Driving Profits
Current events in the auto industry have been receiving a great amount of publicity. It has taken a heavy recession to expose the fact that several large U.S. car manufacturers have been run with the unions’ interests in mind instead of shareholders. The U.S. government has taken a firm stand and done a substantial amount of restructuring, and more changes are definitely in store. But whether the government will allow certain manufacturers to declare bankruptcy is still uncertain.
The economic environment has been dreadful for all manufacturers and the industry is structurally impaired. Production heavily outweighs consumer demand, and since profit margins are thin, companies in all countries are losing money in one form or another. The pressing question at this time is which companies will receive support from their respective governments and how much funding will be handed out. To get additional perspective on the auto industry, I spoke to Saul Rubin, investment manager at Silverstone Capital, LLP a fund based in London, and focused exclusively on the automotive industry.
Rubin mentioned that the general consensus is that there will be very few, if any, new automotive manufacturers springing up in the near future. Consolidation of both manufacturers and suppliers is an inevitable outcome. The surviving companies will be in position to reap a significant amount of market share and profits, but these will come partially at the expense of the smaller and less funded firms. More failure is expected in the supply chain, as these firms are being especially hard hit by the downturn in demand. The government is less likely to intervene in this area of the sector.
Although many of the events in the auto industry project negativity, Rubin explained that the vast numbers of changes are providing some experts with unusual opportunities for profit. Several large companies are likely to file for bankruptcy, which indicates clear entry points for players in the convertible arbitrage field. Other large organizations are likely to join forces with competitors in order to stay in business and maintain their market presence. These and other events are providing ample opportunities for participants in the merger arbitrage arena.
BHA is not positive on how this will affect investor sentiment. Our recent conversations with institutional investors have suggested that experienced fund managers that focus on a specific industry are of interest and are in a unique position to succeed. A large family office in Spain that is running a fund of hedge funds emphasized its need for a sector specialist at this time. The auto industry in particular has attracted the attention of investors because of the incredible amount volatility and opportunity.