Maybe the Market Is Right About GM

Last week, my Foolish colleague David Williamson wrote a thoughtful piece on General Motors (NYSE: GM  ) and its lagging stock price, arguing that the market has been wrong about America's biggest automaker.

Like David, I'm a GM shareholder, so obviously I think the company has a good chance of succeeding, at least eventually. I think he made some very important points, particularly about GM's financial condition and about the likely effects of the Japanese disaster. But I also think he overlooked one important issue, perhaps the important issue. And it's that issue that needs to be confronted and pondered by anyone considering investing in GM, or any other automaker.

What is it? Product.

Automakers live or die by this, period.
While automakers are cyclical, industrial businesses, they're very different from steelmakers or chemical producers in that their products are not commodities. Cars and light trucks are unique products that sell in part because of difficult-to-quantify emotional appeals. What's more, they compete in a marketplace that is hyper-competitive and low-margin, with a small number of giant, global players and immense barriers to entry to boot.

I believe the competitive standing of an automaker's product is the most important factor to consider when evaluating an automaker as an investment. An automaker with great, competitive products has a good chance of overcoming problems that would cripple or sink many other industrial firms. Ford (NYSE: F  ) in early 2009 had a surreal debt load and a wretched economy to contend with -- but it also had some truly excellent cars and trucks, and more in its pipeline. The market saw the debt and left it for dead, but auto-savvy investors knew that it had a chance -- and have been generously rewarded since.

Conversely, an automaker whose products lag behind the leaders will have to spend heavily on incentives to keep sales at a level sufficient to placate its dealers. (In many ways, dealers are an automaker's real customers.) It will also have to spend even more on product development, or risk falling even further behind. And of course there's a risk that it won't be able to catch up at all without some sort of outside intervention -- that's essentially Chrysler's story over the last decade.

Product is a major reason I'm skeptical of Tesla Motors' (Nasdaq: TSLA  ) chances. Can a little startup really build cars that compete on price and quality and ownership experience with the likes of BMW (OTC: BAMXY.PK) and its massive global scale? Product is the biggest reason I've been so bullish on Ford, it's why I think last year's Toyota (NYSE: TM  ) recalls will hurt the Japanese giant for a long time, and it's why I'm concerned about the future of Honda (NYSE: HMC  ) .

And product is why my enthusiasm for General Motors is still muted. While I think there's a good case for GM as an investment, I also think that it isn't so simple.

GM has a product problem
Even as recently as a few years ago, it was reasonable to say that most of GM's products were a step (or two, or six) behind the industry's best. That's no longer true: Thanks to a much-improved cost structure and the lessons of the company's near-death experience, GM's most recent products are by and large excellent.

So what's the problem? This: A lot of the company's products are still not-so-recent, and it's going to be a few years before the company can fix that.

It takes more time than most people realize to develop a new vehicle from scratch -- 28 to 36 months is typical. That's for a fully funded development program (where "fully funded" can mean $1 billion or more) that has an enthusiastic green light from senior management. Constrain the funding or shake up the management's priorities and that time span can expand significantly. If it expands too far, the product that would have been a class leader had it arrived on schedule two or three years earlier can end up being midpack (or worse, irrelevant) when it finally gets to dealers.

GM's product-development programs were cut to the bone -- and beyond, in some cases; several programs will never be revived -- during the company's death spiral. The revolving door in GM's C-suite during the year-plus following bankruptcy made matters worse. Reports suggest that key programs are now ramped up and proceeding at full speed, but the lost time means GM may not reach across-the-board product parity with the likes of Ford and Toyota until 2014, maybe even later if any of the worst-case scenarios above actually occur.

That in turn means two things: First, GM's going to be spending a lot of money as it attempts to overhaul its product portfolio as quickly as possible without compromising quality. Second, GM's incentives spending, which has fallen a bit recently but is still quite high, is going to have to stay high to keep its current products selling at the rate to which its dealers would like to stay accustomed.

