iBooyah.com Investment Matters

General Motors (GM)

General Motors has been in the news a lot as of late.  In the past couple of years, the high gasoline prices have resulted in drastic decline in their SUV models where GM has traditionally reaped the most profit.  Moreover, the company's labor force is unionized; therefore the cost for GM in respect to labor is much greater than of Toyota.  Adding to the mix of problems, GM also has a huge pension obligation to its retired employees.  All these problems mixed in with declining sales have put one of America's greatest companies on its heels.  GM reported a record $14 billion lost last year. GM strategy appears to center around the following areas:

1. Getting cost under control.
2. Getting financials under control.
3. Partnering or potentially merging with competitor (Nissan-Renault).
4. Investing in fuel efficient cars such as that of e-85 automobiles.

The staggering labor cost and declining sales must be corrected. In an effort to bring cost in line with sales, GM recently announced plans to eliminate about 35,000 positions through attrition and employee buyout. The entire cost of the buyout is expected to cost GM $4 billion.  In the long term, I believed the company should be better off in terms of cost.

GM has also showed signs of gaining financial control, reporting a loss of $323 million in the first quarter of 2006. This is a huge improvement when compared to last year's loss of $1.5 billion in the same quarter of 2005. Furthermore, the company has made strides in correcting internal accounting issues which resulted in direct contribution to the company’s bottom line.

GM is also looking at potentially partnering with Nissan-Renault. Whether this deal comes to fruition remains to be seen. Kirk Kerkorian, a large GM shareholder is pushing for such deal as he sees short and long term benefits. If such deal does take place, GM has the potential of increasing its market share and leverages the strength of Nissan-Renault which doesn’t have a lot of the labor problem that GM has. As with any merger or strategic partnership, new problems will arise, but that should be expected.

In the last few months, the high cost of fuel has sparked a lot of debates concerning alternative fuels.  While Toyota is heavily invested in electric hybrid vehicles, GM appears to be betting its future on Ethanol. The so call "E-85" vehicle is a vehicle that can handle 85% Ethanol and 15% traditional gasoline. Part of the reason GM has decided to take this route is because of the success in Brazil. Brazil has become the first country to successful convert their fuel usage to Ethanol, powered by their sugar cane crops.  The main suppliers of these "E-85" flex fuel vehicles are made by GM.  There are serious discussions today in the United States of someday having enough production of Ethanol to meet the demand. If the United States can finds ways to pump up Ethanol production, GM can be in a great position to take advantage.

Toyota Motors (TM)

By all accounts, Toyota’s emergence as the current number two car company in the world has been remarkable.   Once perceived as cheap Japanese car is now replaced as a reliable car with excellent value. Today, Toyota has a lock on the mid-size family sedan and moving aggressively to into the full size truck which has traditionally been owned by GM and Ford.  The electric hybrids are also well embraced by consumers, especially in today’s environment of high fuel cost.  Toyota’s strategy appears to be centered on the following:

1. Keep building relevant automobiles at an affordable price.
2. Change its perception of being a Japanese car company to a global company.
3. Invest in technology such as Electric Hybrids.

Toyota’s strategy of building relevant automobile is the key to their success. Through careful research, Toyota has been able to build products that customer actually wants at the right time.  There is no better example of this than the Hybrid vehicles.  Toyota recognized early on the need to produce better gas mileage vehicles in the face of rising oil prices; today they are enjoying the benefits. 

For some reason, GM and Ford failed to recognize high oil prices as threat and didn’t make the investment in new technology. As a result, GM and Ford are behind and suffering in the market place.  Toyota’s lead goes beyond gas mileage; it is also about changing consumer taste.  The Toyota product line in terms of esthetic is more in line with the demands of the consumer.  GM and Ford tend to lag in this area as well. The interior of a typical GM vehicle remains outdated.

Toyota appears to understand the importance of perception and patriotism. The company realizes its market share can easily evaporate if American suddenly decides to base their buying decision on patriotism.  Given Toyota is still seen as a Japanese company, GM could greatly benefit if such buying pattern takes hold.   In an effort to combat and protect its market share, Toyota has aggressively decided to build plants in the United States.  Recent marketing campaign was also launched to remind Americans of Toyota’s importance in U.S economy, providing thousands of jobs to Americans across the country.  Toyota is slowly on their way to changing its perception to Multi-National Corporation.

Lastly, Toyota continues to make progress in technology and will continue to do so.  Why is hybrid vehicle so well received? Hybrid is the technology of choice today because the cost for consumer to switch is low to non-existent. It requires little change on the part of consumers and other uncontrollable part of the supply chain.  For example, a consumer with a hybrid car doesn’t need to worry about whether there is a gas station that sells certain types of fuel as oppose to GM’s “E-85” strategy. The strategy to concentrate and improving on what is currently in place is the right strategy in my opinion.  Perhaps someday, the hybrid technology will progress to the point of achieving 100 MPG as the norm.

In Summary, Toyota (TM) is the better long term investment.  GM still needs to prove itself.  In terms of stocks, TM is a little expensive, however.  At over $100/share, the risk of this stock doing down outweighs the potential of it going back up to its 52 weeks high.  Given the economy is slowing; large ticket items such as automobile sales could take the first hit.  GM stock is running purely on speculation.  The company sales are still way down.  As noted, it still has much to prove.  Buying in at the current price of $29/share is a risky bet.  If one must own an automotive company, waiting for Toyota to dip back to the $90 range would be a prudent move.

References:

http://news.yahoo.com/s/usatoday/20060710/cm_usatoday/investorsteersgmawry

http://www.smh.com.au/articles/2006/07/09/1152383608474.html

http://www.usatoday.com/news/washington/2006-07-09-alt-fuel_x.htm?csp=34