General Motors' Possible Isuzu Stake Could Generate Strong Upside
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General Motors (NYSE: GM) seems to be missing out on a part of the great improvement in the motor vehicle market recently. It is not as if it is not benefiting from the increased productivity of the market, but it certainly is not among those companies that are seeing the greatest boon. Recent reports show that, amid very significant increases in car sales in the United States, GM’s share of the US market has actually been dwindling. Granted, it is still one of the major players in the market, but it is not a good sign to see it losing some of its control.
This year-to-date, the combination of GM, Ford (NYSE: F), Nissan, Toyota (NYSE: TM), Chrysler, and Honda, has sold 3.5 million light vehicles. This group of companies control about 75% of the U.S. market of car sales. The sales number for this year is very encouraging, because it is better that 2011’s 3.3 million vehicles sold in the same period. It is also significantly better than 2010’s 2.74 million vehicles sold and 2009’s 2.4 million vehicles sold. It is also expected that the full-year numbers for 2011 will show a similar increase, relative to 2009 and 2010, as that trend. These numbers show a very good sign for the industry and, therefore, for GM. If these numbers continue, I expect the stock prices of all of these companies to continue rising.
Unfortunately, it is not all good news for GM in this story. Much the same, it is also not entirely bright for Ford. Each of these companies has seen its share of the increasing market decrease over the past year. At this time last year, Ford controlled 16.5% of car sales, but now it only controls 15.3%. GM has seen a similar trend in its control stake. It controlled 19.3% at this time last year, as opposed to only 18% now. 2009 and 2010 also showed higher shares of the market for these two companies than this year promises too. These numbers are small in percentage, but significant when it comes to actual sales numbers. A 1% drop in market share, when the market has sold 3.5 million vehicles, means a drop of 35,000 vehicle sales. That is quite a large bite taken out of GM’s sales and revenue.
Despite all of this, GM is remaining quite optimistic about its future, especially in the U.S. market. Don Johnson, the vice president of U.S. Sales Operations, is remaining especially optimistic. “We expect gradual improvement in the economy going forward,” he said, “Over time, strength in the manufacturing sector and strong retail sales will lead to more job creation. That will help more consumers put the recession behind them, gain even more confidence and drive vehicle sales higher for both the industry and GM.” I suppose that it is important to remain optimistic, but I would recommend that GM find some way to bring back up its market share very soon, because it will become a bit of a drag on new production if it can’t.
GM is currently in negotiations regarding the possibility of purchasing a controlling share of the foreign truck-maker Isuzu Motors Ltd. Originally, GM was discussing purchasing one-third of Isuzu. This would give it veto power over decisions made by the board. This would have been a great idea, if it were not for the fact that the current stock price means that GM would have to pay more than $3 billion for this controlling share of Isuzu. The market is booming, but it is not enough to warrant that large of a buy.
After scaling down the initial ambitious plans, GM is now considering buying a smaller share of the company, although not a controlling share. It is considering purchasing a 10% share. Other companies, like Toyota and Volkswagen, have shares of Isuzu that are even smaller than that which GM is now considering. If GM were to make the leap and purchase this 10% share, it would then be the largest single owner of stock in the company.
Curiously enough, GM once owned significantly more than the one-third share that it originally considered purchasing. In fact, it owned nearly half of Isuzu not too long ago. It gradually sold off all of its stock in the company, however, until it had only 7.9% left at the beginning of 2006. During 2006, GM sold this last 7.9% share, leaving it with no ownership over Isuzu’s stock. Now it looks like it may be time to buy back in.
The hope, making this proposed purchase, is that GM will be able to open up the Southeast Asia market. Currently, has very little, if any, control in that market. This would be a very large step towards forwarding sales in that area. The other major thing that could come from this purchase, if it happens, is that GM potentially could help Isuzu to develop a hybrid or other environmentally friendly vehicles. This would be a great boon for Isuzu going forward, as well as granting GM with the possibility of controlling a large part of yet another market.
GM has not been very open about these latest negotiations. It is neither confirming nor denying reports of negotiations with Isuzu directly. Alan Adler, a GM spokesman, said “We talk to people all the time about a variety of matters. We are not confirming or denying anything.” I understand why the company might not want word to get out about this current deal before it happens. What I am not quite sure about is why GM sold off all of its stock in Isuzu in the first place. It seems like quite a lucrative relationship and I should hope, for both GM’s and Isuzu’s sake, that it continues in a strong way. This could mean big things are ahead for both companies.
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