That means GM's profits could be muted for a while, particularly in comparison with the gaudy results on display at Ford's headquarters in Dearborn. And that is likely to weigh on GM's stock price in the near-ish term. But it might also make for an intriguing buy opportunity for those who are willing to be patient. Personally, I don't plan to sell anytime soon.

Keep up with the latest on the General's maybe-renaissance by adding GM to your free My Watchlist page.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter at @jrosevear. General Motors is a Motley Fool Inside Value pick. Ford is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Ford. You can try any of our Foolish newsletter services free for 30 days, with no obligation.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On April 05, 2011, at 9:35 PM, ramon123 wrote:

    If John really believes, like I do, that product is what's important, then to not like Tesla's upcoming (really) first in-house product indicates that he's simply not qualified to provide opinions about the auto business.

    He's also rather falsely assuming that Tesla will compete [directly] against BMW and Mercedes. Not exactly will that happen for the small reason that neither BMW nor Mercedes will have any electric even remotely competitive with Tesla's Model S for years. Actually, BMW and Mercedes cannot compete

    with the likes of the Model S. Just put a "not" in front of each of each of John's verbs and you'll be fairly close to the truth.

  • Report this Comment On April 06, 2011, at 12:20 AM, akbarcaskey678 wrote:

    I personally love GM cars. The new caddys and camaros are gorgeous. I absolutely would rather buy a CTS coupe over a Ford Taurus or focus or even a Mustang. The new corvettes are amazing too. GM is also still owned by the government so unless the United States go bankrupt which I feel is highly unlikely GM cannot fail.

    Plus, their cars are nicer than Fords or Toyota and Cadillacs rival Mercedes in my opinion. A E class for 45,000 or a CTS for 35,000. GM is a great brand. I love the cars and the stock.

  • Report this Comment On April 06, 2011, at 8:35 AM, TMFMarlowe wrote:

    @ramon123, it's hard to like or not like the Model S because actual mass-produced examples aren't here yet. Ping me after someone like Consumer Reports has pounded the heck out of an actual production example and we'll see.

    And yes, the Model S will absolutely be competing against BMW and Mercedes and Audi and Lexus and Cadillac. Where do you think all these people willing and able to buy a $70-80k sedan (and that's what it's really going to cost, all-in) are going to come from, after the small first round of well-heeled gadget geeks takes delivery? The cars they're driving today will be the baseline for their impressions of the Tesla. What do you think those cars might be?

    As for competition, Tesla doesn't have any magic huge technological advantage. The Roadster has more range than (for example) a Nissan Leaf because it has a more expensive battery pack. This becomes very clear when you look at the pricing for the Model S. Automotive battery packs are in the process of becoming commodities -- huge factories are being built all over the world right now, so many that there may be a glut by 2015 or 2016. Consider that, and then apply the economies of scale of a GM or a Toyota to that math and tell me why the big guys can't hope to compete with Tesla.

    Likewise, you say the Model S doesn't have any competition, but you don't know that to be true. It isn't going to be here for almost 2 years. What will the big automakers announce between then and now? Nissan is already known to be developing an electric Infiniti. Will there be an electric or plug-in Lexus or Lincoln or Cadillac on the way before the S gets here? I'd bet on it, and even if the Model S gets here first I don't think first-mover advantage is worth a whole lot in this space. And the price points the big brands can command might well pay for the batteries needed to get range in (or beyond) Tesla's ballpark. Where's Tesla's advantage then?

    We haven't even touched on whether a startup carmaker operating on a relative shoestring budget can design and build a car that feels as nice and will stay screwed together as well as a $30k Honda, much less the luxury cars it WILL be trying to draw buyers from. It's hard to build a good car, and for all of Elon Musk's big talk about how there are lots of smart kids in Silicon Valley, those kids don't have the relevant experience to (for instance) design a dashboard that will go 150k rough bumpy miles before it rattles.

