General Motors offers buyouts even after a strong Q3, Japanese automakers’ factories aim to be more flexible, Tesla’s investors want to go further and much more on this, The Morning Shift for Thursday, Nov. 1, 2018.
1st Gear: Why GM Proved Investors Wrong
First, let’s look at that strong quarter GM just finished up. As frequent Morning Shift customers know, the automaker’s biggest problem with its stock price has been convincing analysts and investors that it can weather another economic downturn and that it’s generally prepared long-term for an electrified and potentially autonomous future. It’s not about now, it’s about the long game. Ford has had the same problem but it’s even worse over there.
But GM still managed to beat expectations the old-fashioned American way: with large pickup trucks and margins on luxury cars sold in China, reports Bloomberg:
It’s been more common for GM’s stock to get a bump lately because of its Cruise self-driving car unit, which has lured billions of dollars in investment from a SoftBank fund and Honda Motor Co. This time, it’s getting credit for selling new pickup trucks and sport utility vehicles at fatter prices in the U.S., plus higher-margin Cadillacs are catching on in China.
“The issue has not been financial performance, it has been negative investor sentiment,” said David Kudla, chief executive officer of Mainstay Capital Management LLC, which holds GM shares. “Strong performance in China and positive forward guidance could change that sentiment.”
Adjusted profit unexpectedly rose to $1.87 a share when analysts anticipated a decline from a year earlier, as GM overcame slowing demand. Quarterly revenue rose the most since 2011. GM pulled this off despite its global retail sales falling 15 percent for the quarter.
The headline on that story is “GM Shows Money Can Be Made in the Boring, Old Car Business”, and it’s accurate. That’s not necessarily what investors want—they want THE FUTURE—but the company is doing well at the moment.
2nd Gear: GM Plans Buyouts For 18,000 Employees
Alright, so why offer buyouts to 18,000 salaried workers just in North America then? Exactly for the reasons in 1st Gear, pretty much.
First of all, cost-cutting has been a big part of those profit margins so far. Second, GM says that in order to prepare for said downturn/electro-autonomy future, it’s making these cuts while it’s healthy, reports Automotive News:
The company, after inquiries about the offer, confirmed the plans as “proactive” measures to address future headwinds that GM expects as it invests in autonomous and electrified vehicles and as auto sales in North America and China — its largest markets — slow.
“We are doing this while our company and economy are strong,” the company said in an emailed statement. “The voluntary severance program for eligible salaried employees is one example of our efforts to improve cost efficiency.”
A notification was sent regarding the voluntary severance program to employees Wednesday morning, as the automaker reported a 25 percent increase in pretax profit in the third quarter and net income of $2.5 billion.
If GM determines that there are not enough volunteers for the buyout, the company could terminate employees. GM declined to disclose the number of people it wants to take the buyout offer or the buyout program’s expected cost.
“We will evaluate the need to implement after we see the results of the voluntary program and other cost reduction efforts,” GM said.
It’s more than a third of GM’s 50,000-strong North American workforce and is open to employees with 12 or more years of experience.
3rd Gear: How Japan’s Automakers Stay Flexible
Yet even as some automakers like GM are doing well, make no mistake: this is a very uncertain, precarious time for the industry as a whole. Sales are expected to drop through the end of the year. Long term, no one knows what’s going to happen with electrification and autonomy, and who will survive those shifts. Gas prices could spike again. And President Trump’s tariffs on steel and imported cars have thrown existing plans into disarray.
One way to combat the last problem is to keep factories flexible in the vehicles they produce, something Reuters reports the Japanese are especially strong at. It’s the weapon of choice in the Trump trade wars:
At points along the assembly line at Nissan Motor Co.’s largest U.S. factory, workers wheel trolleys past shelves selecting parts wherever they see a green or blue light.
Nissan calls the system “pick to the light,” and it helps workers get the right part for whichever of six different vehicles built at the plant, according to Ryan Fulkerson, director of new model engineering during a walk along the line.
“No matter which model comes down the line, the right parts are waiting for it,” said Fulkerson.
Designing assembly lines to build more than one type of vehicle dates back decades. But the ability to shift production from one type of vehicle to another is now proving vital for an automotive industry coping with multiple challenges.
[...] Nissan and rival Japanese automakers Honda Motor Co. and Toyota Motor Corp. have been the best at flexible manufacturing, auto experts and industry executives said. Historically, Japanese automakers focused on interchangeable processes and platforms out of necessity — because one model for the Japanese market could not sustain an entire factory.
