|
Published: November 6, 2009
Back in May I recommended that readers
should buy shares in Ford Motor Co. (NYSE: F) on the
grounds that the U.S. carmaker would gain market share from the
bankrupt General Motors Corp. and Chrysler Group LLC. Ford’s
third-quarter profit and healthy October sales growth show I
called that one right. One doesn’t like to blow one’s own
trumpet excessively, but if you’d followed my advice in May, you
would today be sitting on a profit of nearly +50%.
However, while I admire Ford for its brilliant strategic
decision not to cave in and accept government-sponsored
bankruptcy, and wish it well in its future battles with GM and
Chrysler, I’m not sure the company that Henry founded represents
the future for the global automobile industry.
More likely -- while Chrysler will become a money-pit that is
closed only by political means, and GM will limp on as a smaller
and marginally profitable U.S. and European producer -- Ford
will slim down to become a specialty producer of cars tailored
to the tastes and needs of the U.S. market. It’s well known that
the auto preferences of U.S. consumers differ greatly from those
of their European counterparts.
It comes down to this: Ford should be able to make money by
limiting its “world car” ambitions and focusing on those needs.
Detroit Will Need to Learn From Asia
In the world as a whole, the big auto story has been the
continued advance of manufacturers from China and India.
In China, the cheap-money policy of the People’s Bank of China
has helped fuel a continued boom in automobile purchases, to the
point that 2009 vehicle sales in China will reach the 11 million
mark -- making the Asian nation a bigger auto market than the
United States.
In fact, even if China were to suffer a recession, that market
is likely to remain the world’s largest long-term -- despite the
fact that the U.S. market will recover substantially from its
2009 lows.
If China has the world’s largest automobile market, we should be
paying attention to trends in Chinese manufacturing, because
those guys will now possess economies of scale that in the long
run should enable that country’s factories to undercut the cost
structures of Western manufacturers.
From 10,000 miles away, the most interesting Chinese automobile
manufacturer would appear to be Geely Automobile Holdings
Ltd. (OTC: GELYF). Geely manufactures
automobiles for China’s domestic market. More interesting, it
has specialized in “pastiche” reproductions of famous Western
brands, which sell at discounted prices to wealthy Chinese. It
has several Mercedes-type models, some Ferraris and other
Italian sports cars, and a Rolls Royce/Mercedes hybrid.
Of course, Geely can only do this because of China’s slowly
improving, but-still-problematic disregard for intellectual
property laws. However, in a world where China is the largest
automobile market, it may well be that Geely’s approach to
automobile design and manufacture is the wave of the future.
Indeed, the ability to manufacture efficiently even in
much-shorter production runs may bring this to the U.S. market.
One can imagine a business in which the customer could order a
product tailor-made to his or her specifications from a
catalogue that includes the broadest possible design cornucopia.
If, for example, you want a 1924 Hispano-Suiza H6B, you’ll be
able to have one. It makes a Hispano-Suiza H6B noise, and
probably rides like the original. But it will also have modern
safety features, low maintenance costs and a modern, efficient
non-polluting engine.
In the immediate term, Geely has submitted a bid of around $2
billion to buy Swedish automaker Volvo from Ford. From Ford’s
point of view, this makes sense.
Ford sold the luxury brands Jaguar and Land Rover to India’s
Tata Motors Ltd (NYSE: TTM) last year, having taken the
view that high-quality/small-volume automobiles were tough to
make money on, and had little synergy with its mainstream
business. Selling Volvo would get Ford out of the specialty
market altogether, and enable it to concentrate on its core Ford
and Lincoln/Mercury brands. The only major impediment appears to
be intellectual property: Ford owns a large number of Volvo
patents and design specifications and doubtless regards Geely’s
insouciant attitude to intellectual property as a threat.
Geely shares trade in the U.S. Pink Sheets, as well as in Hong
Kong, and currently trade at about 13 times historic earnings.
But the share price has really run up -- to the tune of about
+800% -- during the past year as the company became better-known
to Western investors. At current levels, Geely shares are
trading at about twice their inflated 2007 peak price, so
investors should conduct their own due diligence and approach
the stock with due caution.
India Enters the Picture
China is not the only source of new competition for the
United States’ Detroit and Germany’s Wolfsburg. The Indian
market has also been expanding rapidly, although it is still
only about one quarter the size of the Chinese market.
Tata Motors appeared well placed in early 2008 in that market.
However, its Jaguar/Land Rover purchase -- made at roughly the
market peak -- made the company appear very unstable, indeed.
Tata’s other new product venture -- the Tata Nano, which is
designed to sell for 100,000 rupees (about $2,300), a price
that’s roughly 40% lower than rival offerings -- also was
delayed in September 2008, when Tata had to move its proposed
manufacturing facility owing to local opposition.
The upshot: Tata looked to be in severe danger last winter.
However, Tata’s earnings in the quarter to September more than
doubled from the same period in 2008, on only a +13% increase in
revenue. Since the company also raised $750 million in
convertible bonds during the quarter, the immediate cash flow
worries have largely dissipated.
Moreover, the Nano introduction was a great success. Production
is expected to ramp up to 250,000 vehicles in 2010-11, and the
car is expected to maintain a large price advantage over
competitors for at least a couple of years. Losses at
Jaguar/Land Rover also are lessening, so Tata looks likely to
survive and grow rapidly in the years to come.
Like Geely, its shares have run-up sharply in the last few
months, but look like a sound long-term investment.
In Europe and the United States, the automobile sector looks
mature and not very interesting. In Asia, however, there is true
growth ahead. Asia also possesses companies such as Geely and
Tata, which are trying innovative strategies to capture that
growth. As an investor, I prefer to go where the growth is, even
if relative prices are higher and risks more substantial.
-- Martin Hutchinson
Contributing Editor
Money
Morning |
