Amidst all the attention on Tesla’s (TSLA) struggles and insanely volatile stock this year, the share price under-performance of profitable automaker General Motors (GM) has gone overlooked.
And it’s time management does something about it.
Shares of the Corvette maker have tanked about 10% in 2018, lagging the Dow Jones Industrial Average’s 1.4% drop. Not helping GM, and rivals such as Ford (F) and Chrysler (FCAU) , has been the ongoing shift towards SUVs from passenger cars and the rise of car-sharing. That has left Detroit’s ‘Big 3’ automakers with bloated cost structures that will have to be addressed somehow. If it isn’t, the automakers are likely looking at years of pressured profits and stock prices.
Veteran auto analyst Euna Cook over at Morgan Stanley has whipped up eight ways GM could unlock value for shareholders. One is particularly bold: exit North American passenger car operations entirely.
Change Things Up
“A new reporting structure. We see scope for GM (and other OEMs) to radically change how it reports financial results around business lines rather than geographic lines. The opportunity for GM to do this following the Europe exit and many other international vehicle markets is particularly ripe. Reporting divisions could potentially be redrawn along the following business lines: GM Professional (i.e. pickup trucks vehicles, commercial/delivery vans, full-sized SUVs), GM Mobility & Logistics (shared mobility moving people and things in a connected network), GM Fleet Management (encompassing all aspects of mega-fleet management, including maintenance, repair, and remarketing), Cadillac, GM Financial, and GM Data and Consumer Experience (harvesting vehicle, passenger and route data for commercial monetization in a digital marketplace, including content delivery).”
Exit South America
“We used to value GM Europe at around negative $15bn (including pension liabilities). GM ultimately exited the business for less than a couple billion dollars, creating substantial value for shareholders. While the method of exit may be quite different from the European experience, we see scope for LatAm to follow a similar path. The precedent of GM exiting a region with little or no chance to generate positive returns for shareholders has been set. Since 2011, we calculate that GM S. America lost an accumulated $600mm (excluding restructuringexpenses). GM stopped reporting results from its S. American operations in 3Q’17. We estimate that the economic value of GMSA to the stock price is at best in the range of $0 to negative $2bn in its current form, possibly as much as negative $5bn+. Structurally, we see a business that is capable of losing an average of several hundred million dollars a year, which on top of that, exhibits high levels of cyclicality. The value of management, engineering, and strategic distraction to tend to this business is, of course, harder to measure. Under the right circumstances, we believe that GM’s physical plant, tooling, distribution, and after-sales network could achieve an “above zero” value for other auto firms interested in taking a long-term view on this important auto market.”
“Following the announced closure of the Gunsan plant, our base case now assumes that GM substantially exits GM Korea. Restructuring in Korea is extremely expensive, and it may take many years to play out. Even more than the net financial impact, the greater significance is the strategic messaging to GM shareholders. GM doesn’t have the time or the resources to devote to regions that lack visibility into generating a positive return or even a positive margin.”
Exit North America Passenger Car Operations
“We value GM’s North American passenger car franchise at negative $4bn aggregate value (i.e. before pensions and OPEB). As GM continues to organically move its portfolio away from passenger cars (to as much as 90% light truck by 2020), the portion of passenger cars outside of those sold to rental car companies, government fleets, police cars, and GM employees and retirees is likely minimal. In our view, it could be too minimal to justify incremental investment. While we don’t see strategic value in GM’s NA passenger car assets, we do see further scope for reduction in passenger nameplates such as Chevrolet Impala, Chevrolet Cruze, Chevrolet Malibu, Chevrolet Sonic, Chevrolet Spark, Buick Cascada, Buick LaCrosse, Buick Regal, Buick Verano and others.”
Lightly Exit China
“We have an extremely difficult time seeing foreign automakers retaining a sizeable and profitable business in a shared, autonomous ecosystem in China, primarily due to information/data privacy concerns and national security. The biggest barriers to foreign participation in China, however, may take many years to materialize. This leaves GM an opportunity to monetize the 50% stake in its Chinese JV by offering SAIC a way to inherit key foreign markets, tooling and technology. We do not see the recent rules to lift the cap on foreign ownership of auto JVs in China as something that will tempt GM to increase its stake.”
Get More Into Tech
“GM has developed the tools to operate a shared mobility service with applications for both consumer and commercial end markets. We are particularly excited about the opportunity for GM (and other OEMs) to help online retailers dramatically increase the efficiency of their fulfillment and shipping activities. To provide a sense of the magnitude of the opportunity… there are 1.2bn cars on earth with an average volume of 100 cubic feet (including available passenger cabin and trunk space) for a total of ~120bn cubic feet. This is the volumetric equivalent of more than 3,500 Empire State Buildings, space that could potentially be used for fulfillment and shipping purposes, particularly in the last mile. We’ve seen evidence of some internet retailers wanting to bypass the last mile altogether – WMT and AMZN have made efforts in this area. As players address the last mile by itself, any effort to bring this (the most expensive part of the eCommerce supply chain) down to as close to zero cost as possible likely will involve drones and autonomous and electric vehicles (especially in rural areas).”
Relax On Autonomy
“In our view, the most underappreciated value of the OEM is its top-of-thepyramid ownership of all vehicle data. While the car companies lack the adjacent businesses to best monetize vehicle data directly, we believe that their status as “landlords” of mobile real estate is undervalued.”
Chop Off Cadillac
“We estimate that the Cadillac business generates roughly $3bn of EBITDA (consolidated includes portion of business operated within the Chinese JV). We see the business as well situated between chauffer/livery and premium at a high price point that can absorb a more aggressive move to electrified powertrains, automated driving, and a rich consumer experience in the car. The recent shift in Cadillac management (GM veteran Steve Carlisle was appointed Cadillac President earlier this week) may accelerate the brand’s movement towards the connected Auto 2.0 business model. When discussing the management change, GM President Dan Ammann said: “Looking forward, the world is changing rapidly, and, beginning with the launch of the new XT4, it is paramount that we capitalize immediately on the opportunities that arise from this rate of change. This move will further accelerate our efforts in that regard” – see full article here. A separate entity capital structure of the brand may prove necessary in the attraction of capital and human talent to the Cadillac mission. We value 100% of Cadillac at nearly $15bn at this point.”