E-commerce, one of the auto industry's newest and hottest buzzwords, could help automakers improve old-fashioned shareholder value.
'I think e-commerce could be big. It could be a big driver, and it's not currently being reflected in these share prices,' said Stephen Girsky, managing director and auto industry analyst for Morgan Stanley Dean Witter in New York.
Girsky took part in a panel discussion last week at the Automotive News World Congress, 'How Smart Companies Build Shareholder Value.' Other panelists were General Motors CFO Mike Losh; Tom Sidlik, DaimlerChrysler executive vice president; Chairman Thomas Evans of supplier Collins & Aikman Corp.; and Jeffrey Sands, a director of North American investment banking for PricewaterhouseCoopers Securities.
Shareholder value is measured by stock prices, dividends, stock splits and stock buybacks that affect the value of a shareholder's investment over time.
For instance, $100 invested in a leading group of suppliers in 1995 would be worth $150 five years later, Sands said. The same investment in the Standard & Poor's 500 would have more than tripled, to $320, he said.
Tying compensation to shareholder value is an important way to encourage improvements, Evans said.
'A lot of companies that go after shareholder value underestimate two things: the key of incentivizing the work force at a very broad level and the ability to teach cash-flow management at a company. You can teach cash-flow management all the way down to the shop floor, just like you can teach cost reduction, or you can teach quality,' he said.
AUTO NDUSTRY LAGS
The age-old complaint in the auto industry is that compared with other industries - especially high fliers such as the new dot-com companies - automakers and their suppliers have relatively low price/earnings ratios.
On Wednesday, Jan. 19, for instance, Ford Motor Co. had a price/earnings ratio of 10; Microsoft Corp. was 70. Many other high-tech firms have an 'infinite' price/earnings ratio because they have high stock prices but no earnings.
Automakers could start to cash in on some of that popularity, through e-commerce ventures to sell related services, such as GM's OnStar, and GM's 20 percent ownership of Commerce One Inc., a partnership that will set up an online marketplace.
Losh said GM is putting a new emphasis on expanding the financial-services business, including e-commerce, not only to make money but to help make earnings more predictable. 'The vehicle end of the business is a cyclical business. The service end is much less cyclical,' he said.
Girsky pointed to the revenue potential of services such as OnStar.
'All of a sudden, something like OnStar brings in $200 a month, or $400 a month,' Girsky said. 'Think about it. GM sells 5 million cars a year; you drop in $200 a month in OnStar revenues; suddenly that's $1 billion in recurring revenues. The next year you drop another $1 billion on top of that,' he said.
'If you think about 200 million vehicles on the road, you can get some pretty powerful numbers. Two hundred million vehicles on the road and 200 bucks, there's $40 billion in recurring revenue.'
On the other hand, Sidlik pointed out that other industries also look to the auto industry to learn ways to enhance shareholder value. He said DaimlerChrysler gets numerous requests to study the company's supply-chain management. Meanwhile, DaimlerChrysler studies companies in other industries.
Sidlik said: 'If you can get one nugget from each one, you can move it along.'