Morningstar - Q2 2020 - 83

that's being offset in that fair value. That
makes our valuations look more attractive than
what the consensus might be saying.
Likewise, the coronavirus outbreak will
have a significant impact on 2020 auto-sector
fundamentals, but there is no effect
on our midcycle assumptions. I expect limited to
no change in fair value estimates.
Lallos: Is the concern with Uber and Lyft that people

will buy fewer cars?

Hilgert: Yes. But then again, these vehicles
will be more utilized. Vehicles today have
an average life of over 11 years, but with more
miles going on ride-hailing vehicles, they
might get used up faster.
Whiston: I think ride-hailing autonomous
vehicles will be transformational eventually. But
you'd have to have a fundamental change
in how people use transportation. There's
a difference between the heart of San Francisco
or Manhattan and most of the rest of the
United States. I don't see people who live in the
suburbs or have children hailing a vehicle
on their phone every single time they need to
do something.
GM is a leader in investing in the disruption
around autonomous vehicles and electrification.
They're doing a lot more than the Chevy
Bolt. They recently announced $20 billion in
electric vehicle investment for 2020-25.
They own about 80% of Cruise, an autonomous
vehicle ride-hailing company, and they
just unveiled the Cruise Origin, an autonomous
ride-hailing vehicle. When this eventually
goes into service, you'll see it just in dense city
centers initially.
Lallos: There's evidence that ride-hailing takes people
off public transportation, not out of their own cars.

Whiston: And that's a problem for these
disruptors. The utopian dream of Silicon Valley
to get rid of personal cars in just a few
years isn't happening. Congestion in places like
New York and San Francisco has actually
risen. It's still very early. But autonomous vehicles
are not a fad. Roughly 37,000 people a year die in
the United States in car accidents, including

pedestrians. The government wants that number
to be zero, so there's incentive for the private
sector and government to work together to make
this happen.
Lallos: GM is a no-moat company, but it does make
Morningstar stock analysts' Best Ideas list.

Whiston: A stock can be cheap irrespective
of the moat rating. I cover U.S. autos,
so I don't have the luxury of covering wide-moat
blue-chip companies. But GM is a massive
turnaround story. They've delivered on just
about everything they said they were
going to do, other than turn around Europe. And
they were turning around Europe, until
Brexit happened; at that point, they sold that
business to Peugeot. There's still a lot
more scale to be realized. They can break
even now at a U.S. sales rate of about
10 million to 11 million units a year and 17% share,
which is about the share they have now.
Before, under Old GM [General Motors Corp.,
before it went bankrupt], they needed a
sales rate of 15.5 million a year to break even and
about 25% of the market. That's one reason
it went bankrupt.

In November 2018, they announced their
transformation plan, which ended up being quite
controversial and led to a strike. But they
succeeded in closing one of the assembly plants
they wanted to close in Lordstown, Ohio.
One in Detroit will stay open under the new United
Auto Workers deal. They also closed two
powertrain plants on the East Coast, so that's
helping generate cost savings for new free
cash flow on a net basis of $4 billion to $4.5 billion
by the end of 2020 relative to 2018. And
then, on top of that, you've got a $1.5 billion
capital expenditure reduction over the
same time frame. So, that's $6 billion in new
free cash flow. It's been painful. They recently
announced that they are closing the storied
Holden brand in Australia. But CEO Mary Barra
and her team are making the hard choices. It's
painful to walk away from Europe or exit Australia,
but the fact of the matter is they just can't make
money there.
In the U.S., the Detroit Three have moved
to light trucks or pickup crossovers, SUVs, and

minivans. GM's light-truck volume was 86% of their
U.S. unit volume last year. They made the decision
to walk away from most sedan segments,
except the midsize sedan. The Chevy Malibu's not
going anywhere. But the full-size Impala is
gone, and the compact Cruze, made in Lordstown,
is gone. That plant closing was a contentious issue.
But U.S. new sales are about 72% light truck
now, so there isn't room for everyone to have a
sedan across every segment.
The Japanese do a better job with sedans now-
at least in terms of selling them. Personally,
I'd rather have the Malibu than the number-one
vehicle in that segment, the Camry. GM makes
a fine vehicle now. JD Power's vehicle
dependability study measures three-year quality,
and in 2019, GM won the most segments
of any automaker, and in 2020, GM won five
categories versus six for Toyota. So, it's a
perception gap, not a real quality gap like it used
to be.
Some of the criticism leveled at the American
automakers is fair. They got arrogant, they got lazy,
and the Asian transplants came over and
started making more fuel-efficient vehicles that
became much more in vogue after the energy
crisis. But it's a much healthier industry for
everybody now. We could go back to the U.S. sales
level in 2009 of 10.4 million units-which is a
depression, not a recession, for the auto industry-
and GM would break even in North America
rather than hemorrhage billions of dollars and go
bankrupt. It's a big difference. Of course, they
need to reopen factories ASAP once the
coronavirus pandemic abates.
Lallos: Moats in the automotive industry are
more plentiful among suppliers. What are some of your
favorite names there?

Hilgert: Moats in the supply base generally come
from intangible assets and switching costs.
Most of the technological innovation in the auto
industry comes from suppliers, and they get
compensated for that. Another facet to the
intangible asset moat source is the long-term
interrelationships between suppliers and
automakers at the engineering level. The length
of the contracts can include anywhere from 18
to 36 months in development. Then, the production

morningstar.com/lp/magazine

83
http://www.morningstar.com/lp/magazine
Morningstar - Q2 2020

Table of Contents for the Digital Edition of Morningstar - Q2 2020
