A shiny new initial public offering (IPO) hit the market last month for a rusted old automaker. On Nov. 18, General Motors re-emerged on the New York Stock Exchange after surviving bankruptcy. The carmaker’s IPO, priced at $33 per share, was one of the biggest ever and came about sooner than expected for the once busted company.
On the very first day of trading, General Motors stock (NYSE, GM) rose 3.6 percent on heavy volume. At this writing, it is trading around $33 per share. Before you melt down grandma’s silver tea set for shares of GM, keep in mind that the company still has much to overcome.
In an effort to boost growth, GM just unveiled a new brand in China, targeting Asian buyers. Whatever GM is working on becoming, it will be a far cry from what it once was: The crown jewel of American industry. While GM is no longer the biggest automaker in the world, it is the largest overseas automaker in China.
“So what’s the difference?” Democrats ask as they race to proclaim the GM bailout a stroke of genius by President Barack Obama. This is what The Hill proclaimed under the headline, President Obama’s Capitalist Triumph on Autos:
“Let’s see if those Adam Smith wannabes on the Republican right, and Roger Ailes of Fox who again called President Obama a socialist, will give the president a standing ovation for his capitalist triumph in saving the American auto industry.” [Emphasis added]
Really? Yes indeed, writes The Hill:
“General Motors is now profitable. The auto business is coming back big time. The major Wall Street firms, private equity funds, mutual funds and hedge funds have been breathlessly trying to get their hands on the new GM stock. Remember when they called it ‘Government Motors’? Now they can call it Profitable Motors. Now they can call it the capitalist stock they all crave. Now they can praise the President for a job well done.”
Before you start applauding Obama, you may want to consider the fact that General Motors isn’t out of the woods yet; not even after the Troubled Asset Relief Program (TARP), which provided the nation’s largest car company with $50 billion in taxpayer money following its June 2009 bankruptcy.
General Motor’s IPO has reduced the government’s stake in the company from 61 percent to 36 percent. But the United States is still a huge shareholder, and for the Federal government to break even on its investment it will have to sell its remaining stake for about $50 per share. That is almost 50 percent higher than where the stock is trading now.
The Democrats don’t seem to think this will be a problem. In fact, Obama was quick to claim outright victory with the GM bailout, which he claims has saved more than 1 million jobs across all 50 states.
“We are finally beginning to see some of these tough decisions that we made in the midst of the crisis pay off,” Obama said.
It seems a bit early to proclaim victory by the President or anyone else. That is because we are not seeing anything close to a typical economic recovery for the auto industry.
Not Your Father’s Oldsmobile
The Daily Mail points out the facts: “At the bottom of the recession in June 2009, U.S. car sales had fallen a record-breaking 39 percent from their pre-recession rate of 16 million units a year in late 2007 to 9.7 million units. Based on analysis of previous recessions, by June this year car sales should have recovered 71 percent from 2009’s low. Instead sales have recovered a meager 14 percent.”
Detroit once dominated the car industry. Today the Big Three are in various states of disrepair while Toyota is the world’s largest car manufacturer.
According to Jess Toprak, an analyst at True Car Inc., GM’s future depends on the company moving 80 percent of its production outside the United States, principally in South America and China. That does not bode well for creating American jobs. The Democrats also seem to be ignoring the fact that Detroit automakers have been in a state of decline since the 1970s and that Washington has intervened for them, beginning with the Chrysler Corporation Loan Guarantee Act of 1979.
Furthermore, the United Auto Workers (UAW) union lost another 76,000 members last year, bringing its total membership to 355,000. This puts membership at levels not seen since the late 1930s, just after the fledgling organization had won recognition at General Motors. As the chart below shows, the UAW is an organization that is just a fraction of the size it was 30 years ago.
To believe that Obama has rescued GM is to ignore history and the inconvenient truth that U.S. automakers have been in a state of decline for decades.
In the Feb. 3, 1992 issue of Myers’ Finance & Energy I wrote: “Detroit’s Big Three auto chairmen have sallied over to Japan to hide behind the skirt of President (George H.W.) Bush as he begged for leniency from Japanese auto manufacturers. Further humiliation came when Japan gave trade concessions to placate the U.S. entourage. As one Japanese auto executive said, ‘our feelings are of sympathy for America’s plight.'”
I continued by saying Detroit was broken down and rusted out; that in the 1950s America manufacturers built three out of every four cars made world-wide and sold nine out of every 10 cars in the United States.
Given the Big Three’s long decline, The Hill must think as Henry Ford did, “History is more or less bunk.”* That might explain why that publication has waxed praise about the TARP bailout.
Built Like A Wok
The Democrats want to claim victory on TARP now that the Presidential election is less than two years away. As Charlie Wilson, President Dwight D. Eisenhower’s nominee for Secretary of Defense and the former CEO of GM pointed out: “What was good for our country was good for General Motors and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.”
So the Left is bragging that Obama saved the auto industry. But the truth is, only a few GM plants have reopened in the U.S. And while GM still earns most of its money in North America, the company’s focus for the future is overseas. For example, GM already sells more autos in China than it does in North America. And the company recently announced that it will start exporting Chinese-made Chevrolets to Latin America and the Middle East. Don’t be surprised when the people in the Midwest buy Chevy trucks made in Shanghai.
The fact is, TARP is not creating American jobs. Oh yes, Obama has helped the new GM; the one that will employ tens of thousands of low-cost Asian workers. The original GM, along with the rest of Detroit, is going to be as obsolete as the Edsel.
According to The Wall Street Journal, GM has been abandoning several North American plants and is continuing the massive downsizing that began last year. And UPI recently reported GM is holding fire sales on its U.S. assets.
“Auctioneers are selling lots of hammers, wrenches and 22-ton metal-cutting machines.” The buyers of these tools are foreign companies; corporations that will use these tools to build automobiles on foreign soil and sell them back to Americans; many who trusted in Obama’s vision.
Yours for real wealth and good health,
Myers’ Energy and Gold Report
* The famous quote by Henry Ford was just part of what he said to the Chicago Tribune in May 1916. “History is more or less bunk. It’s tradition. We don’t want tradition. We want to live in the present, and the only history that is worth a tinker’s damn is the history that we make today.”