Car Talk

Is the GM stock sale anything new?

It sure seems like it. By selling stock to the public the automaker may be able to reduce the Government’s 61% stake. Many are impressed by GM’s sales in China and Brazil, where the company plans to launch nearly 20 new models over the next several years.

But there’s a problem in the auto market. It’s called overcapacity. Every country under the sun seemingly has a car company or two. France has Renault and Peugeot. Italy has Fiat. Sweden has Volvo. Germany has VW, BMW, and Daimler. These national automakers are a source of national identity and pride. They also employ scads of well-organized laborers, who form a political block. As a result, auto companies are political machines, as well as engineering and financial entities.

The result has been that car companies around the world have been propped up or supported in some way by their governments, irrespective of their competitiveness. As a result we now have the ability around the world to build some 100 million cars per year. The problem is there’s only demand for some 70 million cars per year. Thi means chronic oversupply and lower prices and margins.

Years ago an S&P analyst said that the only thing propping GM up was massive cash flow. Unless GM can buck the trend and turn that cash into profits, they’ll need government support again before long, and stockholders will be hurt again.

Douglas R. Tengdin, CFA
Chief Investment Officer
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