Last in a Series
“Well she got her daddy’s car and she cruised through the hamburger stand now; Seems like she forgot all about the library like she told her old man now… and with the radio blasting Goes cruising just as fast as she can now …” — from “Fun, Fun, Fun,” as performed by The Beach Boys
Several factors combined to create a downturn in the American car industry: foreign competition, rising energy costs, the deterioration of Detroit’s inner city, and the incredible cost of pension and health care plans for employees in the United Auto Workers Union.
“Ultimately, the UAW drained out the value from once colossal companies, General Motors in particular,” wrote Roger Lowenstein in “While America Aged.” This is no exaggeration. From 1989 to 2006, the company’s pension plan cost GM $55 billion. Over the same period, it paid out $13 billion in dividends, meaning that its retirees received four times as much money as did the investors who owned the stock. GM vastly underestimated the long-term costs of its pension commitments.
No one could have foreseen that the giant auto maker, at one time the world’s most powerful and successful business, would ever need a government bailout like the one it received from T.A.R.P. in 2008. The car business has risen from the ashes since the Great Recession, just like our economy, but now stands at a critical juncture.
Volvo has announced that its future is almost entirely electric. Other car makers are following suit. The challenge is not only to American car makers to transition, but the various ancillary industries that service cars must also adapt.
How long will it take for us to get from gas-powered cars to almost all electric and self-driving cars? It will be a difficult transition with lots of regulatory hurdles. China is our greatest competitor in this transportation battle. In many ways, the race to produce autonomous electric vehicles is like the space race vs. Russia in the late '50s and ’60s.
The legacy U.S. auto makers have not done as well as their all-electric counterparts to date, but they’re potentially stronger business contenders if they can adapt to the new paradigm. Whether people will actually own cars in the future in the same way they do today is another challenging issue facing car makers and dealers.
Stock market valuations sometimes serve as a collective outlook. The market currently trades at 25 times earnings. GM trades at five and a half times earnings. These price to earnings ratios reveal the collective expectations of investors regarding the auto industry. People expect these companies to make significantly less than they make now. So the forecast is not good.
For now, most Americans still want to own a new car occasionally and are happy to purchase a gas-powered one. Your next car and mine doesn’t have to be electric, so car makers have a window during which they can convert to electric. But in 10 or 15 years, that window may be closed. And U.S. car makers must adapt to survive.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.