In this month’s management briefing, Rob Golding runs his financial rule over the financial position of the automotive industry’s major OEMs. In this instalment: Ford, GM and Fiat-Chrysler.
The five-year trend of vehicle sales in the US shows Ford with a 15.5% market share squashed between General Motors with a dominant 18.25% and Toyota at 13.9% (with Chrysler now running at fourth with 11.6%.) The momentum for the big three domestics in February was for Ford to remain stable while GM lost 2% and Chrysler gained by the same amount.
The trends on pre-tax operating profit were better than stable; it was $463m up year-on-year in the fourth quarter of 2011 and the group ended the year generating $10bn of net cash.
Higher fuel prices have been driving demand for more fuel-efficiency and Ford has been investing heavily in new cars, pick-ups and trucks with good fuel economy, especially Focus, Escape and EcoBoost-powered vehicles.
Focus contributed 40% to the company’s total vehicle growth – more than any other vehicle – in February. Utilities gained only five percent, but Escape set a February sales record with over 18,000 vehicles sold. Escape had two best-ever sales months in January and February – its strongest start to a year.
GM is clawing its way back from bankruptcy but still has heavy decisions to make. It is generating alliances with other makers to save on the cost of components and will review the company from top to bottom to find additional efficiencies. But the next decision is the hardest. It has to reduce capacity in Europe in recognition of the vicious competition and the lack of potential to generate profit. After Antwerp, the two next most likely targets for capacity cuts are the Astra model car factories in Bochum, Germany and Ellesmere Port in the UK. The van plant in Luton UK is also under review again.
Negotiations with employees at all three are in progress. The UK has the advantage of huge Vauxhall sales – it is second only to Ford in the rankings. One option is exports and Australia will soon receive British vehicles. Cars might also go to China. Two new models are planned by GM for Europe. There is a gap at the bottom of the range and a study running called Junior (likely to be ‘Adam’ for Opel). GM also believes that there is scope to introduce a premium car at the top to compete with Mercedes, BMW and Audi.
If Fiat goes on buying Chrysler shares at the present rate, we will see the troubled Italian company firmly in charge of the severely-challenged US company before the end of the year. We know that it can be done because Fiat has call options over Chrysler stock owned by the UAW and the US Treasury. Neither owner wants long-term equity commitments.
Analysts are keeping a close eye on events in Brazil where Fiat is deemed to make the money that partly disguises inadequate profit in Europe (small cars, discount prices, cut-throat market).
If and when the South American contribution falters, warning buzzers will trigger in the CFO’s Turin office. Fiat will have lost its honey pot and be in even more trouble than it is already.
Marchionne knows that the alliance is high risk. Ford failed to save Jaguar, Land Rover or Volvo. GM failed to save Saab. Daimler Benz failed with Chrysler and offered an expensive lesson to others for study. The one steady beacon of hope is the JLR second marriage to India’s Tata.
Equity analysts in London take the very simple view that Chrysler has a high gross margin on an average price per unit of EUR20,000 while Fiat has a low or no margin on cars of EUR13,000 average price.
Max Warburton, analyst at Bernstein Research, recently wrote that Fiat’s cheap, small cars “cannot generate decent margins almost regardless of volume and cost structure.”
Chrysler’s personal struggle is with the writhing python of high oil prices and the forthcoming, stiffer CAFE fuel-economy regulations.
What Fiat does have available to sell under a scenario where the wolves start to require feeding, is Ferrari. This business is a jewel whose value far exceeds its modest profitability. VW for example, would know exactly how to extract scale benefits if it added Ferrari to its Lamborghini/Bugatti/Porsche combo.
See more: just-auto management briefings
|Summary financials||12 months to end 2011|
|Operating Income (m)||8.3||8.7|
|Net Income to Common Stockholders (m)||7.5||6.1|
|EPS – Diluted ($/Share)||1.9||1.5|
|Net Cash from Operating Activities – Automotive||1.4||9.8|
|Summary financials||12 months to end 2011|
|Operating Income (m)||5.1bn||5.7bn|
|Net Income to Common Stockholders (m)||4.7bn||7.6bn|
|EPS – Diluted ($/Share)||2.89||4.58|
|Net Cash from Operating Activities – Automotive||6.6bn||7.4bn|
|Profit before tax||0.7bn||1.4bn|