2019-10-12_The_Economist_

The EconomistOctober 12th 2019 Business 69

2 over the murder last October of Jamal
Khashoggi, a journalist, in the Saudi con-
sulate in Istanbul. But the main reason for
pursuing the ipo—to raise money to help
the kingdom diversify its economy—re-
mains pressing. And Aramco looks better
prepared today than it did last year.
In March the company announced it
would pay $69bn for a 70% stake in sabic, a
petrochemical company owned by the Sau-
di sovereign wealth fund. In April it issued
bonds to help finance the deal, which will
help Aramco expand its downstream busi-
ness, a strategic priority (underscored by
its decision in August to buy 20% of the re-
fining-and-chemicals business of Reli-
ance, an Indian conglomerate). The bond
prospectus amounted to a 469-page dress
rehearsal for required ipo disclosures.
The market liked what it saw. Aramco’s
$111bn in net income in 2018 was nearly
twice that of Apple, the world’s most profit-
able listed company, and more than that of
the five biggest publicly traded oil giants—
ExxonMobil, Royal Dutch Shell, bp, Total
and Chevron—combined. Investors lapped
up $12bn-worth of Aramco bonds.
Aramco has also worked hard in the past
few months to assure potential investors
that they will not be neglected as the com-
pany serves its royal master. In September
it said non-state shareholders will get a
proportionate share of “an annual base div-
idend” of $75bn in 2020. The firm intends
to maintain the same payout to minority
investors until 2024 even if the total divi-
dend declines. If crude prices rise, their
dividends could grow, too. The state, mean-
while, would get a progressively larger
windfall from royalties when oil fetches
more than $70 a barrel. Below that, it would
receive a relatively slim royalty of 15%.
The company is moving forward with
plans for an initial listing on the Tadawul,
Riyadh’s stockmarket. Some large interna-
tional investors have voiced concerns
about a lack of liquidity on the Saudi ex-
change (see chart). Last year $232bn of
shares was traded on the Tadawul, about
one-twentieth the volume traded on the
London Stock Exchange.
However, the government has taken
steps to liberalise rules on the exchange
and is eager to boost the kingdom’s finan-
cial sector. A Tadawul listing also avoids
the kind of legal liabilities that might arise
from listing in, say, New York. Aramco
looks likely to list 3% of its shares by the
end of the year, according to a person fa-
miliar with the matter, before pursuing a
secondary listing abroad.
Whether the ipo will be as Prince Mu-
hammad once envisioned is another mat-
ter. Aramco has denied reports that the
kingdom is pressing Saudi families to be
cornerstone investors. Investors have
grounds to be nervous. The company says
production has recovered to the level be-

foretheattacksbuttheywerea reminder

thatits257bnbarrelsofprovenreservesare

notjustuniquelyvastbutunusuallycon-

centrated and vulnerable. Last, Aramco

mustdecidehowmuchit thinksit isworth.

Oneofthemainmetricsforvaluinganen-

ergyfirm,notesOswaldClintofBernstein,

a researchfirm,isthedividendyield.The

best supermajors offer about 6%. For

Aramco’s $75bn payout to match this

wouldimplya valuationof$1.2trnorso,

wellshortoftheoriginalprincelysum.^7

Lordingit

Selectedcountries*,marketcapitalisation

ofbiggestcompanyas%oftotal

Oct9th 2019

Sources:Bloomberg;companyreports

*Outofbiggest 25 countriesbymarketcapitalisation

†Estimatedbasedonmarketvaluationof$2trn,free-floatof3%

806040200

Microsoft

UnitedStates

Samsung

Electronics

SouthKorea

Unilever

Netherlands

Averageexcluding

SaudiAramco

TSMC

Taiwan

NovoNordisk

Denmark

ABInBev

Belgium

SaudiAramco†

SaudiArabia

99

72

94

69

90

42

3

%ofshares

publicly traded

A

merica’s biggestcarmaker is in the

grip of the longest industrial action it

has suffered in decades. In 1970 a crippling

strike called at General Motors by the Un-

ited Auto Workers (uaw), the industry’s

main labour union, dragged on for 67 days.

On September 16th uaw workers at its

plants across North America once again

walked out. Their chief gripes include gm’s

use of temporary workers, health-care

benefits and product allocation at various

plants. Although the company is highly

profitable, its boss, Mary Barra, intends to

reduce costs dramatically in order to invest

more in electric vehicles. A sudden break-

through is possible even in such heated ne-

gotiations. But as The Economistwent to

press on October 10th, the strike looked

poised to reach the one-month mark.

gm is already feeling the impact. It

makes about 2m vehicles a year in its

American factories, which were shut down

immediately by the walkout. Most gm

plants in Canada and Mexico, which make

roughly another 1m vehicles a year, were

forced to shut a few days later. By the reck-

oning of JPMorgan Chase, a bank, this lost

output has already slashed gm’s profits this

year by over $1bn. It is now costing the firm

roughly $82m in earnings each day.

A healthy cash cushion of nearly $20bn

at the end of June should help gmstay

afloat. The firm should be able to boost pro-

duction quickly after the strike ends. The

same cannot be said for most of its suppli-

ers. As a consequence, these companies

have been hit much harder.

The outlook for North American makers

of car parts was darkening before the gm

strike. Moody’s, a credit-rating agency,

now forecasts that their earnings before in-

terest, taxes and amortisation will decline

by 9.7% this year compared with 2018—a

much steeper fall than it predicted at the

start of the year. The main reason is its ex-

pectation that global car sales will droop by

3.8% this year.

A prolonged strike will make things

worse. Adam Jonas of Morgan Stanley, an

investment bank, calculates that by day 22

the strike had already cost suppliers

around $3.7bn in total revenue. Every day it

goes on they lose another $170m.

In dollar terms, the hardest hit com-

pany is Magna, a Canadian maker of drive-

trains and other complex systems with a

market capitalisation of $15bn. It is losing

$27m in earnings before interest and taxes

a week. Smaller suppliers are even less able

to withstand shocks. Lear and American

Axle, two domestic producers of seats and

driveshafts respectively, are losing

$16m-17m each a week, according to JPMor-

gan Chase. Measured as a share of market

capitalisation, the hit to American Axle is

more than ten times that to bulkier Magna.

In defending gm’s workers the uaw may

be hurting others who are worse off as it is.

The Centre for Automotive Research, an in-

dustry think-tank, puts the average total la-

bour cost (including benefits and profit-

sharing) at gm at $63 an hour, above Ford’s

$61, and $55 at Fiat-Chrysler. Suppliers, es-

pecially smaller ones, pay far less.

Dale Rogers, a supply-chain expert at

Arizona State University who grew up near

Detroit, still has family working at gm. For

every worker at a car plant owned by the big

carmakers and affected by a strike, he re-

calls, the rule of thumb used to be that ten

workers at suppliers in neighbouring cities

like Toledo and Lansing would suffer.

“When Detroit catches a cold, Toledo gets

pneumonia,” he says, invoking a local ad-

age. The rise of vehicle production in Ten-

nessee and other parts of the American

south means that Motor City no longer

dominates carmaking. Even so, there is

still truth in this old Michigander saying. 7

NEW YORK

A labour dispute at General Motors is

hitting its suppliers hard

America’s car industry

Strike force