The triumphant return of General Motors Co (GM) to Wall Street less than 18 months after its bankruptcy marks a renaissance in the US auto industry, even though Detroit, Michigan, faces tough competition with Asian rivals and an uncertain outlook in Europe.
GM, Ford Motor Co and Chrysler Group LLC 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 three Detroit 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 of US dollars in emergency aid from the US federal government. Crushed under the weight of their debts and a collapse in sales, GM and Chrysler were steered through Us government--financed bankruptcies in June and July of last year.
PHOTO: AFP
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 Group SpA — which obtained a 20 percent stake in exchange for sharing its technology — and the US government retained an 8 percent stake.
However, while sales have remained at historically low levels, they have nonetheless begun to rebound. 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,” Schuster said.
GM posted a profit of US$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 US$86 billion in losses from 2005 to 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 initial public offering (IPO) late next year.
The market reaction to GM’s IPO was resounding.
Amid strong investor demand, the Detroit, Michigan-based firm priced its shares at US$33 a piece before the stock market opened, in a sale that could net as much as US$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 US$22.1 billion set by the Agricultural Bank of China (中國農業銀行) in July.
The IPO will allow the US government to slash its stake in GM from 61 percent to as little as 33 percent, recouping US$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,” Anwyl said.
However, 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 in its European arm to address overcapacity, labor costs and the limited growth inherent in a mature market.
In addition, 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 Motor Corp in 2008 after a 77 year reign.
While Toyota has been hit by a strong yen and a series of mass recalls that damaged the Japanese automaker’s once stellar reputation, Korean automakers Hyundai Motor Co and Kia Motors Corp 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 US through its partnership with Shanghai Automotive Industry Corp (上海汽車).
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