DETROIT – Strong sales in North America and China are generating big profits for General Motors. Now the company needs the rest of the world to play along.
GM’s net income totalled $1 billion in the first quarter as it sold more vehicles at higher prices in the U.S. But the earnings fell 69 per cent from a year earlier. The reasons: Big one-time charges and high operating costs in Europe, and lacklustre earnings in South America.
For GM to continue its rebound from bankruptcy three years ago, it needs Europe and South America to improve, especially if North American sales slow.
So far, the story of GM’s comeback from near collapse has been North America, where the company earns most of its money, and China, where it sells its greatest number of cars. In North America, GM has slashed costs, introduced hot-selling cars and improved its reputation for quality. That success continued in the first quarter, when the automaker posted a $1.7 billion pretax profit in North America. It also did well in Asia, where it made $529 million in the first three months of the year.
But it’s a different story in Europe, where GM lost $256 million, and South America, where earnings fell 8 per cent to $83 million.
In Europe, GM’s biggest cash drain, costs are too high and new products are needed. Prospects are poor as the economy slips into recession, scaring the middle class away from buying cars. GM has pledged to fix the troubled unit, but anything it does will be overshadowed by high unemployment and austerity measures to cut government debt in many countries.
GM hasn’t released specifics about restructuring, and Chief Financial Officer Dan Ammann says there won’t be one magic answer.
“I’m not sure there’s going to be a big bang,” Ammann said Thursday. “It’s a series of actions that we’re taking.”
GM’s costs in Europe are high because of contracts with powerful labour unions and laws that make closing a factory difficult. The future was so bleak just three years ago that GM tried to sell the unit, but the deal was scuttled by the GM board.
Tim Urquhart, a European auto industry analyst with IHS Global Insight, said GM has at least 20 to 30 per cent more factory capacity than it needs in Europe.
The company has seven assembly plants there and an 8.2 per cent share of sales. By contrast, rival Ford Motor Co. has five plants, including one in Turkey, and an 8.5 per cent share.
Urquhart said that, ideally, GM would close one or two plants. But that won’t happen right away. GM agreed to keep all European plants open until 2014 in a restructuring deal reached with unions two years ago.
“There’s a lot of negotiation that needs to be done, a lot of brinksmanship that needs to go on with the unions,” Urquhart said.
Meanwhile, GM can try to squeeze out profits by making factories more efficient and lowering production costs in other ways. But until it cuts factories, the company is “rearranging the deck chairs on the Titanic,” Urquhart said.
GM’s struggles in Europe aren’t unique. Other automakers, including Ford, also are losing money there.
Economists think the 17 countries that use the euro are in a recession. Unemployment is 10.9 per cent, the highest since 1999. That figure masks an even worse situation in southern Europe. Spain and Italy have shrinking economies and budget woes. Greece, Portugal and Ireland needed bailout loan from the other eurozone countries and the International Monetary Fund.
In South America, most of GM’s problems are caused by flat sales due to an aging model lineup, one the company says it’s in the midst of updating.
Even in North America, GM faces challenges. It has few new models coming until the end of the year. Its U.S. market share fell almost two percentage points in the first quarter to 17.2 per cent. And GM predicted that earnings in the second and third quarters will be similar to the first quarter, representing a decline from last year’s results. GM said its costs will rise as it revamps factories in preparation to build new pickup trucks.
Still, North America performed far better than GM’s other regions. CEO Dan Akerson wants the whole company to mimic North America and China.
“All four regions must become solidly and reliably profitable,” he said Thursday.
For the quarter, GM earned 60 cents per share, compared with $1.77 a year earlier, when earnings were boosted by the sale of GM’s stake in a parts company. The first-quarter results also included a $590 million accounting charge due to future cash flow predictions for the European pension plan. GM says funds in the plan are stable.
The North American profit came as GM’s sales grew almost 3 per cent in the region to 703,000 cars and truck. GM no longer needs to sell cars at a loss to keep its factories running, as it did before bankruptcy. Because it cut costs by closing factories and shedding workers, it can now break even when U.S. annual sales are a depressed 10.5 million. So far this year, sales are running at an annual rate of over 14 million.
Also GM is getting more money for its vehicles. In the U.S., its most profitable market, customers are paying $166 more for cars and trucks than they did a year ago. GM vehicles sold for an average of $32,421 in the first quarter, including incentives such as rebates, said the Edmunds.com auto website.
GM won’t say how much profit it makes per vehicle, but the Center for Automotive Research estimates it at $2,405. That’s almost $900 less than Ford, but nearly $1,000 more than Chrysler.
The situation is a lot different in Europe, where the Opel, Vauxhall and Chevrolet brands account for about 18 per cent of the GM’s global sales. GM’s European sales fell more than 8 per cent last quarter to 398,000. The Astra compact and Corsa subcompact were the most popular models. In South America, sales were flat for the quarter at 249,000.
European losses and a weaker outlook at home rattled investors. GM’s stock price fell 56 cents, or 2.4 per cent, to close at $22.37.