For GM, which is worse—the recall or a weakening yen? (Part 1 of 12)
Toyota’s recalls were bigger
The below graph reflects the ongoing decline in General Motors’s (GM) stock price from January 1, 2013, through April 4, 2014. While the auto sector has been a bit soft overall since the beginning of this year, the below graph reflects that GM’s share price has slowly lost the momentum it had over Japanese automakers. Perhaps GM’s recall of as many as 4.8 million vehicles in 2014 (six times that of the 2013 levels) will reinforce this recent trend. It should be noted that GM’s 2014 total recall is far less than the 9 million that Toyota (TM) recalled in 2010, 7.43 million in 2012, and 6.4 million just announced April 9, 2014. This series considers the prospects for GM in relation to the Japanese automakers, and also examines the macroeconomic factors in the Japanese investment environment, which may support Japanese automakers in the future, and grow pricing pressures for the U.S. automakers like GM.
Are GM’s legal liabilities greater?
After Toyota had its own recall fiascos in 2010, 2012, and 2014, it would appear that GM has unfortunately fallen victim to the same fate. In 2010, Toyota had recalled 5.2 million vehicles for a petal/floor mat issue, and an additional 2.3 million vehicles for the accelerator problem. Toyota then recalled an additional 1.8 million vehicles in Europe, with total recalls standing at 9 million. In 2010, Toyota declined from $90 per share to $70 per share, or 22%. In 2012, Toyota declined from $93 per share to $62 per share, or 33%. In comparison, GM’s stock price is down approximately 22% since December 2013.
New GM/Old GM liability shield—not bullet proof
Given the relative size of past recalls in comparison to Toyota, it would seem that GM’s stock price decline may be at par with Toyota’s prior recall incidents. Thanks to the post-2008 bail out, GM shed $10 billion in debt, and has since generated $12.6 billion in cash flow in 2013, with a $27.92 billion cash position. Plus, if legal claims are made against the “Old GM,” the post-bankruptcy ”New GM” would be indemnified, and claims would have to be filed against the old shell company. So far, claims against the “Old GM” have been unsuccessful. However, the New GM did not receive indemnification for all claims that pertain to pre-bankruptcy issues. In other words, it would appear that New GM could be held liable for pre-existing conditions of the Old GM, which had not been identified or resolved prior to the bankruptcy reorganization.
Apparently, the ignition switch issue could be one of these pre-existing conditions from which the New GM is not completely indemnified by virtue of its bankruptcy. However, given the New GM’s cash flow and cash position, it is in a very strong position to address and resolve potential claims. Not that it is a significant issue at the moment, although technically, Toyota’s headquarters are in Japan, while GM’s are in the U.S., and the enforcement of legal liability against a foreign corporation is not as easy as enforcing Federal rulings in Detroit. (Not that Toyota would ever want to walk away from the U.S. auto market to avoid consumer liabilities.)
As Japan pursues unprecedented monetary expansion, and the U.S. Fed tapers its bond purchases, Japanese equities could also outperform broad U.S. equity indices, as reflected in the State Street Global Advisors S&P 500 SPDR (SPY), State Street Global Advisors Dow Jones Index SPDR (DIA), and Blackrock iShares S&P 500 Index (IVV).
For more on how the U.S. Fed’s recent announcements can impact global equities, read Will the Fed take a bite out of Apple?
To see how Japanese auto imports are growing despite the growing cost of oil imports, read the next part of this series.
Browse this series on Market Realist:
- Part 2 - How Japan’s weakening yen can be worse for GM than the recall
- Part 3 - Japan’s trade deficit with China: Worse for GM than the recall
- Part 4 - GM’s long-term competitive threat: Japan’s investment recovery