By on May 3, 2012

Once upon a time, GM’s North American operations spewed red ink across the firm’s balance sheet, with the whole mess kept afloat by relatively strong overseas operations. Now GM makes most of its money at home while its international divisions limp along. No, really: in its just-released Q1 financial report, GM reveals that some $1.7b of its $2.2b global EBIT came from its once-troubled home markets. What a difference a bailout makes!

GM CEO Dan Akerson sums up the situation with refreshing candor, noting

New products are starting to make a difference in South America, but Europe remains a work in progress. We’ll continue to work on both revenue and cost opportunities until we have brought GM to competitive levels of profitability. [emphasis added]

That GM is not yet experiencing the kind of hot streak one might expect from a global titan that’s been stripped of debt and loaded with government cash is self-evident. Like its share price, GM’s performance in the last quarter has been merely adequate. A billion dollars in profit is always a good thing, but around the world GM is still underperforming the market. In fact, The General lost .3% global market share. in Q1 2012, the third straight quarter of such declines, and GM’s share of the world market is now a full point lower than it was in Q2 of last year.

Even in the US market that now provides the lion’s share of its profit, GM is losing ground to the competition. North American market share has also fallen for the last three quarters, now standing at 16.4%, some 2.4% lower than Q2 2011. US dealer inventories jumped dramatically in the quarter as well, from 583,000 to 713,000. All this in the face of above-average incentives (as a % of average transaction price) and subprime financing (8.2% compared to an industry average of 6%). In light of these developments, GM’s ability to earn the majority of its profits in North America speaks to its bailout-streamlined cost structure. Still, there’s no denying that things are not headed in the right direction.

GM Europe continues to be the source of the most serious bad news, although its $300m loss is half of the Q4 2011 number. Still, restructuring and plant shutdowns will cost GM a pretty penny at some point in the not-to-distant future, and until that bitter medicine is administered, GME can only try to control its losses. GM South America turned the corner into profitability, yielding a $100m gain on its lowest production volume in over a year (albeit with steady market share).

But GM’s opaque “International Operations,” which include Korea, Australia and the crown jewel of China show some of the most troubling signs of malaise. With costs rising faster than volume and pricing gains could make up for, GMIO’s EBIT declined by $100m compared to Q1 2011. With the Chinese market cooling off, GMIO is also losing market share at a steady .1% per quarter for the last three quarters. Given how crucial China is to GM’s global future, this is not a promising development.

This is not a return to “Deathwatch” territory by a long shot, as GM still has $31.5b of government cash and equivalents on hand, and $37.3b of available liquidity. But the premise that GM simply needed a bailout in order to soar to global dominance is certainly wearing thin. And with the government waiting for an uptick in GM’s stock price to sell its stock at a politically-palatable price, mediocre results like this will allow the stigma of government ownership to linger.

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19 Comments on “GM Reports $1b Q1 Profit, Still Seeking “Competitive Levels Of Profitability”...”


  • avatar
    Fusion

    Is the reporting of “adjusted GAAP” numbers something that is regularly done in US companies, or is GM a special case for this? Really isn’t making it easier to compare numbers with the competition, when GM does things like including chinese profits into “EBIT” numbers…

  • avatar
    gslippy

    “GM still has $31.5b of government cash and equivalents on hand”

    Another 31 quarters like this past one, and we’ll call it even.

  • avatar
    SherbornSean

    What is the endgame for GM Europe? Outsource engineering to Peugeot and Daewoo. Move the supplier base to China. Rationalize local manufacturing. And shrink to irrelevance.

    Is there a credible alternative?

  • avatar
    analoca

    And lose 6% share of the European market Opel has right now…I am afraid GM cannot take that risk

  • avatar
    Vetteman

    One source of north american profit I believe is the dramatic increase in service parts prices . I spent my career in a Chevy Cad store and as a current Gm truck owner I see prices that have been doubled and tripled from what they were before the bankruptcy. I saw the same thing back in the 90’s when GM had their first brush with extinction. I saw at the dealership outrageous increases in parts prices that GM charged the dealership and we got the tough job of trying to pass these prices on to the customer. I am suprised that I have not seen any coverage of this issue . Of course GM’s market share is low and still going lower so the percentage of the population driveing GM cars is dramatically lower than it would have been back in the 90’s . The large amount of GM cars on the road now are out of warranty and repair parts are mostly comeing from the aftermarket. For me being gouged on GM dealership repairs does not make me likely to ever purchase another new GM vehicle .

  • avatar
    Crosley

    I love these people that tout GM as some sort of post bailout success story.

    When you allow a company to wipe clean all of its debt, inject tens of billions in tax payer dollars AND give it tens of billions in tax credits to count as losses AND mandate governments and municipalities to buy the vehicles, how can it NOT “succeed”?

