Can GM Regain Stature in Core Auto Business?
General Motors is negotiating to sell its control of Hughes Electronics, owner of DirecTV satellite broadcasting--a business with enormous promise for the future.
Proceeds of the sale, which could be close to $10 billion, will bolster GM’s finances for acquisitions and joint ventures in its core automotive business. It is contemplating an investment of more than $5 billion in Daewoo Motor Co. of South Korea, a bankrupt company at which some labor unions vigorously oppose GM’s presence.
What’s going on? GM is embarking on a new era, with the sale of its controlling 30% stake in El Segundo-based Hughes and its expansion overseas.
The ambition of the world’s largest car maker is to become even more of a global giant with a network of alliances and production facilities producing affordable vehicles for growing markets in developing countries. It’s a bold strategy, born of both vision and desperation under Chief Executive G. Richard Wagoner, 48, who was named to GM’s top job a year ago.
In the North American market, GM is trying to hold its own these days against aggressive competition in trucks, sport-utility vehicles and cars of all price ranges, from Toyota, Honda, Nissan, the Mercedes division of DaimlerChrysler, BMW and hosts of other competitors, including low-cost Korean auto makers.
“It’s a dangerous time for the U.S. auto industry,” says analyst Christopher Benko of the Detroit-based AutoFax Group of PriceWaterhouse Coopers consulting firm. “For the last decade, U.S. companies had profitable markets for trucks and SUVs pretty much to themselves,” Benko says, “but now Toyota and Honda are out with new products and the whole field is crowding up.”
In this competition, giant GM gets a low rating from Wall Street oddsmakers. Investors give GM’s shares a total market value of only $32.5 billion, roughly one-fourth the $125 billion value they accord to Toyota. Ford and DaimlerChrysler each have a higher total stock value than GM. Honda Motor Co., with less than one-third of GM’s sales, has a higher market value than the Detroit giant.
But that makes General Motors today a fascinating company. It is a beacon-like example of the pressures big firms face in changing times, an indicator of the future of automotive industries in this decade and a cliffhanging story of a landmark company struggling to be consistently successful again as it has not been for at least 20 years.
The proposed sale of DirecTV, probably to Rupert Murdoch’s News Corp., would complete GM’s disposition of Hughes Electronics, bought for $5 billion in 1985 by then-GM Chairman Roger Smith, who dreamed of transferring aerospace technology to the auto business.
Most of the vision never worked out, but GM eventually made a profit selling Hughes’ military electronics operations to Raytheon and its satellite manufacturing to Boeing.
DirecTV, an entirely new business developed at Hughes, would appear to have great opportunities as broadband Internet communication beamed from satellites to homes emerges as an industry in coming years.
But pursuing opportunities would demand further investment, and GM--though still rich with $8 billion in cash on the balance sheet and capable of making a $3.5-billion profit this year--can’t afford to invest in other industries and still meet the demands for capital in its automotive business.
Also, “rich” is a relative term for GM these days. One factor holding up the DirecTV sale is that GM has to get $7 billion or more in cash from the sale. Credit rating agencies want to see GM bolster its finances to offset about $30 billion of unfunded liabilities for health and pension benefits for its thousands of retired workers.
Such contingent liabilities are not unusual for large industrial companies and in part reflect only accounting peculiarities stemming from union contracts. But the effect on GM’s credit rating is the kind of complex reality that governs big companies.
In any event, GM chose more than a year ago to concentrate on its traditional automotive business. The company wants to regain some of its shrunken share of the North American car and truck market, which has fallen to 28% from 40% in the 1980s.
To regain share, and to try to lift profitability, the company is bringing out new model trucks and SUVs. Wagoner is discontinuing unprofitable operations--including the Oldsmobile division.
It has begun to expand abroad. Last year it invested $2.4 billion to acquire 20% of Fiat of Italy and spent $1.3 billion for 20% of Japan’s Fuji Heavy Industries, owner of Subaru, plus $650 million to increase its stake in Suzuki Motors of Japan.
GM’s plan, analysts say, is to produce more than 800,000 vehicles from production platforms around the world that it will share with Fiat and Suzuki.
GM wants to increase its share of the potentially vast and rapidly growing Asian market to 10%, from a lowly 3.7% of that market today. Daewoo would be part of that ambition.
Fiat, with a major presence in Brazil--where Wagoner served early in his 24-year GM career--is part of the Detroit firm’s plan to expand in Latin America.
There is good business logic to GM’s striving for global economies of scale. The automotive industry will face huge demands for investment in the next decade, says auto expert Christopher Cedergren of Nextrend, a Thousand Oaks consulting firm. “To counter global warming and meet environmental demands, the industry will have to move away from the internal combustion engine and develop new forms of propulsion,” Cedergren says.
Those investment demands will undoubtedly cause further mergers and force companies to drop out of the auto business.
GM’s network of alliances could be ideal for coping with the changes to come. But the company will have to execute with greater skill and efficiency than it has shown in recent decades.
Size alone, for the company that produces more than 4 million cars and trucks worldwide, hasn’t protected GM lately. The company’s international business today is mired in red ink--from operations in Europe to its 49% ownership of money-losing Isuzu Motors in Japan.
Can the old giant come back? Few analysts recommend GM today. One who does, Richard Hilgert of the Detroit office of Fahnestock & Co., sees the firm getting a financial boost from the sale of Hughes.
Another who recommends GM, analyst Wendy Beale Needham of Credit Suisse First Boston, is impressed by the way the company has reduced inventories. She makes no projections of new eras, but does see the company’s production and earnings advancing into 2002.
GM, a company to watch--again.
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James Flanigan can be reached at jim.flanigan@latimes.com