    These are some of the product-related reasons I'm skeptical of Tesla's chances. I don't hate the company, and I think it would be cool if they succeeded. I just think it's a much longer shot than those who do their due diligence by reading Engadget really understand, and I have good reasons for feeling that way.

    John Rosevear

  • Report this Comment On April 06, 2011, at 8:54 AM, RBusiness wrote:

    This is a well written article!

    I agree with everything here! I'd like to add that GM's paying of stock dividends to preferred stock holders during a time where it has billions on debt to the US Taxpayer and at the same time ignored regular stock holders of a less than 1 year old IPO was the biggest middle finger I've ever seen from any company in the history of the world.

    They really should have paid back the US taxpayer with that money! Not the select few that were friends of important people that got in on the preferred stocks! That move is the one and only move that put a nail in GM's coffin in my mind! I will never consider a product from them again! Even if it's cooler, faster, nicer or better! They've proven their general ignorance on every level!

    Buy a Ford - They worked for their success and they actually have the best cars out there now! They didn't get bailed out by the gov and then give the one finger salute to the country with a dividend for a select-few like GM did!

  • Report this Comment On April 06, 2011, at 9:15 AM, TMFMarlowe wrote:

    @RBusiness: The US taxpayer has been paid back... with GM stock, including preferred stock. The US Treasury held GM preferreds until GM bought them all back (at a premium) in December of 2010. There's really nothing GM can (or, I'd argue, should) do in terms of repaying the Feds until the US sells all its common stock. If the US is still in the red at that point, it would probably be wise for GM to make up the difference. But until then, I don't think there's anything for them to do.

    Trust me, GM would like that debt to be gone and forgotten about even more than you and I would. But it's just going to take some time.

    Thanks for reading.

    John Rosevear

  • Report this Comment On April 06, 2011, at 10:02 AM, magui31 wrote:

    confiar ,con las estafas que hicieron con la vieja GM JAJAJA

  • Report this Comment On April 06, 2011, at 11:11 AM, RBusiness wrote:

    I'd argue that you're not paid back until your money is "realized" as a gain. Not just an IOU in the form of stock!

    So the US Gov got a dividend check?

  • Report this Comment On April 06, 2011, at 11:19 AM, williamjacobs wrote:

    Tesla is in a partnership with Toyota which USED TO mean quality workmanship.

    Maybe they got the guys who kept Toyota solid for 2o years and not the turkeys who are hissing away the Toyota reputation with seeming indifference?

    There's also a lot to say for the passion behind Tesla's entire reason for being. Building first rate cars that are fun to drive is the goal. They expect rofits to follow. This was the same mentality of industry 40+ years ago when America believed in itself rather than the dollar.

    If they can listen to their brains and hearts rather than shareholders (of which I am one.), they can succeed. They can be the Apple computer of cars. Give the people a reason to believe in you, and they'll give you the time and money you need.

  • Report this Comment On April 06, 2011, at 11:39 AM, magui31 wrote:

    que pasa con los viejos accionistas ?

  • Report this Comment On April 06, 2011, at 2:43 PM, TMFMarlowe wrote:

    @williamjacobs: There's merit to what you say. But believe it or not, there's lots of passion at GM and Ford and Chrysler and Toyota and Honda and BMW, too. (Don't believe me? Go test-drive a new Mustang. The experience will speak for itself.) That's part of what makes this business so interesting to watch.

    Thanks for reading.

    John Rosevear

  • Report this Comment On April 06, 2011, at 3:15 PM, RBusiness wrote:

    @John

    I agree with you on the 2011 Mustang! It's seriously the most incredible car I've ever been that's under 60K. Well worth the money!

  • Report this Comment On April 07, 2011, at 9:07 AM, baldheadeddork wrote:

    Good piece, John.