So basically, no matter which way the winds shift, those factories are prepared to do what’s necessary. By contrast, automakers like GM have struggled with this:
But General Motors illustrates some of the pitfalls of relying on single models. While The No. 1 automaker’s U.S. plants producing popular pickup trucks are running around the clock to meet demand, others that make a single car model are running well below capacity.
At the GM plant in Lordstown, Ohio, workers make only the Cruze compact sedan, which has suffered a 26.5 percent sales decline this year through September. The plant is running a little over 30 percent capacity, on one shift.
Raph and I drove right past that plant on our BMW cross-country trip. I had forgotten that it only makes the Cruze, at a time when pretty much nobody is buying the Cruze or other small cars. Rough times in Ohio.
4th Gear: The Clock May Run Out On An Autonomous Car Bill
Even non-controversial bipartisan bills are having a hard time in Washington right now, with the elections coming. An important bill that would clarify federal regulations for autonomous vehicles, and pre-empt state and local rules, may get held up in Congress this year. Via Bloomberg:
A push on Capitol Hill to speed development of self-driving vehicles may not cross the finish line in time for this Congress — casting doubt on the future of unusually bipartisan legislation in Washington.
In order to get a final bill to President Donald Trump this year, the Senate must pass still-pending autonomous vehicle legislation quick enough after next week’s midterm elections to hammer out a compromise before the end of the year with House lawmakers who passed a different version.
If they fail, the House-passed measure dies and the next Congress would have to start over next year.
“This entire process has been an incredible feat of bipartisanship,” said Greg Rogers, director of government affairs at Securing America’s Future Energy, an energy-independence advocacy organization. “Attempting to recreate a bill that’s this ambitious and this significant would be like trying to catch lightning in a bottle all over again.”
As that story notes, a lot of this is up in the air with the looming mid-term elections:
It’s uncertain whether the bipartisan agreement that produced both the House and the Senate measures will be re-created in the next Congress. If Democrats secure a majority in the House, legislative priorities may shift. The rancor and discord that has upended other measures such as immigration and health care reform may spill over.
5th Gear: Tesla Investors Want Board To ‘Grow Up’
Despite what’s been probably its most contentious year yet, Tesla is doing well at the moment in terms of profits and production, though many aspects of what it does remain shaky. CEO and former board chairman Elon Musk’s endless drama hasn’t helped with that.
The Securities and Exchange Commission ordered Musk to step down from his chairman role, and has told the board to appoint two new independent directors. But some Tesla investors say those reforms don’t go far enough. Via Bloomberg:
The investors — several of which have pressured Tesla in the past, and achieved mixed results — lay out a series of measures the board should take to boost oversight and better hold Musk accountable as CEO. The billionaire’s run-in with the SEC over allegations of securities fraud have added urgency to changes that the investors say are long overdue.
“Shareholders need new stewards on the board,” the investors wrote in a letter Thursday to three of Tesla’s independent directors. The signatories are officials with California, Connecticut, Oregon, New York state and city pension funds, plus CtW Investment Group, which is affiliated with a federation of unions.
Tesla didn’t have an immediate comment.
The group wrote that they help oversee about $774 billion in combined assets and say they’re substantial investors in Tesla. They call for the creation and release of a plan to refresh the board and for timelines to be set for some directors to leave.
The investors also ask that the board permanently separate the chairman and CEO positions, a step beyond the SEC settlement that prevents Musk from being able to hold both jobs for three years.
In part, this group is mad that so many board members are Musk family members, friends or close allies:
Investors have long criticized Tesla’s board for several directors’ close personal and professional ties to Musk that date back years. In April 2017, the California State Teachers’ Retirement System, New York City Comptroller Scott Stringer and CtW were among those who called for the company to add new independent directors. James Rupert Murdoch and Linda Johnson Rice were appointed about three months later.
[...] “Five of eight current non-executive directors have professional or personal ties to Mr. Musk that, in light of recent events, appear to have put at risk their ability to exercise independent judgment,” the investors wrote. “As the SEC has recognized, Tesla’s board needs directors who go beyond the technical definition of ‘independence,’ and fulfill the spirit of the term.”
Would such reforms fix some of Tesla’s chaos?
Reverse: Visit Scenic Windsor, It’s Great, I’ve Been There
Neutral: Is GM Making The Right Moves?
What more should it be doing, for now and for the future?