GM Rides Strength In North America And China As Europe Heals
Strong demand for pickups in the U.S. and a solid performance in China lifted General Motors‘ (NYSE:GM) profits in the second quarter. Total revenues grew 3.9% to $39.1 billion while the operating income jumped 7.4% to $2.3 billion. However, GM’s net income declined by a fourth to $1.4 billion, primarily due to higher taxes paid this year compared to the same quarter in the previous year. [1]
GM is in the middle of a major product overhaul with a total of 18 new or refreshed models lined up for 2013. Most importantly, the success of the new Silverado, which recently hit the markets, could be a game changer for the automaker. The Silverado is GM’s highest selling vehicle and accounts for a majority of the profits since the bulkier pickups generally have higher margins than compact and small cars. The average transaction price of GM’s pickups was up 5.5% in the second quarter. [2]
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Other models to watch out for are the Buick Regal and the Cadillac CTS, both of which will debut in the fourth quarter. Cadillac has been a bright spot for the automaker. Helped by an expanded portfolio which includes the introduction of the ATS and the XTS sedans in 2012, the luxury brand’s sales are up 33% through June. [3]
Besides selling more vehicles, GM’s operating margins in North America stood at a solid 8.4%. Generally, the profits tend to slump before new model introductions as the companies offer greater incentives to clear the stockpile of the existing models in order to make way for the new ones. Moreover, there are one-time investments associated with model launches which hurt the margins in the near term. But GM has weathered the storm well and brighter days lie ahead.
Green Shoots In Europe
GM’s improvement in Europe continued as the automaker’s losses narrowed to $110 million compared to $174 million in the first quarter. GM is restructuring its European operations and doesn’t expect to become profitable in the region before the mid-decade. During the quarter, GM’s unit sales were down 5% in Europe.
The automotive market in Europe has been so weak for the last couple of years that a 6% decline in June is seen as a sign of improvement. There is no consensus on when the market will bottom out. Overall, the European auto market is down 6.7% in the first half of the year.
GM’s brands Opel and Chevrolet don’t appeal to European consumers but the automaker hopes to change that as it spends $2.5 billion in introducing new models by 2015. It will also spend heavily on marketing in order to improve its image in the region. The automaker reportedly spent more than $30 million on advertising for the Adam.
China Consolidation Continues
GM operates in China through joint ventures. Profits in the world’s biggest automotive market surged by more than 25% to $418 million, helped by 11.5% growth in the unit sales. China is the most important division for GM as per our estimates and accounts for more than 35% of the company’s valuation. In 2012, it even overtook the U.S. as the biggest market for GM. The automaker’s small cars and minivans, which it produces through its joint ventures, are extremely popular with the Chinese public.
The automaker is also hoping to cash in on the growing demand of the luxury car market in China through its Cadillac brand. GM recently got the approval from the Chinese government to build a $1.3 billion plant with a capacity of 150,000 units to manufacture the Cadillac cars locally. Until now, GM used to sell imported Cadillacs in China, as a result of which, the prices of its models swelled due to the high tariffs imposed on imported vehicles.
With the help of lower prices, Cadillac will now appeal to a greater number of price sensitive Chinese customers. GM is targeting a 10% market share in the Chinese luxury market by the end of the decade. That could translate to more than 250,000 units annually just from the sale of luxury cars.
As the proportion of the higher priced vehicles increases, we could see some improvement in the average income earned per vehicle. The automaker is extremely bullish on the Chinese automobile market as it targets annual unit sales of 5 million by the mid-decade, up from 2.84 million in 2012. GM is pouring in a staggering $11 billion over the next few years to extend its position as the market leader in the world’s largest automotive market.
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Notes:- GM 10-Q [↩]
- GM Beats Profit Estimates Ahead of New-Model Wave, July 26, 2013, bloomberg.com [↩]
- GM Investor Relations [↩]