Detroit has always been the beating heart of America’s automotive industry. The city was once home to a vibrant population thriving on the jobs provided by Ford Motor Company (F), Fiat Chrysler Automobiles (FCAU), and General Motors (GM). In recent years, however, motor city has been less vibrant than the “mo-town” of the late 20th century. As financial crises have rocked the American economy, manufacturing has migrated overseas, and the economics of electric vehicles have improved, the Big Three automotive manufacturers have struggled to grow. In response, General Motors (America’s largest automaker) has opted to shrink the scope of their multinational exposure and improve by growing smaller.
Founded in 1908, GM and its portfolio of brands including Chevrolet, Buick, GMC, and Cadillac are a mainstay in the U.S. auto market. At one point, GM commanded 50% of automotive market share in the U.S. In 2019, GM produced around 7.7 million vehicles. The company began trading on public markets in 2011 at $33 per share and prices are stuck drifting around that point despite the fact the company has beaten analyst earnings estimates for 21 straight quarters.
In 2019, GM generated $20.0 billion in EBITDA on $137.2 billion in revenues, but the organization has scaled back its production materially compared to 2016, a year in which the auto-maker produced upwards of 10 million vehicles. Coupled with the impact of the coronavirus pandemic, this scaling down of production is evident in the company’s stock ratings, which heavily reflect the 53.4% decline in year over year revenues reported in the company’s most recent earnings announcement.
These results reflect a changing auto market as much as they reflect a bad quarter. In recent months, GM has watched the market pile into its electric vehicle-focused competitors, like Tesla (TSLA), which now commands a valuation approximately 10x that of GM. However, the news isn’t all bad. Led by CEOM Marry Barra, the organization plans to invest $20 billion in electric and driverless vehicles over the next five years as it pursues what it views as the future of the automotive industry.
Ms. Barra has also remained adamant that GM will have to adapt in order to grow and deliver value to shareholders, and part of that adaptation has included downsizing. Since Barra started in 2014, GM has reduced the number of countries it operates in from 25 to 9, shrunk its global workforce from 219,000 to 164,000, and trimmed the number of global GM auto-dealers from 20,706 to 12,650. Although these moves have reduced GM’s overall revenues and global market share, they have helped the company eek out record operating income and profit margins.
Where the rubber meets the road, this all means that Barra has built a lighter, nimbler, more efficient GM that is positioned to benefit significantly should the company’s R&D investments pan out. A GM offering a set of electric and self-driving vehicles that could compete with first movers like Tesla would be a powerful player in the global market. In the meantime, investors have preferred GM shares over shares of the other major U.S. automakers, suggesting that maybe growing by shrinking isn’t such a bad strategy.