The GM Plant Closure: Confessions of an Oshawa kid

December 7, 2018 Edward Golding

           

Oshawa means a lot to me—I was born there, attended elementary and high school there, and I played hockey, baseball and lacrosse there. My parents and brother still live in Oshawa along with many of my good friends. So, on November 25th, when news leaked about General Motors (GM) closing its Oshawa assembly plant, I felt that some of my identity was being lost. Although neither my parents nor I ever worked for GM, the community we lived in has always embraced the spirit of the company and the auto workers who built the city into the great success it has become.

GM's story is pretty clear

It's my job to assess GM's decision to close the plant based on its merits, not my personal feelings, but I must admit my connection to Oshawa made it that much more difficult.

It's important to assess and analyze how these closures impact the company's cost structure, profitability, capital expenditures, cash flow generation, competitive positioning, balance sheet strength and a myriad of other factors that go into the future direction of the company's stock price. And, on that level, it's not a huge surprise that GM decided to close its Oshawa plant (and four others across the U.S.).

The company faces several threats to its business model, including:

  • a shift in consumer preferences from cars to crossovers
  • declining demand
  • increased competition from tech companies like Tesla and Uber,
  • an industry is being disrupted at an unprecedented pace

Such threats have impacted GM's financials—revenue has shown little growth in over the past 10 years, with no expansion of gross margins since the end of the Global Financial Crisis.

There has also been a huge increase in the amount of capital expenditures over the past five years alongside a deterioration of the balance sheet as more and more debt is required to finance the business.

The sector's position in North American markets is also relatively small—today the automobile and components sub-industry represents only 1.15% in Canada and just 0.54% in the U.S. So while we have a slight overweight in the MDPIM Dividend Pool with an allocation to Magna, a Canadian company supplying parts to car manufacturers, our exposure to the automotive industry is very minimal in the MDPIM Dividend Pool, the MDPIM Canadian Equity Pool and the MDPIM U.S. Equity Pool.

Oshawa's future

The side of me that is conditioned to assess business changes rationally and without bias tells me that Oshawa will survive the closing of the GM assembly plant—it will be subject to the forces of “creative destruction," an economic process that has for centuries seen industrial change lead to the demise of old industries as new ones are formed. Oshawa is undergoing this process right now as traditional automotive assembly plant jobs are eliminated. Obviously, the knock-on effects will be felt across several other industries in Oshawa.

But it's also important to understand that Oshawa has the ability to reinvent itself—in fact, according to Statistics Canada, only 9% in Oshawa are employed by the auto sector. As a bedroom community to Toronto—Oshawa offers relatively reasonable housing prices as well as strong transportation links to the city centre— we could see an influx of talent.

Oshawa will not only move forward – it will thrive as it transitions away from its past.

So, while the nostalgic and emotional part of me wants Oshawa to remain the place I remember—far away from the big city, the common identity of hard work , family and blue-collar bravado—my business training tells me the city will change with the times and transition into a new economic engine in Canada.

And on this, both my emotional and business sides agree.

About the Author

Edward Golding

Edward Golding, CFA, MBA, is an Assistant Vice President with the Investment Management and Strategy team at MD Financial Management. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.

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