Chevrolet’s 2016 Malibu Represents A Big Opportunity For GM

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General Motors (NYSE:GM) and Ford Motors (NYSE:F) are two auto makers which have been embroiled in a rivalry for a number of years. Each company tries to outdo the other in the race for market share. For every aspect that one dominates, the other tries to surpass it in another. When Ford reinstated its dividend first and reduced the number of its vehicle production platforms ahead of GM, the latter countered it with entering China years ahead of the former. Now, the two rivals have brought their competition to the mid-size sedan market segment.

Ford and Chevrolet have competed with each other in the family sedan market for years, but have fallen behind Honda and Toyota in recent years. But with the launch of Fusion, Ford has been able to claw back market share in this segment. The Fusion is Ford’s attempt to satisfy American and European tastes under the “one Ford” product strategy. The car combines good fuel-economy and cutting edge infotainment features with spacious interiors. Comparatively, Chevrolet’s offering in this segment, Malibu, targets a much more conservative audience. While the Fusion bears the influence of Aston Martin in its styling, there is nothing audacious about Malibu’s styling. Malibu’s main selling point is its ease of use and cheaper price compared to the Fusion. Consequently, its sales have lagged that of Fusion by over 100,000 units.

We have a $40 price estimate for General Motors, which is about 4% more than the current market price.

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2016 Malibu Represents A Big Opportunity For GM

GM is now planning to launch the 2016 version of Chevrolet’s Malibu. [1] The car will feature much more dynamic and sophisticated styling, but will also be about 300 pounds lighter than the current model, which should improve its fuel-efficiency and handling. The car is important to GM for two specific reasons:  First, if the Malibu were to be successful, it would enter the largest new-car segment in the U.S. This is a segment in which the company has been previously outdone by a number of foreign car brands such as Hyundai, Honda, and Toyota. The model’s success would provide considerable boost to the company’s investors because if the company can increase the competitiveness of its passenger cars, it would improve sales and profits considerably. Secondly, the mid-size sedan segment is the largest-volume selling segment in the U.S. automotive industry. Consequently, it represents perhaps the biggest opportunity for GM to increase its overall market share. Moreover, this market share would come at the direct expense of an import car brand like Honda and Toyota, which have historically been much stronger in this category.

Tough Ask

The midsize sedan segment is the most competitive segment in the U.S. automotive market. The competitors to Chevrolet’s Malibu are all well established and are well recognized brand names: Toyota’s Camry, Honda’s Accord, Nissan’s Altima, and Ford’s Fusion. In order to be competitive, GM will have to produce an extremely strong product. Moreover, there are other obstacles to GM in improving its sales in the segment at a strong clip: in 2014, Malibu’s sales were down 7%, which was the only decline among the eight best sellers in the segment. [2]

However, GM’s recent success with the Chevrolet Impala might give them some hope. In trying to increase the sales of its cars from retail buyers, GM had to rebrand the Chevrolet Impala as a key point about the fleets business is that, if done right, selling cars to rental fleets can serve the purpose of good marketing, exposing people who might not otherwise be interested to try your brand. The Chevy Impala was previously only known as a successful fleet vehicle but a redesigned version of the car became the first domestically manufactured car in over two decades to win Consumer Reports’ top ranking for a large sedan. [3] The company expects the car to be much more popular with retail buyers now and has made bold predictions for the model on the business side of things. Management at GM believes that 70% of the model’s future sales will come from retail buyers, a segment of buyers who have shown a willingness to pay much higher prices for cars in the past. Thus, if sales pan out as the company expects them to, the redesigned model should contribute a great deal more to the bottom line than its previous versions, which although successful as fleet vehicles, only sold to retail customers about 30% of the time.

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Notes:
  1. #NYIAS: TEASED! This Is What The 2016 Chevrolet Malibu Looks Like When It’s Put Through HELL, Auto Spies, March 2015 []
  2. Cain’s Segment: U.S. Midsize Car Sales In 2014, The Truth About Cars, March 2015 []
  3. 2014 Chevrolet Impala is Consumer Reports’ highest-scoring sedan, Consumer Reports, July 2013 []