Europe drags down General Motors' 3Q profit

AP News
Posted: Nov 09, 2011 6:31 PM
Europe drags down General Motors' 3Q profit

The fragile European economy is dragging down General Motors' profits, forcing its management to look harder for cost cuts and ways to boost revenue in the struggling region.

GM said Wednesday that its third-quarter net income fell 15 percent from a year earlier, pulled down by losses in Europe and South America and weak earnings in all areas except North America and China.

The company's shares fell over 10 percent to $22.31 Wednesday as GM executives were backed off an earlier prediction that the company would break even before taxes in Europe this year.

Europe faces a financial crisis and could slip into recession. Growth is slow is several key nations. Italy, the region's third-biggest economy, is bucking under the weight of government debt. Greece faces default unless it can accept a new debt deal, and the region also is dealing with high unemployment, stingy bank lending and declining exports. General Motors Co. is among the first U.S. corporations to forecast lower earnings due to the problems.

GM CEO Dan Akerson told industry analysts that the company's performance in Europe is due in part to slower sales "which itself is a manifestation of Europe's economic morass." He said the results in Europe and South America are "not sustainable and not acceptable" and said GM must look for more ways to control costs. But Akerson stopped short of giving specifics.

Sales in Europe are about 18 percent of GM's 2.2 million global total, but they are expected to weaken as the economy slows in the fourth quarter.

Citi Investment Research analyst Itay Michaeli said other automakers have hinted at difficulties in Europe, but GM was sounding a louder alarm based on the third-quarter performance.

Michaeli said he thought GM would have been able to remove more costs in Europe by now. Third-quarter costs at GM Europe were about even with a bad quarter a year ago, so that means more cuts will have to be made, probably by cutting factory capacity with plant closures, he said.

"These guys just aren't going to sit around and let Europe lose a bunch of money," he said. "I imagine they're working on plans to rightsize capacity to make money on lower (sales) volume."

In the third quarter, GM's net income fell to $1.7 billion, or $1.03 per share, compared with $2 billion, or $1.20 per share, a year earlier. The quarter's figures also included $200 million in dividends paid on preferred stock that didn't exist a year earlier.

GM posted a pretax loss of $292 million in Europe. Its profit rose slightly in North America to $2.2 billion, but earnings at its international operations, including China, fell 29 percent to $365 million. South American operations also swung to a loss of $44 million for the quarter.

Without the loss in Europe and the preferred stock payment, GM's net income would have increased.

Chief Financial Officer Dan Ammann said GM had a solid quarter, but needs to improve its profit margins in all regions. The company also needs to take better advantage of its global scale, building the same cars for all markets to cut engineering and research costs, he said.

Ammann said that in Europe, GM will follow the formula used to turn around the company's North American operations. GM cut its break-even point in North America by closing 16 factories since 2008. It also won concessions from the United Auto Workers union, and it rolled out new vehicles that are selling well. But Ammann wouldn't say for certain if plant closures are coming in Europe.

"There's nothing that's off the table," he said.

Ammann said the company has made significant progress in Europe and is more than $1 billion ahead of last year's pretax earnings.

Cutting costs appears to be a bigger challenge than trying to sell more cars in the region. It's difficult for GM to close plants and cut staff in Europe because of strong unions and laws that protect jobs.

European sales rose 4.6 percent during the third quarter. But the growth rate was about half the 9 percent increase GM reported worldwide.

In South America, Ammann said GM is revamping an aging car and truck lineup to try to boost sales. It also offered buyouts to employees that resulted in a 4 percent reduction in the work force there to deal with cost inflation, he said. GM is coming out with nine new vehicles in the next year in South America, including the Chevrolet Cruze compact and a subcompact named the Cobalt, he said.

Ammann said GM plans actions companywide to improve profit margins. Its profit margin, or pretax profit as a percentage of revenue, is around 6 percent, a full percentage point lower than its closest global competitors, Volkswagen AG and Ford Motor Co.

While the company plans to cut costs further, it mainly will boost profit margins by increasing revenue, he said.

"You can't cost-cut your way to prosperity in the business. You've got to grow the business, get the right vehicles on the road," he said.