Big Three face scrap yard

The US has for decades ceased to be a man­u­fac­tur­ing econ­omy

Finweek English Edition - - Openers - Vic de Klerk

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.

Source: fi­nance.ya­ Source: Share prices on fi­nance.ya­

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