General Motors (NYSE: GM ) has made some big improvements to its North American business since declaring bankruptcy several years ago. The company has introduced a wave of new models, many of which have become highly acclaimed. CEO Dan Akerson boasted this week that Consumer Reports had recently chosen the Chevy Impala as the best sedan, and the Chevy Silverado as the best truck, in the U.S.
Despite this industry recognition, GM has been unable to keep up with Ford Motor (NYSE: F ) in terms of profit margin or total profit in the North American region. In fact, Ford has been building up impressive sales momentum that could potentially vault it past GM as the top automaker in North America by revenue. Is this changing of the guard inevitable, or can GM make a comeback?
The continuing gap between Ford and GM can be seen in the two companies' North American profit margin outlooks. GM's goal is to raise its North American profit margin (earnings before interest and tax) to 10% by mid-decade.
The company made good progress toward that goal last quarter, increasing its earnings before interest and taxes margin to 9.3%, up 160 basis points year over year and up 90 basis points sequentially. However, GM's management warned on Wednesday that the third quarter is a seasonally strong quarter for profit margin. Akerson told analysts that GM expects margin growth in 2014, but that investors shouldn't expect a straight path to the 10% target.
By contrast, Ford already hit the 10% margin level last year in North America. In fact, Ford reported that Q3 was the sixth time in the last seven quarters that it achieved a pretax margin of at least 10% in North America. Ford's Q3 North American pretax profit of $2.3 billion also came in ahead of GM's Q3 North American pretax profit of $2.2 billion.
The main catalyst in GM's attempt to close the gap with Ford in North America is the early 2014 launch of its redesigned heavy-duty trucks and full-size SUVs. Heavy-duty pickups are even more profitable than light-duty pickups and make up about a quarter of the large pickup market. The SUV launch is also a big opportunity for GM, because the company has long dominated the lucrative full-size SUV segment in the U.S.
Tough hill to climb
These developments are likely to help GM improve its performance next year, but Ford is not standing still. Recently, Ford has been taking some market share from GM in North America. In Q3, GM's market share slid from 16.9% to 16.7%, while Ford boosted its market share from 14.8% to 14.9%.
The gap has become even smaller in terms of revenue. Ford's North American revenue grew 11% in Q3 to $21.7 billion, while GM's North American revenue increased just 5% to $23.5 billion.
Looking ahead, Ford's growth catalysts are just as powerful as GM's. While GM is now several months into the launch of its new full-size pickups, Ford's best-selling F-150 will be redesigned for the 2015 model year. This means that the new models will start hitting dealer lots sometime next year. Ford is also poised to grow sales of its midsize Ford Fusion next year, due to the recent addition of a second manufacturing plant to boost capacity.
Foolish bottom line
GM is finally getting back up to par in the critical North American market, but it's still behind Ford when it comes to margins and profit. Ford has also been gaining market share, and has plenty of catalysts of its own heading into 2014.
In other words, Ford is showing no signs of stumbling, and a stumble by Ford is what GM would really need in order to leapfrog its rival in terms of North American profitability. Still, lagging just behind Ford isn't necessarily a bad place for GM to be. Ford still looks like the superior company, but based on the two automakers' Q3 earnings performances, it's clear that both can thrive simultaneously.
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