GM Posts $3.3 Billion Loss

GM Posts $3.3 Billion Loss
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Ford may have surprised with a profit in the first quarter of this year, but at General Motors it was more of the same: losses in U.S. operations that overshadowed and overwhelmed profits elsewhere.

GM lost $3.3 billion in the first three months of this year, largely due to softening U.S. sales, particularly in the light truck and full-size SUV segments which GM dominates.

GM’s chairman and CEO Rick Wagoner attempted to put a positive spin on the results, issuing a statement which said that "[w]e continue to leverage our global product portfolio to take advantage of tremendous growth in key emerging markets, while at the same time taking the appropriate actions to deal with the challenging economic conditions in the U.S."

While that statement is, on its face, accurate and literally true, the reality isn’t nearly as rosy as Wagoner would have us believe.

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Though a large part of the lost was attributed to one-time events, the operating loss was $350 million without those charges. That loss contrasts with a $67 million profit in the same period last year.

As a result, GM officials have finally – and belatedly – downgraded their estimate for total U.S. vehicle sales in 2008 to the high 15 million vehicle range, down from the low 16 million estimate that GM officials were sticking with, even as recently as last month. Analysts, however, believe that even the new GM estimate is unrealistic, and that GM is simply ignoring reality by holding to it.

GM’s loss contrasts with its world-wide sales, which totaled $42.7 billion, a decrease of $600 million for the previous year period. That decrease was entirely due to sagging North American revenues. The North American loss for the quarter totaled $812 million, up from the $208 million loss last year. Outside North America, GM’s revenues increased a whopping 20%, with operations in China, Russia, Brazil, and India leading the sales gains.

Among the factors contributing to the North American losses were deficits at GMAC. Though GM sold a 51% interest in GMAC to Cerberus last year, fall-out from the crumbling mortgage business at GMAC spread to GM’s bottom line, as well. GMAC was the cause of $276 million of the North American loss figure.

The good news is that GM is actually turning into the global car company which Wagoner originally envisioned. GM, alone among domestic manufacturers, has been spectacularly successful in emerging markets. In fact, no major automobile manufacturer has pursed a more successful strategy in these markets than GM. That progress is clearly the result of Wagoner’s long-term vision, one which has led GM to pursue a long-term strategy that is now paying big dividends. There is every reason to believe it will continue to do so.

But the bad news is that GM still hasn’t developed a strategy for winning in the United States. The various moves which it has made in the past year, including the UAW contract and the VEBA for retiree health care liabilities, have done nothing to improve its market position.

Moreover, the company is the market leader in light trucks and large SUVs. That market is declining, but still huge. It is a market that GM cannot afford to neglect, particularly as its competitors introduce new models. However, the days when GM could expect the large return on investment in new products for that market are likely over. GM will, in the future, be saddled with development costs in that segment which remain high, but it will not have the same volume to offset those costs over the product life cycle.

GM also has the problem of reinventing the brand identity of every line they produce, save Cadillac. Chevrolet has become a brand identified with trucks. Though the Malibu is selling well, it is going to take more than that to reestablish the identity of the Chevrolet brand as an automobile. Further, GM has yet to define what it wants the Chevy car brand identity to be.

To all of that is added the inescapable confusion and cost associated with the new Corporate Average Fuel Economy standards adopted by Congress in 2007. GM snoozed while momentum in Congress was building to adopt these standards, and completely missed the multiple warning signals that politically powerful elements were pushing very strict and expensive new regulations. By the time management woke up, it was too late to do anything more than damage control.

That mistake – if it was a mistake and not a calculated strategy based on the premise that GM could afford the extra expenses associated with meeting these new rules while other carmaker cannot - is going to cost GM billions in expenditures to meet the standards and billions more in sales lost because they have, once again, been forced to pause and regroup before proceeding with future product plans.

All in all, the situation in North America is not likely soon to turn. Though GM may be able to show profits in the future in the United States, those are not likely to be high and they will not be the result of solving fundamental problems which the company faces in North America.

Given the growth of GM’s operations elsewhere, however, the real GM strategy may not be winning in the U.S. market. It may simply be nothing more than not loosing, or not loosing very much. The opportunities for profitable investment for GM are elsewhere and the future looks bright in other countries. Wagoner can legitimately conclude that a dollar invested in China brings a much better return than a dollar invested in Detroit.

General Motors celebrates its 100th anniversary this year.

But, Rick Wagoner is not a man of nostalgia. He is a man of finance.

GM will succeed, in the future, because Wagoner is not interested in investing in losing propositions.

What do you think?
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