When investors think about the automotive industry in general, there aren't many very smart moves that come to mind. That's in large part due to the pain the Great Recession brought major Detroit automakers, and the multitude of bankruptcies that filtered down to parts suppliers and/or dealership groups.
That said, it's great to see a couple of automakers making smart moves recently as Sonic Automotive (NYSE:SAH) tries to capitalize on its scale in a fractured industry, and Fiat Chrysler Automobiles (NYSE:FCAU) enters into discussions with Samsung to sell its auto-parts business.
What's next for dealership groups?
It certainly appears that the long-awaited slowdown in new-car sales in the U.S. has arrived. Dealership groups can sit idly, hoping that major automakers don't devolve into an incentive war harking back to a time when supply and demand was ignored and many cars were selling for massive losses -- that's not a viable solution for investors.
That's why Sonic's move to launch a new online sales initiative, dubbed Sonic Digital One-Stop, early next year is a brilliant move. Basically, the idea is to allow consumers to shop for a vehicle, get a trade appraisal, and complete the purchase online. Sonic hopes customer who wish to do so can complete much, if not all, of the purchase online before opening the dealership door -- heck, a Sonic employee may even deliver the car to the buyer the same day.
The idea behind Sonic's digital-shopping program is to exploit an advantage that very few dealerships own: scale. Capitalizing on scale can be tricky as the automotive dealership industry is extremely fractured and only a handful of groups possess the capital necessary to make an extensive online-purchasing website, and make it effective.
Further, not only do few dealership groups possess the capital, but few own the network of stores and supply of inventory to offer a valuable service to consumers. As one of the largest groups, Sonic offers over 100 stores and more than 25 brands with over 30,000 new and pre-owned vehicles -- that offering is a network advantage few dealerships can match.
As new-vehicle sales growth in the highly profitable U.S. market slows, the company's ability to exploit its scale in a fractured industry will be vital for investors of Sonic Automotive moving forward, and that's why the digital shopping initiative is a smart move.
Fiat Chrysler stock jumps
Wednesday Bloomberg broke news that Samsung Electronics Co. was in advanced talks with FCA to buy some or all of the operations of auto-parts maker Magneti Marelli from the carmaker. Apparently, Samsung wants to enter the vehicles sector, and reportedly is interested in lighting, in-car entertainment, and telematics business.
Samsung getting its foot in the door of the automotive industry won't come cheap, though. The deal, rumored to be worth more than $3 billion, would be Samsung's biggest-ever acquisition outside South Korea. FCA's stock went up roughly 9% after the announcement hit the news feeds.
But why is FCA selling off a valuable auto-parts business a smart move that investors cheered? Because the troubled carmaker set forth a very aggressive five-year plan a couple of years ago, and to execute such a plan everything needed to go smoothly (and when does that ever happen?).
The plan, if you need a refresher, called for FCA to turn its 5 billion euros in net debt -- that is, debt that exceeds its cash pile -- into a cash pile of at least 4 billion euros. Thus, FCA CEO Sergio Marchionne's primary goal is eliminating debt, and selling this business for a price tag of more than $3 billion would be a nice start before Marchionne leaves his position in 2019.
It's a move that other, and healthier, automakers have already made. "It makes sense for a manufacturer to separate and crystallize value from their components business," George Galliers, an analyst at Evercore ISI told Bloomberg. "Ford and GM separated their businesses several years ago."
Ultimately, as business in the automotive industry begins to slow down in the U.S. after a remarkable run since the Great Recession, investors are going to have to find companies, such as these two examples, that continue to make smart decisions, or it's going to be a bumpy ride.