A Mixed Outlook for GM as It Works to Complete Its Turnaround
byAug 2nd 2012 4:34PM
In its second quarter, General Motors (GM) beat analysts' estimates with a profit of $1.5 billion, as losses in its much-troubled European division were less than many experts had predicted.
That wasn't necessarily good news, though. It's a billion dollars less than GM earned in the second quarter of last year. That's a huge drop, and it reflects the big headwinds now facing the world's largest car company.
Europe's Not Getting Better Anytime Soon
GM's profit was better than expected because its European division, which includes money-losing German subsidiary Opel, reported a loss of $361 million. While that's a big drop from the $102 million that GM made in Europe a year ago, it's much less painful than the more than $500 billion that many analysts expected it to have lost after rival Ford (F) reported a shocking $404 million loss in Europe last week.
But that doesn't mean GM's long-troubled European operation is on the mend -- not yet, anyway. GM's dealers in the region have too many cars and trucks in their inventories. GM's European factories will likely have to reduce production through the rest of 2012 so that dealers can sell off existing stock. That means even lower income for the company in the second half of the year. Meanwhile, GM's costs remain high because it has too many European factories and not enough orders to keep them all busy.
GM is working on the problem. It replaced its Europe chief with a turnaround specialist, and hired two key executives from Volkswagen (VLKAY) to fill important senior-level roles. Meanwhile, GM officials are negotiating with union leaders in Germany, planning to close one or more factories and cut costs in a number of other ways.
CEO Dan Akerson said on Thursday that he expects a deal with the unions to be announced sometime this fall. That will be a welcome development, though any actual savings from the agreement could still be several years off.
Concerns Mount at Home
GM's problems go far beyond Europe, though. While its Asian operation remains healthy and profitable despite a slowdown in China, GM's slipping market share in its most important market -- the United States -- is starting to become a concern.
GM's market share fell to 18.1% in the first half of 2012, down from almost 20% just a year ago. But that's not the only problem. GM is spending more on incentives -- those "cash back" or low-cost financing deals that dealers love to advertise -- to keep its sales numbers going.
The real problem is that many of GM's products are dated: They're no longer competitive with the best cars and trucks on the market. GM wasn't able to invest in product development during its spiral into bankruptcy, so it lost a lot of ground to rivals like Ford and Toyota (TM).
Because a new car or truck can take three years or longer to develop, GM has had few new products since its bankruptcy -- while Ford, which had borrowed heavily before the economic crisis and was able to keep up its spending, has rolled out a series of hit products like the Explorer and Focus.
GM has a bunch of new vehicles coming, including all-new pickups and SUVs that are due early next year. That should help GM make up some of its lost ground without heavy spending on incentives. But meanwhile, the pressure to improve sales is immense; it may be part of what drove Akerson to fire his marketing chief, Joel Ewanick, earlier this week.
Taxpayers Can Still Break Even
GM's profits in its North America division will likely be lower in the third quarter, it said. That's partly because it shifted some spending to summer from spring -- in part, to buy more ads around the Olympics. That's not a big source of concern, but if profits dip more than expected, GM's stock price will likely suffer further.
Despite the concerns, post-bankruptcy GM is still fundamentally healthy. Its debts are low, it has more than $30 billion in the bank, and it has now booked 10 consecutive quarters of profits. But its low stock price means that the federal government is unlikely to sell its stake anytime soon, and that remains a source of frustration for GM's leaders and for many Americans.
At the time of publication, Motley Fool contributor John Rosevear owned shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford.