DETROIT A looming slowdown in global auto demand will test U.S. automakers General Motors Co and Ford Motor Co as they try to funnel more cash to shareholders while still investing adequately in new vehicles and technology.
At a conference on the sidelines of the Detroit auto show, the rivals outlined their strategies for an era of slower growth and rapid shifts in technology and consumer behaviour.
As of Wednesday, GM (GM.N) was winning the referendum among investors, with its shares up slightly, while Ford (F.N) shares sank about 5 percent. Yet with investors concerned about the challenges facing the automakers, shares of both companies remained well below the highs they hit during the past 52 weeks.
Some of these issues, such as the ups and downs of the sales cycle and pressure to make cars safer, are as old as the car industry itself. Others are still not clearly understood, for instance the transformation of cars into digital devices and selling to consumers who want to buy rides instead of cars.
Automakers face a challenging future where 60 per cent of the value of a car is software and content, said Morgan Stanley analyst Adam Jonas, who has a sell rating on Ford and is restricted from covering GM. With China's market uncertain and U.S. vehicle sales at a peak, "more investors will say it's a pretty good time to sell" automaker shares, he said.
GM Chief Executive Officer Mary Barra and two of her top executives outlined plans to return to shareholders a total of $16 billion for the period of 2015 through 2017. In March 2015, GM agreed to return a total of $10 billion in share repurchases and increased dividends through the end of 2016.
If GM carries out the plan, the once-bankrupt automaker will have returned to shareholders about $23 billion between 2012 and the end of 2017, or about 90 percent of free cash flow, Chief Financial Officer Chuck Stevens said.
Top Ford executives announced a special dividend of $1 billion, but cautioned that margins in its North American auto market could plateau at about 9.5 percent.
Ford and GM executives faced questions from analysts about how they will juggle investments needed to keep global product lines competitive, while forging into new and riskier ventures involving ride sharing and autonomous vehicles.
In addition to giving investors more cash, GM President Dan Ammann said the company plans by late this decade to reduce capital spending as a share of revenue below the current rate of 5 percent to 5.5 percent.
In the past, such buybacks and capital spending cuts would have hurt GM's efforts to develop competitive new models. But Barra and Ammann said now the company can do more with less.
For instance, Ammann cited GM's plan to invest $5 billion to work with its Chinese partner to engineer a low-cost vehicle architecture for developing markets. This will replace a hodge-podge of vehicles currently produced with different tools and dies and components.
Once new vehicle architectures such as the emerging markets car are engineered, "we will be able to run those assets for a long time,” Ammann said, adding basic architectures could used for the "next decade-plus."
In the short run, though, the strain will show as automakers work to keep vehicles fresh, comply with new regulatory demands for cleaner cars and fend off challenges from Silicon Valley disrupters such as the Uber ride sharing service.
Ford executives cautioned Tuesday that margins in the company's core North American auto business could plateau at about 9.5 percent in part because of investments in new "mobility" ventures such as car sharing and development of self-driving cars.
Ford is also spending this year on a push to enrol consumers in a programme called "FordPass" that will stream consumer data to Ford in return for services such as quick access to parking. FordPass is a response to the threat that digital companies, such as Apple Inc (AAPL.O) or Alphabet Inc (GOOGL.O), will step between drivers and car makers.
Fields said new, technology-enabled service businesses could provide Ford with "sources of revenue that are less cyclical" than auto sales.
Investors, however, are watching a flattening sales cycle. Industry veterans say a slide in sales is inevitable.
China and the United States, the world's No. 1 and 2 auto markets, have hit plateaus after six years of robust growth. Industry executives are forecasting slower expansion this year in both markets, albeit from record levels.
"We still are very strong on China," said Barra. Long term, she said the Chinese auto market could grow to 35 million vehicles from about 25 million currently. For now, she said, "It's going to be very volatile."
(Editing by Jeffrey Benkoe and David Gregorio)
This story has not been edited by Firstpost staff and is generated by auto-feed.