GM Feels The Pinch Of European Losses And Weaker North American Margins

by Trefis Team
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General Motors (NYSE:GM) announced its fourth quarter and full year earnings Thursday. The automaker’s full year revenues stood at $152.3 billion up 1.3% over 2011 as gains in North America were offset by plunging European sales. GM reported net income of $6.2 billion, down 33% from the previous year mainly due to the effect of unfavorable one-time events and soaring European losses. The automaker sold 9.49 million vehicles in 2012, up 2.4% from the previous year. [1]

Margins Hurt But Could Improve

North American profitability suffered, although that was not totally unexpected since the automaker was struggling with rising inventory levels in the fourth quarter. GM resorted to discounts and promotions in order to clear its stockpile. [2] The margins fell 70 basis points to 5.8% in the fourth quarter. [1]

With a slew of new introductions and model refreshments lined up for 2013, GM’s vehicles could command higher prices, which in turn could help raise profitability. Customer response to the recently unveiled 2014 versions of Silverado and GMC Sierra will be critical since the models combined account for about a fifth of GM’s American sales. Moreover, pickups generally have better margins than cars so if the new models sell briskly, we could see some upside to the margins. In total, GM plans to introduce 13 new models under the Chevrolet brand in 2013. [3]

GM’s international operations, which are dominated by China, remained solid as the company’s earnings jumped 27% to $473 million. The automaker sold 2.8 million vehicles in China in 2012, up 11% year-on-year, which makes the country GM’s biggest market in terms of unit sales. With the automaker already having committed significant investments to expand its offering of small cars, the world’s most populous nation should continue to be steady source of income for GM.

See full analysis for General Motors

Europe, The Culprit Again

Europe was again a troubled market. The company’s operating losses widened 24% to $699 million in the fourth quarter to take the full year losses to $1.8 billion. GM hopes to become profitable by mid-decade but a deteriorating automotive market conditions in Europe combined with a weak brand image offer no guarantee of things going according to the company’s plans.

So far, GM has reached an agreement to close down its Bochum plant in Germany in 2016. During the earnings call, the automaker indicated that it might close down the plant two years earlier if it is unable to achieve the required cost concessions with the workers. GM also has an alliance with France’s Peugeot, in which the two companies are sharing R&D and technology costs to develop small cars for the European market. However, with Peugeot’s troubles getting deeper and the French automaker already having accepted the government’s bailout money, the alliance has achieved little so far. In fact, GM recognized an impairment charge of $220 million related to its investment in Peugeot, in the fourth quarter.

Thus, things so far haven’t really panned as the automaker would have wanted to, and there is plenty of work that needs to be done before investors can be confident about GM’s European turnaround.

We have a near $27 price estimate for General Motors, but we are in the process of revising our estimates in order to incorporate the latest earnings.

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Notes:
  1. GM 8-k [] []
  2. GM Boosting Discounts to Sell Trucks Seen as Holiday Gift, December 11, 2012, bloomberg.com []
  3. U.S. auto sales, wsj.com []
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