What's happening
Shares of General Motors (NYSE: GM) were down sharply on Monday morning, as a crash in oil prices and growing fears of a novel coronavirus pandemic drove a broad-based market sell-off.
As of 10:15 a.m. EDT on Monday, GM's shares were down about 10.7% from Friday's closing price.
So what
A sharp drop in oil prices might seem bullish for GM, which makes a lot of money on trucks and SUVs. But there are larger concerns for investors right now.
A Chevy Bolt EV. What happens to GM's $20 billion electric-vehicle plan if gas is cheap? Image source: General Motors.
First, the oil crash and the global COVID-19 outbreak have made a recession more likely in the near term. Because automakers have high fixed costs, a drop in sales during a recession can have a disproportionate effect on their profits. General Motors has said that it will break even at a sales pace of about 10.5 million vehicles per year in the U.S., about the level we'd expect at the trough of a moderate recession.
Second, the collapse in oil prices may call GM's electric vehicle strategy into question. The company will spend $20 billion over the next few years to launch a series of battery-electric vehicles across its brands. At least in the United States, those vehicles could be a hard sell if gas is cheap.
Now what
It's still too early to know how the coronavirus will affect auto sales and the larger economy in the United States and much of Europe. But note that in China, where authorities have instituted drastic measures to contain the virus, auto sales fell 80% last month. A prolonged hit like that in the United States would be very bad for GM.
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John Rosevear owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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