GM's Wall Street return marks revival of US auto industry

11:33 | 21/11/2010
The triumphant return of General Motors to Wall Street less than 18 months after its bankruptcy marks a renaissance in the US auto industry, even though Detroit faces tough competition with Asian rivals and an uncertain outlook in Europe.

GM, Ford and Chrysler were among the hardest hit by the 2008 collapse in US auto sales amid the worst economic downturn in decades.

Hundreds of thousands of jobs were lost at the Detroit Three automakers and their suppliers which had just begun to reap the rewards of years of painful restructuring when the crisis hit.

While Ford managed to stay afloat thanks to a massive loan it obtained shortly before the credit crunch, GM, Chrysler and a host of suppliers were forced to seek tens of billions in emergency aid from the US government.

Crushed under the weight of their debts and a collapse in sales, GM and Chrysler were steered through government-financed bankruptcies in June and July of 2009.

GM emerged as an essentially nationalized company with the US government anxious to reduce its 61 percent stake. Chrysler emerged under the direction of Fiat -- which obtained a 20 per cent stake in exchange for sharing its technology -- and the US government retained an eight per         cent stake.

But while sales have remained at historically low levels, they have nonetheless begun to rebound. And radically lower cost-structures and a renewed focus on product design have allowed GM, Ford and Chrysler to make a sharp turn back to profitability.

"We may be at much lower sales volume than historically but health is much stronger," said Jeff Schuster, a JD Power analyst.

"It's evident with earnings numbers, GM's in particular."

GM posted a profit of $4.8 billion through the first nine months of the year and is expected to end the year in the black for the first time since 1994 after having accumulated more than $86 billion  in losses from 2005 through 2008.

Ford's share price is at its highest point in nine years after posting its sixth straight quarterly profit last month and Chrysler is expected to launch an IPO late next year.

The market reaction to GM's initial public stock offering was resounding.

Amid strong investor demand, the Detroit, Michigan-based firm priced its shares at $33 a piece before the stock market opened, in a sale that could net as much as $23.1 billion across all stock classes.

Although the final value of the sale may not be known for weeks, strong-demand clauses could send it beyond the current IPO record of $22.1 billion set by the Agricultural Bank of China in July.

The IPO will allow the US government to slash its stake in GM from 61 per cent to as little as 33 per cent, recouping $11.7 billion for US taxpayers.

"It seems as if investors are viewing the auto stocks as a one-way bet right now because they think that the industry is at the bottom of the cycle and there is a lot of promise," said Jeremy Anwyl, head of automotive site Edmunds.com.

"Car companies have high fixed costs and profits could skyrocket as sales increase, given that they are already profitable."

But Anwyl cautioned that several significant risks remain.

"There is a gap in GM's product introduction cadence because it squeezed the development pipeline to save cash during the financial crisis," he said.

"GM's management team is still untested and the company's track record of profitability is anything but long."

Europe is also a trouble spot because of its weak economy, he said, especially since GM has not yet tackled meaningful restructuring there to address overcapacity, labor costs and the limited growth inherent in a mature market.

And the largest US automaker -- which shed a number of storied brands and shut down scores of factories -- is not expected to regain the title of top-selling global automaker which it lost to Toyota in 2008 after a 77 year reign.

While Toyota has been hit by a strong yen and a series of mass recalls which damaged the Japanese automaker's once stellar reputation, Korean automakers Hyundai and Kia have made a strong play to fill in any gaps in the critical US market.

Yet GM stands to benefit from its spectacular growth in China, where it sells more vehicles than in the United States through its partnership with Shanghai Automotive Industry Corporation (SAIC).

AFP

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