    But somehow, my guess is GM will find a way.

    • 0 avatar
      Steven Lang

      When the overwhelming majority of your sales and profits come from overseas operations.

      To call GM a success or a failure at this stage of the game is far too soon. The future remains to be seen.

      • 0 avatar
        DweezilSFV

        Mr: that is sooo true. But that didn’t stop GM execs from giving themselves nice fat bonuses after an initial quarter or two of “profitability”

  • avatar
    NormSV650

    But I thought Obama “…saved GM”?

  • avatar
    Speed3

    Nice! Now talk about Chrysler’s “mediocre” results! Didn’t they get a bailout too?

  • avatar
    CliffG

    Given that total new car sales are unlikely to spring up substantially in the near future, the question becomes at what market share point does even this level of domestic manufacturing become untenable? 15%? 12.5% Keep in mind that seemingly minor drops of market share can have catastrophic results since margins are not that large. The scary part is that YOU may have stopped the GMDW, but GM may not have…

  • avatar
    Pch101

    “Still, there’s no denying that things are not headed in the right direction.”

    I would be inclined to deny it. GM seems to be a mediocre performer and it continues to have more than its share of deficiencies, but it isn’t falling to pieces, either.

    You’ve also ignored the positive developments, such as the fact that GM produced $2.5 billion in cash from operations during 1Q2012, versus a $377 million loss in cash from operations during 1Q2011. If that sort of cash build can continue, then that’s actually quite a positive development, as GM was generating operating losses and cash burn even prior to the recession.

    http://www.sec.gov/Archives/edgar/data/1467858/000146785812000029/gm2012q1.htm#s07AAD0A1F317EBF1584CED7B060691D0

    You’re right about the incentives, although all of the domestics, including Ford, continue to have incentives that are well above the market average. That’s the sort of problem that can’t be fixed overnight (although it is fair to question whether GM is doing enough to fix it.) Detroit made the mistake of living and dying by the quarter, and it would be a mistake for the rest of us to take that same approach when assessing these companies.

  • avatar
    alluster

    Opel needs a US like bankruptcy in 2009 to get rid of excess capacity, pension obligations and get their house in order. It sucks for the workers but North American operations should not be subsidizing European operations. $2.2 Billion in operating profit is not too shabby. Would have been $2.5 Billion a quarter or $10 Billion a year if all Opel did was just break even. Most volume players in Europe are hurting and most of the losses are beyond their control. If GM could align production with sales in Europe and once the EU economy improves, Opel will do just fine. Unlike old GM that ignored most of its problems, New GM is facing them head on with the entire top brass dedicated to fixing Opel. The deal with PSA could also help cut costs and spread design/development costs in the long run.

    GM is continuously investing gobs of money in China which is going to hurt profit margins. They also have to keep margins low in China to establish a dominant presence and wait till the market matures for them to increase margins. Once the Chinese market matures they will be able to command higher prices. They have outperformed the market in China in the 1Q and a large part of the growth came from Shangai GM, not less profitable wulings. GM is also doing a major push of Cadillac into China to increase sales from 30,000 to 100,000 a year by 2015. Profits in IO are also lower because of massive investments in South East Asia to increase their market share from 1.5% in 2010 to 10% by 2015.

    With more than 70% of the sales in North America coming from models that are more than 5 years old and at the very end of their product cycle sales are obviously going to be lower and incentives higher. The Lambda CUV’s and GMT 900 models, GM’s most profitable are 5 and 6 years respectively. They did actually cut incentives by 11% in North America netting them $400 more in profit and $800 million more in revenue for 1Q. Incentives by themselves don’t tell the whole story. A big % of GM’s sales come from big SUV’s and Trucks which traditionally have incentives higher than average as a % of ATP. I wish someone could breakdown incentives by segment. I would gauge how well redesigns perform by looking at new models and redesigns in the past 3 years. The Cruze, Equinox, Terrain, Sonic and Verano are selling well with barely any incentives. They are commanding the highest transaction prices in their segment and are light years ahead of their predecessors in terms of retail penetration and pricing. Cruze – $4000 more than Cobalt, Equinox – $5000 more than prev model, Terrain – $7000 more than Torrent, and Sonic- $4200 more than Aveo.

    Australia is still a cause of concern. The market is moving away from traditional RWD saloons to mainstream cars. GM is making the right moves by re-badge Chevrolet’s as Holden’s instead of wasting money on Australia specific models.

    It will take time to right a company the size of GM. On a positive note this is their 9th straight profitable quarter, revenue is up by $1.6B, Operating profit is up 10%, Opel’s losses have been cut in half compared to the prev quarter, and net profit is actually $1.6B excluding a one time good will charge of $600 million.

