Blog > US Stocks and Markets > Bad sales at General Motors (GM) and Ford Motor Company (F) could pummel Tata Motors (TTM) and Brilliance China Automotive (BCAHY)
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Bad sales at General Motors (GM) and Ford Motor Company (F) could pummel Tata Motors (TTM) and Brilliance China Automotive (BCAHY)

Posted August 1, 2008

The practical consequences of unsold inventories and worthless used cars at General Motors (GM) and Ford Motor Company (F) could pummel Tata Motors (TTM) and Brilliance China Automotive (BCAHY).

by J. Christoph Amberger

Baltimore — (TFN): In a year of Monday morning hangovers, the U.S. automotive industry just chalked up another bad day as Ford Motor Company (NYSE:F) announced a 15% drop in July car sales. Overall sales year-to-date are down 14.2 percent to 1.3 million vehicles (from 1.5 million last year). Shares of Ford are now selling at roughly the same price as a gallon of super.

Half a gallon, if you happen to live in Europe.

General Motors Corp. (NYSE:GM) also has been caught with its full body weight resting on the wrong foot. While people are putting their names down on waiting lists just to qualify for the Toyota Prius waiting list, GM’s been left with a mega-parking lot full of unsold trucks and SUVs. GM was forced to chalk up a second-quarter loss of $15.5 billion, or an enormous $27.33 a share, from a year-earlier profit of $891 million, or $1.56 a share.

Revenue for the June quarter fell 18% to $38.16 billion. This not only reflects lagging U.S. sales but also lagging sales abroad. (No wonder, if the American consumer feels depressed and stops buying, all those countries carried piggyback by Joe Sixpack’s joyful spending over the years end up sitting on unsold inventories as well.)

Foreign competitors are beginning to feel the pain: Germany’s BMW AG (BMW.XE) announced today that a dramatic downturn in sales means that it won’t meet previous targets for 2008 — after a 33% decline in second quarter net profit.

They have seen nothing yet.

Used car catastrophe

This is only the beginning of an epic shake-up in the global automotive industry.

Over the years, U.S. car manufacturers have increasingly depended on leasing and used car sale revenues.

By 2005, Detroit had pumped up the amount of leasing contracts to 17 million annually — thanks to massive corporate subsidies. Pennywise automotive consumers were allowed to pay through the nose for enjoying the fading of that new car smell. At the end of the contract, the depreciated vehicle reverted to the appropriate subsidiaries, to be resold as a used car.

For 2008, the Center of Automotive Research expects 2.2 million leased cars to come home to Detroit. GM’s financing arm GMAC alone has $33 billion of used jalopies on the books. Many of them are pickup trucks, SUVs, and other models with sub-par mileage standards. Supplies are swelling, demand is choking, and valuations are plummeting.

Leasing gas guzzlers at this point is financial suicide. Which is why Detroit’s Big Three have stopped a number of leasing programs.

Writing off millions of devaluing used vehicles will not only send the financials for GM, Ford, and Chrysler down even further in the next two quarters. The question of what will happen to all that unsold inventory is quite another problem.

Global glut

U.S. consumers believe that gasoline at $4 a gallon is the fifth horseman of the apocalypse. Of course, $4 a gallon is a nostalgic memory for drivers in Europe, who are paying anywhere between $6 and $9 per gallon depending on the greed of their national governments.

The only consumers in the world who remain shielded from high gasoline prices live in countries that subsidize gasoline: In Russia, gasoline costs $2.10 a gallon. In Riyadh, a gallon is $0.91, in Kuwait City it’s $0.78… and Venezuela’s Peto-Communist Hugo Chavez buys the favor of the crowds with $0.12

The Chinese are bracing for a post-Olymic jump in gasoline prices from around $2.60 a gallon to $2.80.

Oh, the humanity

Chances are that global manufacturers will bee seeking to offload millions of used and unsold new cars at dumping prices into markets like China, India, the Arab petrocracies, and Russia. Since manufacturers in all established consumer markets depend on exports — as is evidenced by the pain visited by hesitant U.S. car buyers on European makers — the competition for survival sales in these markets could result in ludicrously undervalued car prices over the next two years.

Back in the 80’s — when the dollar was strong, men were men, and Ronald Reagan was president — many Americans combined their European vacations with the purchase of a luxury car which, after a few hundred miles on the odometer, could be imported to the States as a used car for great discounts. In this decade, many European car buyers took advantage of buying and re-importing European-made cars from the States back into Europe.

As global Caravan Capitalism moves along, chances are we’ll be able to pick up American and European luxury models at great discounts in Beijing, St. Petersburg, or Doha starting later this year.

But what’s good for the consumer could be devastating for the nascent industries in China and India. Be honest: If you had the choice between a Nano and an underpriced BMW — what would you buy?

This is bad news for Tata Motors (NYSE:TTM), Brilliance China Automotive (OTC:BCAHY), and other Asian manufacturers.

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Posted by J. Christoph Amberger · Filed Under US Stocks and Markets 

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