Crucial Cylinder Not Firing at GM

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Have you ever had a spark plug or a plug wire go bad? It's a major drain on your vehicle's performance and efficiency.

General Motors (NYSE: GM) knows all about that. Its latest press release shows that the automaker has only five cylinders in its V-6 working. Auto operations at its GM Europe, GM Asia Pacific, and GM Latin America/Africa/Mid-East divisions all posted positive net income. GM Daewoo posted positive sales growth, and the mother ship increased its investment in this sector by 2.7%. And as usual, GMAC, the finance arm, also reported positive net income. It was $30 million less than last year's second quarter, but $816 million is nothing to sneeze at when the worldwide automobile businesses are losing money as a whole.

But GM North America continues to suck the power away from the wheels. North American operations lost $1.2 billion despite gaining 1.1 points of market share using new sales incentives.

Does all of this sound familiar? It should. Ford's (NYSE: F) performance yesterday mirrors GM's. That shouldn't be surprising given the brutally competitive North American car market. There are too many players pushing too many cars in an arena that's already saturated.

To give you an idea of just how saturated things are, GM reduced its dealer inventory by 349,000 units compared with last year. That's a lot of old units to sell to get new products in front of customers. But I will ask the same questions: Why will customers buy another new car soon thereafter, and why will they want to give up their employee discount?

CEO Rick Wagoner continued his mantra of "costs are out of control." I agree. And although he can continue to pressure the union chiefs about benefit costs (which he does in every press release), they aren't going to budge. The two big levers Wagoner has are sourcing, which he mentions, and scale reduction, which at least he started by ramping production down by 142,000 units for the quarter. I don't think sales volumes will increase substantially, so he will have to get his costs in line with lower production volumes to restore profitability. That's a tough task.

My takeaway today: GM North America needs to extract some "best practices" from its sister business units that are making money. Unfortunately, that's not likely to happen for a long time, and to make matters worse, the GMAC premium is going away. It doesn't look good.

David Meier owns none of the companies mentioned. The Fool has a disclosure policy.