    I am personally only worried about GM’s relentless quest to buy other companies. Rumor has it that they initially wanted to buy a controlling stake in Isuzu and later backed down to 10% after Isuzu resisted a takeover. These acquisitions only work in theory or at least in GM’s case.

  • avatar
    ByTheLake

    Will America forever find pleasure in attacking GM? Will they forever vilify GM for getting the support that foreign governments have bestowed upon their automotive companies for decades?

    Other countries have directly or indirectly supported their auto industries through huge tax breaks, R&D reimbursements, state-sponsored health care and currency manipulation, clearly recognizing the value of the manufacturing base to their economies. Jim Press, former Toyota executive, admitted that the Japanese government essentially funded the development of the first generation Prius, which Americans regularly praise.

    When will Americans stop making sport of attacking GM for essentially receiving the government support that foreign manufacturers have enjoyed for years?

  • avatar
    harshciygar

    Only TTAC could make a billion-dollar profit for a company that teetered on the verge of bankruptcy a few years ago seem bad.

    Yes, GM is hurting overseas. Is there any automaker who ISN’T taking a loss on one continent or another?

    I don’t think GM would be here today with the gov’t aid under both Bush AND Obama. I have yet to hear of one hedge fund or venture capital firm come out and say “We wanted to buy GM but the gov’t didn’t let us.”

    Now GM is turning a profit here in North America of a billion+ a quarter.

    Does GM have a long way to go? Yes. But for a company that was as close to the End as GM was, I’m happy to see GM doing better.

  • avatar
    Zackman

    At the time, the so-called “bailout” was viewed as the least-harmful option. Was it the right decision? You can Monday-morning-quarterback all you want, but the “bailout” was and is an undeniable fact, so get over it, because personal opinion doesn’t mean squat, especially when nobody asked me at the time for my input!

    Time will tell if GM makes it, and if the “bailout” was right or wrong. Personally, I’d rather see the government spend money on an automaker rather than wasting it on other – ummm – “ventures”. Right now, I see some good, but lots of bad and I worry about their future, especially now that I like much of what they build, and will have to replace at least one of our cars in the next two years, most likely, and no, I don’t want a Honda or Toyota if I can help it.

  • avatar

    As always, I appreciate the perspectives of TTAC’s B&B here… but there’s just one issue that several don’t seem clear on, namely the role of the bailout in all this. The bailout plays two basic roles in my analysis:

    1) The bailout raised expectations for GM. Yes, GM is doing much better now than when it was at death’s door, but it also was absolved of debt, shuttered plants and was handed tens of billions in liquidity. That GM isn’t making as much of those profound advantages as it could be is evidenced in its share price.

    2) The fact that taxpayers own so much of those shares should make these results of greater interest to Americans than, say, BMW’s results. GM has made it clear that it wants the government out, but it seems the government doesn’t want to count its losses until they reach some politically palatable level. GM can’t “put the bailout behind them” until it starts turning in performances that exceed expectations, which raise the stock price and allows the government to divest at an acceptable loss.

    This is not about “punishing GM because it was bailed out,” it’s about putting these results into context. The problem isn’t that GM isn’t meeting my expectations, it’s that it isn’t meeting Wall Street’s expectations.

    • 0 avatar
      Pch101

      “it also was absolved of debt, shuttered plants and was handed tens of billions in liquidity. That GM isn’t making as much of those profound advantages as it could be is evidenced in its share price.”

      Corporate valuations are driven by earnings and growth potential. Debt reduction, capacity reductions and cash don’t equate to earnings.

      The share price is doing largely what is supposed to do, i.e. it’s a reflection of current and future earnings potential. And auto stocks, on the whole, tend to be boring.

      The auto industry is mature, and margins are modest. For an automaker to have a sustainable above-average valuation multiplier, it would have to be actively expanding volume while maintaining some level of profitability. That is not a realistic expectation for GM; it never was, and it never would be.

      Automakers are also highly cyclical. The slow economic recovery is not a benefit to auto stocks generally.

      The items that you have identified — debt, capacity, cash — are not good measures for determining stock value. While a clean balance sheet isn’t a bad thing, the business produces earnings through operations, not through modest debt levels. Accordingly, the problem is with your expectations.

      For GM stock to rise,

      (a) the company needs to be expanding greatly (unlikely, being that GM is already one of the highest volume producers in the industry)

      (b) the business needs generate more margin per vehicle (less unlikely, but neither easy nor quick)

      (c) GM needs to expand or enter into other businesses that can otherwise increase its earnings (not likely), or;

      (d) the general valuation of stocks has to rise, which would provide a tide to lift GM’s (and everyone else’s) boat. (What will happen along these lines is anyone’s guess.)

      Over the medium term, ongoing US economic recovery may help, given the cyclicality of automakers and their dependency on consumer spending.

      I suppose that the average taxpayer may not know or understand most of that, but a smart investor should.


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