BY: Nona Makaveeva
This year, General Motors is poised to retake leadership as the top automaker after a near bankruptcy and long competition with Volkswagen AG and Toyota. GM released that its global sales have risen 9.2 percent this year, and its profits have reached 20 year highs.
However, although sales and profits have been rising, GM’s earnings before interest and taxes relative to sales (EBIT) still lags behind Ford and VW. The EBIT measure is particularly applicable in this industry, where companies are highly leveraged (Hello, Ford Debt/Equity Ratio?). Furthermore, overall net income dropped due to European losses and the shift in production between GM’s more-profitable trucks/SUVs to the more low-priced small cars.
Yet, the question is: is GM adding more value, or is it simply taking advantage of Toyota’s recent misfortunes? The earthquake in March and the floods in Thailand disrupted Toyota’s production in Japan and made room for other competitors to capture its lost market share. Still, GM may be able to retain its top spot even after Toyota recovers. Last year, Toyota recalled millions of cars because of issues with floor mats and a sticky accelerator pedal. So it’s possible that Toyota might take a long-term hit, as investors doubt the quality of Toyota products. In order to recuperate from the hit, Toyota would need to significantly alter its strategy. And there’s a chance that Toyota’s greater emphasis on environmental responsibility could save it in the long term, as precious resources eventually disappear – causing the industry to focus more on hybrids and fuel-efficient vehicles.
During GM’s government bailout in 2009, the Obama Administration was hopeful of its ability to generate big profits once freed of its massive debt and high labor costs. Hopeful – but also personally invested. Currently, the U.S. owns almost a third of GM. And in order to break even, it would have to sell its stake at about $53 – a questionable target considering that shares have dropped 32 percent since the IPO.
So I guess the hope lies in the prospective for sales abroad (particularly China): a reason for GM’s recently unsuccessful margins. The company has strategically positioned itself as a top seller in China with joint ventures selling luxury Buicks, bread-and- butter Chevrolets and subcompact cars with native Chinese partner Wuling. Going forward though, India will be the next potential market, since the current market is mainly fragmented among local players.
However, sales in Europe and South America are still weak, and are dragging down GM’s profits. And until the market volatility in Europe subsides, it will be challenging to find growth opportunities there. But, as long as GM continues to focus on its more successful markets and products, it will be be able to sustain its current top market position.
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