Morningstar | GM Is Unlocking More Scale Potential Each Year
We think General Motors' car models are of the best quality and design in decades. The company is already a leader in truck models, so a competitive lineup in all segments, combined with a much smaller cost base, says to us that GM is starting to realize the scale to match its size. The head of Consumer Reports automotive testing even said Toyota and Honda could learn from the Chevrolet Malibu. Tariff risk is an increasing concern, however.We think GM's earnings potential is excellent because the company finally has a healthy North American unit and a nearly mature finance arm with GM Financial. The most critical cost-saving measure was setting up a voluntary employees' beneficiary association for the retiree healthcare costs of the United Auto Workers. This saves GM about $3 billion a year; other benefit concessions and plant closings have drastically lowered GM North America's break-even point to U.S. industry sales of about 10 million-11 million vehicles, assuming 18%-19% share. We expect further scale to come from GM moving its production to more global platforms and eventually onto vehicle sets over the next decade for even more flexibility and scale. GM makes products that consumers are willing to pay more for than in the past. It no longer has to overproduce in an attempt to cover high labor costs and then dump cars into rental fleets (which hurts residual values). GM now operates in a demand-pull model where it can produce only to meet demand, is structured to do no worse than break even at the bottom of an economic cycle, and is about to see the upside to having a high degree of operating leverage. The result is higher profits despite lower U.S. market share.We also like GM embracing the opportunity of ride-sharing and ride-hailing and selling Opel/Vauxhall. We think actions such as a 9% investment in Lyft for $500 million, buying Cruise Automation, and unifying GM’s legacy car-sharing activities under the Maven brand, along with GM’s connectivity and data-gathering via OnStar, position GM well for this new era. GM expects to start autonomous ride-hailing at scale in 2019.General Motors designs, builds and sells trucks, crossovers, cars and automobile parts. The company also provides automotive financing services through its subsidiary, General Motors Financial Company, Inc. (GM Financial). GM Financial provides retail loan and lease lending across the credit spectrum. GM Financial provides commercial lending products to dealers including new and used vehicle inventory floorplan financing and dealer loans, which are loans to finance improvements to dealership facilities, to provide working capital, and to purchase and/or finance dealership real estate. Other commercial lending products include financing for parts and accessories, dealer fleets and storage centers.
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