General Motors (NYSE:GM) on Wednesday reported a third-quarter profit of $1.48 billion, or 89 cents a share.
Analysts' concerns were centered on Europe, where GM has posted extensive losses in recent quarters. Those concerns turned out to be justified. But GM did better than expected in several ways.
Solid profits at home and in Asia
GM's earnings reports are best understood by looking at them the way the company does, broken down by operating unit. Here's how things stacked up for each of GM's divisions:
- North America generated pre-tax income of $1.8 billion, down from $2.2 billion in the year-ago quarter. While GM's U.S. market share has fallen as competitors like Toyota (NYSE:TM) and Honda (NYSE:HMC) have surged, its sales are up versus year-ago totals. GM's pricing power – its ability to sell vehicles without discounts – has improved, contributing about $300 million to this quarter's results. But "mix" -- the mix of models it sells – has worked against the company to the tune of roughly $400 million, because of the relative popularity of new (lower-profit) small cars like the Chevy Sonic and Buick Verano versus a modest decline in sales of its (higher-profit) soon-to-be-replaced pickups. Still, as GM is set to introduce a slew of new models, including all-new pickups, the trends in North America are going in the right direction for the company.
- International Operations, which includes GM's joint ventures in China, earned $689 million – a nice bump from the $365 million earned a year ago. GM is running neck-and-neck with Volkswagen (OTC:VLKA.Y) for leadership of the huge Chinese auto market, but CEO Dan Akerson has repeatedly emphasized that his goal is to maximize profitability in China, not market position. About half of GM's sales in China right now are of low-margin Wuling commercial vans. It's not a bad business, but GM would like to earn more. The company is taking several steps to improve its product mix in the region, including an overhaul of Cadillac's lineup. The hope is to make Cadillac more appealing to well-heeled buyers around the world, including the Chinese who have made VW's Audi brand a big hit in the Middle Kingdom.
- South America swung to a modest profit of $114 million from a loss of $44 million a year ago. GM has been working for several quarters to turn around its operations in the region, and those efforts are beginning to bear fruit. Among other initiatives, the company is introducing seven new models in Brazil, in an effort to steal sales from major players VW and Fiat (NASDAQOTH: FIATY.PK).
And then there's Europe.
Is a plan for Europe finally emerging?
GM's loss in Europe was $478 million in the third quarter, a big number but less than the $500-million-plus predicted by some analysts. Much of that loss is attributable to deep problems with Opel, GM's German subsidiary.
Opel's problems, like those of most European carmakers, are chronic, structural ones – too many factories and too-rich labor deals to be sustainable. Those problems have been exacerbated by a deep downturn in auto sales in Europe, which have fallen to a near-two-decade low due to a protracted recession.
Rival Ford (NYSE:F) made headlines last week with a dramatic plan to overhaul its own European division, closing three plants and bringing in a slew of new products. GM is clearly feeling the pressure to do something similar; so far, the announced steps have been incremental ones.
The alliance formed between GM and French automaker PSA Peugeot Citroen (OTC:PUGO.Y) earlier this year is close to bearing fruit, with plans under way to reduce costs by sharing parts on several jointly developed models. GM has overhauled Opel's executive suite, placing several of Akerson's key lieutenants on Opel's Supervisory Board and appointing turnaround expert Thomas Sedran to the top spot at the German automaker.
None of those are bad things, and it's possible that they'll be enough to stop the bleeding by mid-decade. But it's also possible that GM will need to do something more dramatic to separate itself from Opel. Is that in the works? Stay tuned.