Don't Fear Ford and GM's Declining Market Share

General Motors (NYSE: GM  ) and Ford (NYSE: F  ) lost U.S. automotive market share last year, losing 1.7% and 1.3%, respectively. In fact, GM's 17.9% market share is its lowest in 50 years, and has been consistently declining. Toyota Motors (NYSE: TM  ) had the strongest share gain, up 1.5%, followed by Chrysler and Honda (NYSE: HMC  ) with gains of 0.7% and 0.1%, respectively. Cue massive panic for domestic auto investors and sell, sell, sell!
Kidding aside, no sell-off is required; I'm going to explain three reasons why I'm not worried one bit about Ford and GM's 2012 decline in U.S. market share.

1. Trucks haul the cash cows
It's no secret that trucks bring in more dollars, at higher margins. Morgan Stanley analyst Adam Jonas suggested that as much as 90% of Fords global profit could be from the F-Series alone. I feel that's a little high, but it emphasizes the right point: Trucks are still key to profits. Ford and GM may have lost some market share overall, but let's look at how market share shaped up in 2012, where the major bucks are made.



Ford and GM have a history of dominating the truck market, which is great news for investors. 2012 was, yet again, a great year for the F-Series, which sold 645,316 units for a 10.3% increase over 2011, and good for a 1.2% market share grab. Ford represents decades of dominance in the U.S., where the F-series is the best-selling vehicle for 31 straight years, and best-selling truck for 36 years.

GM is runner-up at 22% in total market share with its Chevrolet Silverado, which is a 1.2% decline. GM North America president Mark Reuss said that he thought the decline was due to owning the oldest vehicle portfolio in the industry. We'll look at how GM plans to change that over the next 18 months next. One thing is clear, Ford and GM own the category where bucks and margins are earned.

2. Redesigns will bring share back
GM shoots for the stars with the largest set of vehicle revisions in its history. Just look at what's planned over the next 18 months, with redesigns of the Chevy Silverado, Chevy Impala, and GMC Sierra. By late summer, a new Chevy Corvette is slated to release, followed by the Buick Encore crossover by February 2014. The Suburban, Tahoe, Yukon, and Escalade are expected by the first half of 2014. Safe to say, designers and engineers at GM will be earning their salaries over the next year and a half.

Those are some popular vehicles, and if that doesn't help GM regain U.S. market share, investors will truly have reason to hit the panic button. In the meantime, investors should keep an eye on incentives that GM places on previous-generation vehicles to clear room for new models. It's a fine line to walk -- on one hand if you give too large incentives, margins will decline. On the other hand, if you don't give enough, GM will be burdened with cash tied up in older, slower-moving inventory.

Ford doesn't have nearly the amount of revisions coming up, but it just launched fresh designs of two best-sellers, the Escape and Fusion. Reviews have been very positive, even after recent recalls. Ford is confident in the new designs going into 2013, announcing increased production of the Fusion at a second factory. Look for these popular vehicles to help Ford and GM to sustain, or even gain, market share going forward.

Ford is also doing its best during the Detroit Auto Show to steal the spotlight from the new Ram trucks by displaying a sneak-peak concept of its next generation F-Series. Its lone goal is to urge potential truck buyers to wait on the sidelines and buy a Ford when they hit the showroom in 2014. 

3. Transaction prices up, incentives down
Transaction prices are at a record high, according to TrueCar. It estimated that transaction prices in December for U.S. light vehicles were up 1.8% versus 2011, for an average of $31,228. GM and Ford came in second and third for highest transaction prices of all automakers, with $33,010 and $33,219, respectively, trailing only Volkswagen. In addition to higher top lines, incentives for light vehicles were estimated to be 9% lower versus December 2011. That's ideal for automakers and investors alike, as margins will be seeing healthy increases.

Bottom line
As long-term investors, don't worry about the loss of market share last year. At least not yet, because while market share is slightly lower, profits and margins are trending up. Expect Ford to start gaining market share back faster, as GM will be unveiling its redesigned vehicles over the next 18 months.

This year analysts predict truck sales to top 1.7 million, more than 50% higher than the low of 2009. Expect Ford and GM's dominance from the surging truck market to help them increase profits, while redesigns of popular vehicles should increase market share. Keep an eye on their stock prices, they aren't done truckin' yet.

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  • Report this Comment On January 16, 2013, at 1:30 PM, TMFMarlowe wrote:

    I'm not worried about F. I am a little worried about GM, though. Look at the new trucks to understand why.

    John Rosevear (long both F and GM)

  • Report this Comment On January 16, 2013, at 3:11 PM, TMFTwoCoins wrote:

    I totally agree, I have an article coming that details the risk F is taking with its next generation F-150 and how it compares to the Silverado and Sierra. My money's on Ford, especially after seeing and understanding the Atlas concept.

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