GM
08:04am EST 10-Jan-00 Prudential Securities (M.BRUYNESTEYN 212-778-1323) GM GE
GM: AGGRESSIVE GM E-COMMERCE GOALS LAID OUT BY E-GM PRESIDENT MARK HOGAN
GM: AGGRESSIVE GM E-COMMERCE GOALS LAID OUT BY E-GM PRESIDENT MARK HOGAN
R E S E A R C H N O T E S January 10, 2000
Subject: General Motors (GM-$74 13/16)--NYSE
OPINION
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Current: HOLD
Analyst: Michael Bruynesteyn (212) 778-1323 RISK: LOW
12-Month Target Price: $73 Market Capitalization: $47,880 mil.
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Ind. Div.: $2.00 Yield: 2.7% Shares: 640 mil. 52-Wk.Range: 78-54
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EPS FY Year P/E 1Q 2Q 3Q 4Q
Actual 12/98 $4.70 15.8x $1.93 $0.48 $(0.51) $2.83
Current 12/99 $ 8.51E 8.8x $2.70 $2.66 $1.31 $1.82E
Current 12/00 $ 8.64E 8.6x
Aggressive GM E-commerce Goals Laid Out By e-GM President Mark Hogan. e-GM
President Mark Hogan spoke at Prudential Securities' January 7 B2B Symposium in
Pheonix, laying out his plans for webification of General Motors (GM--Hold, 74
13/16). In general, GM seeks to advance its e-business goals with the help of
targeted partners for portals, buying services, on-line auctions, on-line
merchandisers and affinity groups. GM's share of on-line generated or on-line
researched US sales is only 18%, so e-GM faces a major challenge to boost its
presence on the Internet. Key points included:
Build to Order Goal is 10 days. GM hopes to be able to deliver a vehicle to a
customer within 10 days of the customer placing the order. Depending on which
vehicle is selected, orders now typically take 6-8 weeks to arrive. As a
preliminary step, GM has planned a pilot program involving 10 day
Order-To-Delivery for the Pontiac Grand Am later this year. Customers will be
able to track their orders over the Web and watch the production process over
Webcams in the plant. Achieving this goal will require a dramatic improvement
in supplier communications and finished goods delivery time (currently 5-10
days). The credible establishment of 10-15 day Order-To-Delivery times should
significantly increase the number of customers willing to order from the factory
rather than select a vehicle from dealer stocks, so the need to hold 60-70 days
of vehicle inventory will be eliminated.
Target of 20 days dealer stock levels. From the 60-days level that is currently
accepted as close to ideal (lower than the 74 days at the end of December,
1999), this would be a 40-day reduction, which would be worth about 500,000
units of North American production. Assuming a 4 year roll-out to reach this
goal, the impact would be 125,000 units per year, which would reduce annual
pretax earnings by $625 million ($0.66 EPS). This should be offset by a
reduction in incentives, i.e., the automakers typically allocate a 5% incentive
to blow out end of model year inventory, which, for 40 days of field stock,
would cost about $550 million pretax. Further incentive savings should be
possible as a higher percentage of customers order vehicles built to their
specifications from the factory (over 85% of customers now purchase a vehicle
from dealer stock but need to be incentivized to accept a vehicle that usually
is not exactly what they are looking for).
Revised dealer agreement sought by mid-2000 to set the stage for lower cost
distribution. In order to achieve its e-business goals, GM and the other
automakers will have to derive a distribution model that incorporates dealers in
a different way. We think that some form of delivery fee or commission will be
paid to dealers to handle customer orders generated directly by the
manufacturer (primarily via the internet). Dealer gross margin on new vehicle
sales averages about $1500, so the fee should fall near but below this level (a
salesperson commission, typically $500-$600, will not need to be paid).
Reaching agreement with the dealers may not be as difficult as we might expect,
since much of the industry's fleet sales (about 20% of the domestic OEMs'
volume) are already negotiated directly between the OEMs and the customers with
the dealers collecting delivery fees and handling the service relationship. The
key point is that good dealers already earn the bulk of their income from
service, parts, accessories and used vehicles, so they should not object too
strenuously to receiving a fixed fee for a proportion of their new vehicles
sold. The resultant lower cost distribution should lead to reduced prices and
enhanced demand.
Commerce One Not The Sole Exchange Partner. TradeXchange, the GM / Commerce One
partnership, will be GM's primary but not exclusive sourcing exchange. GM will
not want to lock itself out should another exchange develop innovations that GM
would find desirable. Companies like Freemarkets.com will likely continue to
receive business from GM, however at a nominal level.
Compensation A Key Indicator Of Management Commitment To E-business. Execution
is everything when it comes to transforming into an e-business. While many of
the January 7 symposium participants, including GM, highlighted the necessity of
leadership commitment, we believe that lower to middle management should also
be incentivized through their compensation to achieve e-business goals. We
point to General Electric (GE--151 5/16, rated Strong Buy/SBI by Prudential
Securities Senior Analyst Nicholas Heymann), which drove its divisions to
web-enable their business processes by the end of 1999 on the back of powerful
endorsement from Jack Welch coupled with appropriate financial incentives. GM
and Ford (F--54 5/8, Accumulate) started their e-business drives 12-18 months
behind GE, and could send a strong internal and external signal by including
e-business goals in management's compensation. We know that GM caught the
attention of the full management cadre in the past when quality measures and
goals for Return On Net Assets (RONA) were incorporated into bonus
determinations for the top 3500 managers. Ford claims to be working on an
e-business link for its bonus system. We will monitor the situation closely as
an announcement that Ford and/or GM are to reward their managers for executing
an e-business strategy would be a positive catalyst for the stocks.
Drive And Surf - GM/AOL Alliance To Bring The Web To The Vehicle
GM and AOL have announced a partnership in which AOL will be the browser to the
internet for vehicle drivers and passengers. The OnStar program will be the
platform for the cellphone-based link. GM will add the system to Cadillacs
starting in mid-2000, which should provide a boost to sagging Seville sales.
Acceptance levels of new options (i.e., self-dimming mirrors, power locks) in
vehicles have typically been quite slow to ramp up, so GM will have to virtually
give the systems away to ensure the subscriber base growth is adequate. The
vehicle price will be increased by the cost of the hardware, about $200, with a
limited period subscription (likely 1 year) included. Experience with current
OnStar users is that once they become accustomed to the service they are loathe
to part with it, so the imposition of a $30 monthly fee after one year for the
full service should not deter many drivers of these higher-end vehicles from
maintaining their subscriptions (3 levels of service will be available to
drivers: $30/month for concierge plus internet capability, $20 for concierge
only service (the current offering to the 100,000 subs now in place), and $10
for a basic safety/security alternative). Vehicle occupants will be able to
interact with AOL using voice telephony technology provided by General Magic
(GMGC - not rated), a company in which GM holds an $15 million stake. |
