The Big Three automakers have had an impressive recovery. After a near-death experience in 2007-09, the U.S. automotive industry has come back with a vengeance, proving yet again that those who write off America do so at their own risk. Last year, General Motors sold 9.2 million vehicles worldwide, posting a 3% gain. GM is locked in a three-way race with Toyota and Volkswagen for the No. 1 spot among volume automakers. Ford sales were strong as well, topping 2 million units in the U.S. alone, and Chrysler was the best performer, albeit increasing sales from a low base. Still, its Jeep brand sold a record 700,000 vehicles worldwide.
Financial results have been equally impressive. Ford's pretax profits in 2012 were the highest in more than ten years, reaching $8 billion. The company not only resumed regular dividends in early 2012, but doubled them a year later. GM is running close to Ford in terms of profits, and, while the company projects only a modest improvement in 2013, some analysts believe that its profitability could be boosted substantially this year.
Chrysler—which seemed like a gamble when Fiat took it over in 2009—earned a $1.5 billion net profit last year and has an $11 billion cash pile.
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Financial performance was helped by a strong recovery in the U.S. market last year, where sales jumped 13.4%, with nearly 14.5 million cars and light trucks sold. Strong sales continued into early 2013. But this is only a small part of the story. The Big Three are now far more efficient, better managed companies. They have been able to overcome the resistance of the trade unions to more flexible work rules and more competitive wages.
Bankruptcy allowed GM and Chrysler to shed onerous unfunded liabilities to retired employees. As a result, the cost advantage in favor of Japanese manufacturers, measuring $1,000-2,000 per vehicles, has swung into the opposite direction.
The Big Three prospered last year by selling American drivers smaller, more energy efficient cars, but this merely indicated that they have become more responsive to the need of the markets. Chrysler executives believe that demand for pickup trucks and SUVs will rise this year, reflecting a return to normal market conditions and rebound in residential construction. If this happens, U.S. companies will not be caught with showrooms full of subcompacts, but adjust their offerings accordingly.
Moreover, Detroit is now a global city. GM remains the top seller in China, the world's largest motor vehicles market, just ahead of arch-rival Volkswagen. Ford is number two in Europe, and it posted gains in sales all over the world last year. Even Chrysler, which heavily relies on the U.S. market, has increased its global reach sharply, thanks to the international network of Fiat dealerships.
And yet automotive stocks have not been high fliers. Chrysler shares are not traded, and GM and Ford have performed poorly. To be sure, shares are up since mid-2012. GM shares have gained around 50%, reaching their highest level in nearly two years in early 2013. Ford shares similarly reached a two-year high in January. But their shares remain remarkably cheap. Ford, while paying a 3% annual dividend (compared to the average yield of around 2% for S&P 500 shares) trades at a price-to-earnings multiple of under 9. GM's P/E is not much higher, or around 11. This is still well below the average of nearly 17 for S&P 500 stocks.
Sales in Europe continue to flag after posting their worst result in 19 years in 2012, but sales growth was never expected to come from Europe, anyway. Instead, U.S. automakers have bolstered their positions in emerging markets, where the action has now shifted. India and other parts of Asia outside China, Latin America and Russia will continue to boost global demand for cars. After worldwide sales hit a record 80 million vehicles last year, a study by IHS Automotive predicted a rise to 100 million in five years, fueled by emerging markets.
