Maruti more valuable than General Motors

With GM on the verge of bankruptcy & Ford in trouble, the US auto industry has shrivelled

MUMBAI: If you wanted to buy General Motors, all you would need today is Rs9,000 crore. For that’s the meagre value the stock market puts on this iconic American company that was till early last year the world’s largest carmaker.

Not only has Toyota displaced it as No 1, our own Maruti-Suzuki is today worth Rs15,500 crore in terms of stock market valuation. Even two-wheeler company Hero Honda is worth more than GM at Rs14,670 crore.

In other words, Maruti is worth 75% more than GM, a company 17 times its size. In the first nine months of 2008, Maruti produced 3,82,000 vehicles while GM produced around 6,630,000. Ford, the No 3 US car-maker, is worth Rs20,450 crore. This means Maruti-Suzuki and Hero Honda together are more valuable than the two biggest US carmakers — GM and Ford.

The reason why General Motors is now available for a song - about $1.84 billion, at the current price of $3 a share on the New York Stock Exchange - is impending bankruptcy. The share has fallen 90% over the last one year as the markets have realised that the company is on its last legs. Or last wheels, if you will.

The company has been brought to its knees because it has been unable to compete with fuel-efficient Japanese cars, which has forced it to sell its cars at steep discounts to cost. Any buyer who opts to shell out Rs9,000 crore for GM will have to reckon with the possibility of going under himself as the liabilities of the company currently exceed its assets by nearly $58 billion (or Rs284,200 crore). This means the real price a buyer would be paying for GM is $60 billion - the market value plus liabilities.

The late Alfred P Sloan, a long-time president and chairman of General Motors who made GM an automobile superpower in the first half of the 20th century, once famously said: “What is good for GM is good for America.” The truth of that boast is, perversely, being borne out today as GM is going down along with the American economy.  

The difference is that while the US economic meltdown, which has forced the government to bail out several huge banks and financial institutions, is temporary, GM’s decline is almost permanent.

GM’s October sales numbers are an immediate cause for concern. Vehicle sales in the US fell by 45% from the same period last year. The current financial crisis in the US is obviously taking its toll on the company. GM president Fritz Henderson in a conference call with analysts to announce a third quarter loss of $2.5 billion said recently: “Immediate federal funding is essential in order for the US automotive industry to weather this downturn.”

But experts refuse to believe that the current financial crisis is the only - or even proximate - reason for GM’s failure. “General Motors has been in trouble for years. It is just pure fiction to say that the reason why the auto industry is now in trouble (Ford and Chrysler, too, are asking for bailouts from the US administration) is because of the financial crisis. These companies have had huge problems with their product offerings, labour contracts and management direction,” says Anil Kashyap, Edward Eagle Brown professor of economics and finance at the University of Chicago Booth School of Business (formerly the Graduate School of Business). 

“My feeling is they have been terribly run,” says Burton G Malkiel in reference to the US automobile companies. Malkiel is the Chemical Bank chairman’s professor of economics at Princeton University, and the author of the investment classic A Random Walk Down Wall Street.

News reports suggest that GM now has around $16 billion of cash left, but it is losing around $2 billion a month. Calls for a government bailout have already been shrill, and president-elect Barack Obama has supported the industry’s cries for help.

Estimates suggest that around 2.9 million jobs (directly as well as indirectly) depend on the three Detroit car makers (Ford and Chrysler being the other two). Other than this, there is a whole chain of automobile suppliers at work. Even if only GM goes bankrupt, the other two Detroit majors will find it difficult to build cars because of lack of spare parts when some component suppliers also go bust.

Given these reasons, it may not be politically viable to let GM go bust. Which is why Obama is trying to get the US Congress to approve a bailout of around $50 billion to save the US auto industry. In the recent presidential election, Obama won the state of Michigan (where Detroit is) with a huge margin.

“If the Obama administration would be in now, there would be a bailout of General Motors without question. It is the more free market Bush administration that is resisting,” says Malkiel. “It is very clear that the Democratic leadership in the Senate and the House of Representatives as well as Obama have said that they favour support right away for General Motors and that it would be unthinkable to see our automobile companies go bankrupt,” adds Malkiel.

So will the Obama administration bail out GM when it takes over from George Bush in January? “Yes, they will. If it hasn’t gone bankrupt before that,” says Malkiel.

But economists remain a little sceptical about efforts to bail out GM. “If we bail out General Motors and other auto makers now, I don’t think we are going to turn them around. We are going to put off the day of reckoning and we will end up spending taxpayers’ money that will not be repaid because they will again go bankrupt in a year or two,” says Kashyap.

All in all, a situation where you are damned if you do, damned if you don’t.