General Motor’s (GM) stated vision is to design, build, and sell the world’s best vehicles. In reality, it’s seeking to sell the most cars and gain economies of scale across its global footprint. It’s a challenging goal for any automobile manufacturer. GM has to manage its portfolio of assets across the globe and across time. A car takes years to design. Each part has to be designed to specifications, bid out to suppliers, and then contracted to have these thousands of parts be on hand when manufacturing begins. This has to happen for each of the estimated 30,000 parts in each car. This is a long process and it’s why new models are introduced every five years. A vehicle manufacturer has to manage the portfolio to maintain sales over the short, medium, and long terms in each market it competes in. The company that can manage this process not only sells more vehicles, but also sells more vehicles at higher price points. Higher average selling prices drive earnings.
The graph above is the R&D (research and development) spending by major automobile manufacturers over the past five years. The idea from this is a manufacturer has to spend on R&D to produce vehicles customers are going to want to drive. As you can see from the light blue line above, GM spends less than Toyota (TM) but is spending nearly $8 billion a year. This is well above Ford’s (F) $6.4 billion in 2013. BMW Group (BMW), which makes under 2 million vehicles a year, spent $5.4 billion on R&D in 2013. GM applies its technology to 9 million vehicles. Theoretically, GM should be able manufacture at a lower cost, as it spread this cost over 7 million more vehicles. As we saw earlier, GM isn’t able to drive higher average selling prices and margins from this investment, but it is spending enough to have competitive products.
You could invest in the index of automobile manufacturers by investing in the CARZ ETF.