The Return of Toyota: How Does GM React?

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At first glance, the fall and rise of General Motors (NYSE: GM) seems like one of those success stories of a dying car maker roaring to life and getting back into competition. GM was the lowest of the low in 2008, resorting to a government-managed bailout to save staff and, as American politicians would like us to believe, Detroit and the American car.  For the past few years, it looked like it worked: GM cars were dazzling car enthusiasts, and the new Chevy Volt was promised to be the next big thing in energy-efficient cars.  However, with the latest news of Toyota’s ascendancy into the top position in global sales, more people are seeing that underneath GM’s new suit there still lives a weak and fragile company.

Toyota's (NYSE: TM) reclaiming of the #1 spot may not have been much of a surprise to people in the car industry. It’s long been one of the big time players in the automotive world, and with production getting back into gear after the Japanese earthquake, it wasn’t a matter of if, but when it would sit on top. What is startling, though, is that Toyota’s market value dwarfs GM’s by a near 3:1 ratio, and while Toyota continues to export cars, GM is still having problems with high expenses and its European wing. 

Toyota was able to increase its worldwide Prius sales for 2012, increasing them from 252,000 to 279,000 worldwide, and is well on its way to topping that mark in 2013. The company made a good rebound from 2011, when the earthquake stalled production, and could match the 2010 mark of 315,000 vehicles before production slowed down. GM’s North American production has been on the upswing, posting a stronger than expected January sales month, as well as reports that the Chevy Volt, the headline fuel efficient vehicle that has had selling problems, sold over 23,000 units in 2012, compared with just over 7,000 in 2011, but it’s the European production that is hurting the company.

Thanks to a continent-wide recession, GM’s Vauxhall and Opel dealers have seen declines in profits and revenue, losing $200 million in profit compared to last year, dragging down the company’s already fragile bottom line. Also, GM’s expenses are still incredibly high, which hits at the affordability of a GM car in a world that is still struggling with recessions and crises of confidence. Toyota, meanwhile, has earned a near lock on the hybrid market with their Prius, arguably the most famous hybrid car in the world. Since nearly half of the Prius’ sold last year were to the US market, Toyota is able to take a bite out of GM’s domestic market share in fuel-efficient vehicles, posing a potential problem for the American giant going forward.

Not all is lost for GM though; it can turn things around and be a stronger competitor than it is today, but it still may have to downsize its European ambitions. It’s clear that the European market may be out of reach for GM, as Volkswagen, the third-largest car maker in the world, is looking to hit 10 million sales by 2018, the majority of which will be in Europe. Domestically, GM has a cross-town rival in Ford (NYSE: F), which also had a strong January. Ford has seen steady and strong growth year-over-year. GM’s initial problems that led to the fall of the company in 2008 were related to its size, which had become too cumbersome for a 21st-century economy, while Ford has been able to focus predominately on the US Market, and could challenge Toyota with its mid-sized Fusion, which sold 241,000 vehicles in 2012 to American customers. That's a 2% drop compared to 2011, but is still the second-best year for that model.

Perhaps it is time for GM to think about downsizing its European ambitions so that it can try to reclaim American dominance, rather than placing its bets in a recession-gripped Europe with a car industry that will have a distinctive German accent? GM has the potential to get back to the top spot, but its foothold in Europe is weakening the company's international viability, as its American competitiveness improves. GM will have some decisions to make, and it has to make them soon. 

jmckenna15 has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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