    About investing in GM, I'm afraid of the stock being pinched a'la Cisco if (or, more likely when) they miss estimates. I don't think the company is in any danger of failing but there's too much risk for my taste. (Especially when F is so attractively priced and has a clearer path to success.)

    Can GM get back on track with their product cycle in three years? I don't think so. As bad as it looks at first blush (missing a cycle on trucks, the Lucerne and Impala that date to 2006), on closer examination it's actually a lot worse.

    Here's a great bar bet question: What's the newest GM car you can buy in the US today? It's not the Cruze. That's been sold as the same car in Europe since 2008. (The Volt is built on the same platform.) It's not the Camaro, either. That's a reskinned Holden dating from 2006. What about the Chevy Equinox? It got a chassis update (added stiffness) in 2010, but the platform dates back to 2005. The Traverse came out in 2009, but that was a badge-engineering job on the 2007 GMC Acadia/Buick Enclave.

    The winning answer is the new 2011 Aveo, next year's $10-a-day rental special, which is off the 2010 Gamma II platform. Second place is the CTS, which dates back to 2008.

    GM doesn't have to replace three or four outdated platforms. With the single exception of the Aveo, every platform they sell today will be at least six years old in 2014. They'll need to replace everything and that isn't going to happen in the next two or three years.

    But even if it could happen, it shouldn't. GM needs to get back on a product cycle so it can spread its development costs over years and get new product on dealer lots every spring and fall. Replacing the entire line by 2014 would put them back to square one, with either a drought of new product or more rushed development and spending to restart a cycle for 2015, 2016 and beyond.

    If everything falls into place for GM, they're looking at 2016 at the earliest before their product cycle is back on track. Depending on Opel's position and their ability to share US development costs with Europe, it could stretch to 2020.

    I can hear someone saying that the platform age doesn't matter. The Cruze may be a three year-old design but it's new to US buyers and that's what counts. As my wife likes to tell me, Brrrwrong! That's only true if you're competing against designs as old as yours. Let your competition come out with a newer, better design and your new-old car will look worse than old, it will look mediocre.

    That's happening now with the Cruze and the Traverse. Put them up against genuinely new product like the Focus, Elantra, Explorer and Durango and they get slaughtered. They also don't look as fresh because the hard points in the chassis (roofline, a-pillars, firewall location) were created according to what looked good five years ago. That's why the Cruze was born looking so dated compared to the Focus and Elantra.

    And then there's GM's ongoing upheaval in management, but that's another rant...

  • Report this Comment On April 07, 2011, at 12:21 PM, wyrdmage wrote:

    I think Tesla is exciting but I think emotion, instead of common sense, is ruling most Tesla lovers. Keeping my emotions in check, I see Tesla as one of the riskiest investments possible, and therefore one with more potential return. The odds are great that Tesla will not meet the high expectations of anyone except diehard Tesla lovers that can see no wrong in the extreme risk (they don't admit the risk...Tesla is an absolute to them). It is fun to see the excitement of Tesla lovers, but I feel sorry for them (I also realize that the risk may be worth it and Tesla may actually beat the tremendous odds against it). Although future data may change the perspective, Tesla currently is a roll of the dice rather than a sound investment. But hey, if we have the money to spare, Tesla has tremendous potential and is fun to boot.

  • Report this Comment On April 10, 2011, at 11:08 AM, buffalonate wrote:

    Gm is killing Ford in China sales and is beating Ford in Brazil. Their product is already awesome. I thought Honda and Toyota were unbeatable a few years ago but their auto design has regressed over the last couple of years.

  • Report this Comment On April 19, 2011, at 1:16 PM, davedallas wrote:

    you are right about poor product at GM

    combine that with complacent and marginally competent management

    stir with UAW desire to get back concessions made in "bankruptcy'

    so outlook for top line and profit growth is very dismal

    then you should consider 'overhang' of unregistered shares still held by US treasury and you have a very poor investment outlook

    why are you "fools" holding this stock?

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