One Small Step for Detroit, One Large Step for GM

By Tom Gibbs - April 4, 2012 | Tickers: F, GM, HMC, TM, VLKAY | 0 Comments

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With the discretionary income spending habits of consumers coming back to life, the auto industry is well past the depressing 2009 season fraught with historic volume minimums, lack of consumer confidence, and expensive and image crushing restructuring plans.  Although Japanese automakers including Toyota (NYSE: TM) and Honda (NYSE: HMC) have staged their own impressive comeback from the 2011 natural disasters that rocked their local supply chains, and the German luxury makers including BMW, Mercedes, and the select makes controlled by Volkswagen (NASDAQOTH: VLKAY) have reached all time volume highs in the United States market, the most important long-term changes have taken place within the nation’s domestic-based brands. 

The significant sales increases General Motors (NYSE: GM), Ford (NYSE: F) and Chrysler have all eked out over the past several quarters did receive a welcomed boost from the relative competition reprieve the automakers enjoyed following the 2011 Japanese natural disasters, but have been primarily driven by their willingness and ability to finally start building competitive, fuel efficient autos. 

The entire auto industry was rocked in July 2007 as the Detroit Three’s domestic market share fell below 50% for the first time in history.  Although the automakers were making the wrong moves for years prior to the announcement – losing focus on quality, relying too much on heavily incentivized large trucks and SUVs – the news represented a tangible milestone that the once-unbeatable American brands could finally be knocked from their pole position. 

Following the completion of 2012’s first quarter, however, General Motors finally has its own tangible milestone that it has not only right sized its operations from their least efficient pre-restructuring period, but that it has also equipped its ship with the suitable personnel, the strongest of artillery, and the most accurate of maps to successfully navigate in its voyage back to the top. 

Club MPG

General Motors has become the first U.S. automaker to sell more than 100,000 cars in a single month that can achieve 30 miles per gallon (highway).  Nearly 43% of the domestic units the automaker sold in March were characterized by such fuel efficiency dynamics, which compares to a recent low of around 16% in the comparable month four years ago (TrueCar.com).  The news tidbit may not be an industry first, as the Japanese have previously accomplished the task, yet it does represent a very important industry shift.  Not only have the domestic-based brands shifted away from their traditional reliance on the high volume sale of larger trucks and SUVs with huge technology and design improvements, but they have also established a platform from which they can once again begin chipping away at the foreign-based competition.

The fuel efficiency focus has started to run deep within the General Motors brand.  Especially in its flagship Chevrolet division, nearly every new vehicle launched over the past several years has been a 30mpg or higher model – the mid-sized Malibu sedan, the compact Cruze, Sonic, and Spark, the EV Volt, and the Equinox small SUV.  Several of these vehicles have replaced a previously less fuel efficient model, including:

All mileage as rated by EPA, on highway basis

• 2013 Malibu Eco with estimated 37mpg vs. older generation 30mpg 2007 Malibu
• 42mpg 2012 Cruze Eco vs. 35mpg 2010 Cobalt
• 32mpg 2012 Equinox vs. 24mpg 2009 Equinox

Likewise, other new vehicle entries including the Sonic, Spark, and Volt have pushed the automaker into previously untapped vehicle segments.  The Sonic and the upcoming Spark, which have had the dual effort of replacing the older, and relatively unpopular Aveo model, have finally given GM a competitive edge in the extremely important “Millennial” consumer market.  Characterized by fashion-forward and technologically savvy 18-34 year old consumers, the Millennials category has historically been commanded by Toyota’s Corolla, its Scion subdivision, and more hip Honda models including the Civic and the Fit. 

With monthly sales of the Sonic increasing more than four-and-a-half-fold between September 2011 and February 2012 (to 7,900 units), the Sonic is increasingly becoming a legitimate player against comparable compact models by Ford, Toyota, and Honda.  Likewise, the upcoming RS (rally sport) package that will add on to the vehicle’s design with certain aesthetic improvements should act to make the Sonic a popular niche car for the almost cult following of Toyota’s Corolla S, the entire Scion brand, and Honda’s sportier Civic Si model. 

Lastly, the Volt, despite its frequent criticism and politicization by pundits, should offer inroads to an extremely important and higher-volume technology going forward.  Although the Volt itself is not intended to be an extremely high volume model (although sales of more than 2,000 units this March represent a meaningful 33+% improvement over the past monthly high), GM has the ability to generate a significantly higher return on its investment in the EV technology by transplanting it onto new vehicles.  The 2014 model of the Spark, to be released in 2013, is expected to be the first of these additional electric vehicles. 

Investors must understand that no one, even the automakers themselves, knows what the future holds for alternative vehicle energy sources.  The most likely scenario, and the one that will continue to allow automakers to pump out millions of units in volume per year, will be a multi-pronged approach to alternative energy.  Some consumers, as sales of the Volt, Nissan Leaf, the Tesla Model X and S presales indicate, are willing to ante up for the currently expensive EV technology.  Many have prematurely hypothesized the unviability of the technology despite the inevitable increase in its affordability as it advances.  One firm in particular is extremely bullish on EV technology.

For others, hybrids, flex-fuel (look at sugarcane ethanol industry in Brazil), or traditional fuel-efficient gas engines will be adequate.  It will become increasingly important, especially because the future of the industry cannot be estimated with 100% certainty and because different consumers have unique driving wants/needs, for automakers to not focus on a particular propulsion technology for its entire line-up but instead to have compelling offerings across all frontiers.  General Motors’ recently announced milestone, although deserving little more than a pat on the back in the short run, shows that the automaker has the technological know-how, the financial stability, and the design skills to continue to release high volume autos in the most important consumer segments in the fastest growing economies in the world. 

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