What Is The Deal With GM?

Context

GM has exited several markets in the recent past. Recently it exited the Indian market as well. These are very bold decisions and go against the grain of a company that is historically known for a lack of market focus.

So, how can we make sense of this?

Well, instead of giving our readers ready-made perspectives, we offer you exercises to practice your ability to develop perspectives. In this context, below are some dots that we have selected for you. Your task is to connect these dots, in order to develop a theory about what is going on at GM.

Dots

Dot 1: GM has exited from multiple markets

In the past 2 years, GM has exited big markets–such as India, Russia, South Africa, and Europe. Most of these markets were loss making for GM.

Dot 2: Ironically, the company has been historically known for stretching itself too thin

Such a market focus (as is depicted by dot 1) is a bit unexpected from a company that has historically displayed a complete lack of market focus. For instance, in 2009 GM’s web site listed a product portfolio of over 95 cars!

Dot 3: Institutional investors own 75% of the company (very high!)
General Motors
Ford
Toyota
Source: http://www.nasdaq.com
Dot 4: GM is known to give money back to its shareholders–often after some activism 

From 1996 to 2000, GM delivered more than $20 billion to shareholders: $13 billion in multiple repurchases and an additional $7 billion in dividends. Toyota, however, followed a different path.

In 2015, an activist named Harry Wilson with a relatively small position in General Motors pressed the company to deploy $5 billion of its cash to buy back its stock. This move probably does not make sense in the long term since General Motors needs a large cash cushion to deal with possible downturns. Yet General Motors agreed to Wilson’s proposal without putting it to a shareholder vote.

Dot 5: Frustrated by GM’s share price, some investors have proposed 2 types of shares

The frustration with G.M.’s share price led Greenlight Capital, the hedge fund overseen by the billionaire investor David M. Einhorn, to propose creating two classes of stock — one that pays a dividend on the company’s core business, and a second that tracks its growth in ventures such as autonomous vehicles and ride-hailing services.

Dot 6: GM has become quite profitable in US recently

GM reported a record quarterly Q1 2017 profit on robust sales of its large pickup trucks and crossovers in the United States. The No. 1 U.S. automaker said it was its highest ever profit for a first quarter, including pre-bankruptcy which it emerged from in 2009.

Dot 7: Auto industry is at an inflection point–due to electric and self-driving technologies

 “When I look at the automobile, what I see is that software becomes an increasingly important part of the car of the future,” Tim Cook (Apple’s CEO) said, according to the Journal’s live-blog of the event. “You see that autonomous driving becomes much more important.”

Dot 8: GM seems to be investing in new disruptive technologies

GM spent over $1 billion for its acquisition of the startup Cruise Automation. It also has invested $500 million in Lyft. Marry Barra, who became the CEO in 2014 is said to be pushing the company in these new directions.

Dot 9: GM had to be bailed out by the US government in 2008

The US government shelled out $49.5 billion in 2009 to ensure that General Motors survived its bankruptcy filing. Through the bailout, the US government became a part-owner of GM, which it remained, until finally selling its stake in December 2013.

Dot 10: GM is highly unionized

GM reported that it earned $9.4 billion in 2016, enough to win unionized GM workers a $12,000 profit-sharing bonus. This announcement of profit-sharing figures may give autoworkers a reason to dislike reforms that would make GM less profitable.

Theory

Surface-level sensemaking

A surface-level theory will connect only a few dots. It will go like this:

GM is going after profitable markets and exiting from loss-making markets [Dot 1]. Its strategy seems to be to go after profits and not market share. This makes sense–esp. when it is making money already in the US [Dot 6], and also because GM has already faced the consequences [Dot 9] of a lack of focus [Dot 2] too. After all, Apple has also followed a similar strategy–and very successfully!

Interestingly, this is the theory that is doing rounds in public domain.

Deep-level sensemaking

A good theory must connect all the salient dots. Though, keep in mind that a few dots may be noise too! Below is an attempt at a theory:

Diagnosis

GM is going after profitable markets and exiting from loss-making markets [Dot 1]. Its strategy seems to be to go after profits [Dot 6] and not market share. But there is more to the picture! But, for that let us go back in time a bit.

Historically, GM has been known for a  lack of focus [Dot 2] and it has already faced the consequences [Dot 9] too.

GM’s institutional shareholders took heavy positions [Dot 3] in GM due to GM being a top auto company for decades. But, these shareholders have been unhappy due to GM’s stock’s performance. Hence, they have often pressurized GM to return money–through dividends and share buy backs [Dot 4], and other proposals [Dot 5].

Now, it is quite expected that a lot of these institutional shareholders would prioritize short-term profits over long-term profits–esp. in case of an uncertain bet like GM. So, there would be a force-at-work to make GM avoid getting into loss-making areas/markets. But, there will be some shareholders who would see things differently. They would want GM to take some risks, tolerate some losses, in the hope of future returns. This is a typical scenario–and it will lead to a conflict in a typical situation. And hence company’s actions will lack decisiveness.

So, what has happened now that has made GM take such decisive moves [Dot 1]? In our view: it is the impending disruption of the auto industry [Dot 7]. Let me explain.

Institutional investors are a powerful group at GM. They are calling the shots [Dot 3]. The threat of disruption has made both the short-term as well as the long-term institutional investors agree and align on at least one thing: there is no point in wasting cash on loss-making markets under the same old business model. The decisiveness that we see in GM’s moves is a result of this meeting of minds.

Prognosis

This is where things get more interesting. If our diagnosis is true, then we will not see much trouble in GM’s effort to conserve cash (by exiting out of loss-making areas). The most powerful group–the institutions investors [Dot 3]–will all agree to this.

But, there will be a conflict over the best use of the conserved cash! Some investors would want cash to be returned back, while other would want it to be invested in disruptive technologies [Dot 8].

Our view on the endgame

GM does not have visionary leadership. GM does not have innovation as one of its strengths. GM competes now with Silicon valley too. Hence, most investors would eventually align on not betting on GM. Hence, they will aim to milk GM like a cash cow.

Note: What you see above is just an outside-in attempt based on limited information. The point is to do such sensemaking over time as new evidence unfolds, and after some time you will start feeling on top of the matter!

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