GM faces up to reality

GM’s job cuts and factory shutdowns make for bad politics – but the car giant has little choice, and investors know it. Matthew Partridge reports.

924_MW_P07_Shares+Main

General Motors: downsizing

General Motors is to cut up to 14,800 jobs and end production at several factories in the US and Canada. It's the car manufacturing giant's first significant downsizing since its bankruptcy in the wake of the financial crisis, reports Mike Colias in The Wall Street Journal. Unions decried the decision as "callous", while both US president Donald Trump and Canadian prime minister Justin Trudeau called GM's chief executive, Mary Barra, "to express their disappointment", with Trump telling Barra that "she should stop making cars in China and open a new plant in Ohio to replace the one that is ending production". Yet investors welcomed the move, with GM's share price surging nearly 5% on the announcement.

GM's move might seem unfair, particularly given that "during the financial crisis a decade ago, the US Treasury Department kept GM alive by investing $49.5bn in both equity and debt", say Bloomberg's David Welch and John Lippert. That bailout ended up costing the taxpayer $10bn. However, there's no getting away from the fact that "consumers are abandoning the conventional sedans that have defined the US auto industry since the days of Henry Ford". So it's no wonder that Wall Street is "applauding" the fact that GM "is moving unusually fast this time to reckon with the new reality".

New focus on robo-taxis and SUVs

GM is hardly alone in cutting production. Earlier this year, rival manufacturer Ford announced "it was all but giving up on cars" in favour of SUVs (sports utility vehicles), which "now outsell cars two-to-one" says Slate's Henry Grabar. It's somewhat ironic a decade ago, with oil prices soaring above $100 a barrel, a death knell was being sounded for the SUV, yet it seems that "a period of cheap gas and high consumer confidence has empowered Americans to stop caring about fuel efficiency".

The reality is that Barra's decision "to scrap low-selling brands and thin the $53bn carmaker's bloated executive ranks" was not only "overdue" but "gives GM more fuel to weather trade wars and slowing sales", says Antony Currie on Reuters Breakingviews. Her move also allows GM to put money "into the electric-vehicle and self-driving race Barra hopes to win". She "has already steered GM toward the front of the pack in developing the car of the future", with plans to start commercially operating robo-taxis in at least one US city next year. With car sales "slowing or falling around the globe", it "makes sense to act now while earnings are good and the balance sheet strong".

Green talk aside, GM's move reflects "a broader challenge" for US vehicle makers, note Brendan Greeley and Jamie Powell in the Financial Times. Demand has risen steadily since the recession, and is now "well above pre-crisis levels". The trouble is, production capacity is "well above its pre-crisis level" too. It increasingly looks as if US car makers have been "too optimistic" about future demand, with Federal Reserve statistics suggesting that over the past three years, the percentage of capacity actually being used has stayed "flat". So it makes sense for GM to cut car capacity and focus on light trucks instead.

Britain's ten most hated shares

These are the ten least popular firms in the UK, based on the percentage of stock being shorted (the "short interest"). Short-sellers aim to profit from falling prices, so it helps to see what they're betting against. The list can also highlight stocks that may bounce on unexpected good news when short-sellers are forced out of their positions (a "short squeeze").

CompanySectorShort interest on 28 Nov (%)Short interest on 2 Nov (%)
Kier GroupConstruction14.012.3
Pets at HomePet Retailers12.113.4
Ultra ElectronicsDefence11.910.3
Arrow Global GroupFinancial Services11.710.1
Marks & SpencerGeneral Retailers11.311.2
Plus500Financial Services10.710.0
DebenhamsGeneral Retailers9.811.6
Anglo AmericanMining9.0NEW ENTRY
IQESemiconductors8.911.4
PearsonPublishing7.79.3

The latest new entry is mining group Anglo American. Recent trading figures saw a 6% drop in diamond sales from its De Beers subsidiary, while the price of metals has been in decline due to fears about slowing Chinese economic growth.

City talk

"As Carlos Ghosn's incarceration without charge drags on, it is increasingly obvious that this is a coup d'etat," says Jim Armitage in the Evening Standard. The ex-Nissan chairman (accused last week of under-reporting his pay, which he denies) caused "huge friction" with Japanese managers, especially Nissan's CEO, who opposed "his plan to increase Nissan's domination by French partner Renault".

The "lopsided alliance" between the two has not changed much since 1999, when Renault rescued "the struggling Nissan", note David Keohane and Peter Campbell in the Financial Times. Now, there are "suggestions Nissan would be happier to cut ties with the company it sees as the weaker partner".

But while Ghosn (pictured) is being portrayed by the Japanese as "a garish free-spending gaijin who used corporate resources to buy homes and bankroll a lavish lifestyle", let's not forget that "Renault did revive Nissan", says Brian Bremner in Bloomberg Businessweek. Whatever happens, his place in business history is "secure" as someone "who saved a car company and did so with panache".

"Dolce & Gabbana is going out of fashion in China," says Clara Ferreira-Marques in Reuters, thanks to a "disastrously insensitive advertising campaign" depicting a Chinese woman trying to eat pizza with chopsticks. Having "cashed in on the mainland's ambitious urbanites", D&G is rapidly becoming "a prime example of how fast the same savvy shoppers can unravel a brand". If D&G cannot repair the damage it could lose a third of annual sales. It's yet another demonstration that "social media can be especially devastating when a company botches the message".

Recommended

Royal Mail will deliver for investors – here's how to play it
Trading

Royal Mail will deliver for investors – here's how to play it

Royal Mail Group has found its feet in the past 18 months and looks cheap. Matthew Partridge looks at how to trade the shares.
14 Sep 2021
The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Three hidden gems from Japan’s overlooked stockmarket
Share tips

Three hidden gems from Japan’s overlooked stockmarket

Professional investor Eiji Saito of JPMorgan’s Japan Small Cap Growth & Income fund picks three promising stocks from Japan's vibrant but under-resear…
13 Sep 2021
Change is coming to the German stockmarket as the Dax index expands
European stockmarkets

Change is coming to the German stockmarket as the Dax index expands

Germany's benchmark Dax stock index is to expand to 40 companies from the current 30 amid a broader shakeup of the German stockmarket.
10 Sep 2021

Most Popular

Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How you can profit from the power of the grey pound
Share tips

How you can profit from the power of the grey pound

Higher life expectancy and surging asset prices have proved a boon for the baby-boomer generation, which has accumulated vast wealth. Younger generati…
10 Sep 2021