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Investing in US Auto Makers

We posed the question last fall, “ Is GM a good investment ?” In fact, is investing in US automakers in general a good idea? Most recent sales figures would indicate that this might be the case. The Chevy Cruze is now the bestselling US car and Chrysler’s Jeep Compass sales went up nearly three hundred percent. Meanwhile Japanese car production is hampered by the lingering effects of the worst earthquake, and subsequent tsunami, in the nation’s history. General Motors is projecting total sales for this year of over thirteen million vehicles. Investing in US automakers would seem to be a good idea, at least in the short term. GM is still in the early days after its recovery from bankruptcy and Japanese production will likely stay low for some time while the nation finds ways to increase electric production lost when several nuclear power plants were damaged by the tsunami.

With the prospect of fewer Japanese exports to the US in the near term US auto makers could reclaim part of their lost market share. But, will investing in US auto makers be profitable over the long term. The auto industry in the US is largely to blame for the position it finds itself in. As foreign auto makers invested in the technology for more efficient manufacturing and more fuel efficient vehicles the US auto makers made bloated profits selling oversized vehicles. The apparent disconnect from reality that plagued the Big Three was highlighted when they appeared before a congressional committee requesting protection from bankruptcy after flying in on private jets. The heyday of US industry is over. Although American ingenuity persists the fact is that Europe and Asia have long ago recovered from the devastation of the Second World War and are economic competitors. China has come out of its self-imposed communistic cocoon and is applying its unique brand of capitalism with a vengeance. The point is that US industry needs to innovate, be cost effective, and productive. When investing in US auto makers one should keep this in mind.

However, putting doubts aside, a good investment opportunity today could well be investing in US auto makers. The major competitor to the US auto makers is Japan and Japan has lost roughly fifty percent of its power generating capacity for the Tokyo Electric Company power grid. This is where the bulk of Japanese industry is located. There is talk of rolling blackouts of residential areas during the summer in order to preserve power for industry. There are also small companies that fear for their ability to survive until normal power supplies are reestablished. This gives the US auto makers a window of opportunity to regain customers that they lost due to their own disinterest over the years. Over the long term, however, Japan will reemerge as a great industrial power. The long term investor will wish to do diligent fundamental analysis when investing in US auto makers in order to profit from such investments and exit if profits falter. As usual we are neither promoting investing in US auto makers nor suggesting that investors ignore the opportunity. Rather we offer an example of what sort of investment opportunity investors may choose to investigate.

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