past year to try to forecast the victors of the battle.
Another interesting factor, and much more closely related to your choice of car, is the effect of the fuel price – more specifically, crude oil – on the vehicle industry. It was the sharp increase in the price of crude to almost $150/barrel and US fuel prices of $4/gallon that sank Ford and GM, with their trucks disguised as cars. And Toyota’s oversized 4x4, produced in an effort to ape them, was responsible for its significantly poorer profit prospects.