GM is not pivoting to green

Update: Since we published this, Donald Trump has responded to the news, explaining before boarding Marine One that "the car was not selling." He was referring to the Chevrolet Cruze, the car assembled at the Lordstown plant in Warren, Ohio. He's right, basically. The car wasn't selling.

On Monday Mary Barra, GM's CEO, announced the company was going to improve its cash flow by $6bn/year by the end of 2020. It's going to do this by laying off 15 per cent of its workforce. There's some other stuff in the announcement, but none of it contradicts the basic story: GM makes too many different products, and thinks it can do better for its shareholders by making fewer of them.

To start with, this is a broader challenge for auto makers in the US. By some measures, things are going great. Demand for cars and trucks has been rising steadily since the recession, and is well above pre-crisis levels. Capacity — a basic measure of plants and equipment needed to make things — is also well above its pre-crisis level. Motor vehicles are hard to make, high on the value chain, and China hasn't yet presented the same industry-threatening challenge as it has for, say, furniture or semiconductors.

But capacity is a lagging indicator. It takes years to give up on old products, and years to commit to new ones. And in adding capacity, the US may have been too optimistic. When the Fed's Board of Governors measures capacity, it also looks at "utilisation" — the percentage of that capacity that's actually being used. Since about 2015, utilisation is flat:

So let's dig back into GM's press release, and see if we can't find... yep, right here (emphasis ours):

Increasing capacity utilization – In the past four years, GM has refocused capital and resources to support the growth of its crossovers, SUVs and trucks, adding shifts and investing $6.6 billion in U.S. plants that have created or maintained 17,600 jobs. With changing customer preferences in the U.S. and in response to market-related volume declines in cars, future products will be allocated to fewer plants next year.

Trucks are a money spinner for the big autos -- Ford, GM and Fiat Chrysler -- so it is no surprise GM is cutting models and focusing on what works. Just look at this tweet from pseudonymous Twitter account Pessimist Investor, highlighting the pricing power of gas-hungry-hauling-four-wheelers from Ford and GM versus their top-six selling models (MSRP is auto-jargon for a recommended retail price):

Pricing power brings profits, so it makes business sense.

There's language in the press release about "future vehicle investments in... next-generation battery-electric architectures" and "resources allocated to electric and autonomous vehicle programs", but look at the list of assembly and propulsion plants scheduled to be "unallocated" (shuttered) next year:

  • Oshawa Assembly in Ontario, Canada, makes the Chevolet Cruze, Cadillac CT6 and the Buick LaCrosse, as well as the Chevy Silverado and the GMC Sierra, both light trucks. (It's also GM's Canadian headquarters.)
  • The solar-powered Detroit-Hamtramck Assembly is home to the Cadillac CT6 and the Buick LaCrosse, as well as GM's hybrid — the Chevy Volt.
  • The solar-powered Lordstown Assembly in Warren, Ohio makes the Chevrolet Cruze
  • Baltimore Operations builds hybrid transmissions and electric motors.
  • Warren Transmission Operations makes transmissions for the GMC Acadia, Chevy Impala and Cadillac XTS, as well as the electric drive unit for the Chevy Volt, Malibu Hybrid, and Buick Velite.

Notice what all these plants have in common? They make sedans and hybrids. Only Oshawa in Ontario makes trucks. GM's capacity to make trucks: just about right. GM's capacity to make cars: way too much. Answer: cut car capacity, improve total capacity utilisation. Imagine a ball player, improving per-game stats by choosing not to start against difficult teams. Americans like trucks and SUVs. So why bother with cars and hybrids?

Shareholders tend to like things that increase cash flow, so they're pretty happy about the news. At pixel, GM is up a touch under 4.6 per cent, at $37.58.

Whether it will sit with the rust-belt-favouring Trump administration is another matter. (Maybe Sheryl Sandberg can help Mary Barra spin it.) Donnie from Queens has yet to tweet about GM's decision to shed weight, but we can't imagine he'll be too happy when it comes up later on Fox News.

But for the moment, something else is on his mind again...

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Markets Now - Wednesday 8th July 2020

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