General Motors (NYSE:GM) is set to report fourth-quarter and full-year 2012 earnings on Thursday, Feb. 14. What should we expect?
First off, it's likely that GM's quarterly result will come in behind old rival Ford's (NYSE:F). While the Blue Oval was able to post a $1.7 billion profit for the quarter on the strength of fat margins and strong truck sales in the U.S., GM -- despite selling more vehicles than Ford -- is still in a somewhat weaker position here at home.
And for all of its size overseas, what happens here in the U.S. is still of immense importance to GM's bottom line.
Why isn't GM making more money?
The consensus estimate of analysts polled by Bloomberg is that GM likely earned $1.17 billion in the fourth quarter. That would give it a 2012 profit of $6.65 billion, well short of the $8 billion earned by Ford and short of the $7.6 billion GM earned in 2011. It would also trail profits at GM's principal global rivals, Toyota (NYSE:TM) and Volkswagen (OTC:VWAGY).
But in terms of the number of vehicles sold around the world, GM trailed only Toyota in 2012, and not by all that much. So why are its profits so far behind most of its key rivals? And why are its 2012 totals likely to be short of 2011's? Why isn't GM making more money?
There are a few factors involved, starting with GM's operations here in the U.S., where Ford is out-earning the General in a big way despite selling fewer cars and trucks. To some extent, that's more about Ford than about GM: The Blue Oval's margins here have been well over 10% in recent quarters, thanks to the success of Ford's global "One Ford" strategy.
That strategy has given Ford a string of class-leading new products that command premium prices, increasing per-sale profits. It has also allowed Ford to make the most of its factories, running some around the clock -- a move that reduces the company's overall costs per vehicle, increasing profits further.
GM is on course to do something similar, but it's a few years behind Ford. The General plans to introduce a slew of new products over the next several quarters; if they're as good as GM's best recent models, improved U.S. margins should follow. Meanwhile, though, GM's margins aren't close to Ford's in the U.S., and that means its profits here will be less impressive for a while longer.
Overseas, the story is more complicated.
More losses in Europe and subdued profits in Asia
It's likely that GM Europe posted another big loss in the fourth quarter -- $500 million, maybe more. Like Ford, which has also posted big losses in Europe lately, GM is taking action to try to restore its regional operation to profitability. But unlike Ford, which announced a clear-cut plan last fall, GM's efforts have been stop and go, with little sense -- at least in public -- that they are progressing toward a clear-cut set of objectives. Any updates GM chooses to offer on Thursday will be closely watched.
Meanwhile, GM is selling a lot of vehicles and making good money in Asia, but, again, not great money. GM is the biggest-selling automaker in the world's largest automotive market, China -- a position it held onto in 2012 despite a fierce push by archrival VW, the other auto giant in China. But in a sense, it has already fallen behind VW in China, and elsewhere: The German automaker's profits in the region are much, much higher than GM's, a trend that is unlikely to have changed in the fourth quarter.
There are several reasons for that, but a big one is product mix: About half of the vehicles GM sells in China are Wulings, small and inexpensive (read: low-margin) commercial vans. While sales of GM's bread-and-butter brands, Buick and Chevrolet, have been good, luxury brand Cadillac so far has only a tiny presence in China.
Contrast that with VW, whose Audi brand is posting huge sales numbers in the Middle Kingdom. Audi's success around the world is a big part of VW's terrific profits in recent quarters: While the luxury brand accounts for just a small percentage of overall sales, it generates nearly half of VW's profits.
GM is working hard to upgrade Cadillac's offerings -- an all-new version of its CTS sedan is expected to debut next month -- but it will be a few years (at least) before Cadillac is seen as a credible global peer to the likes of Audi. Meanwhile, GM's profits in places like Asia will lag VW's.
The upshot: much room for improvement
For all the ongoing challenges GM faces, it's worth noting that the company is on solid ground. Complaints that GM's profits could be bigger are legitimate, but the fact that the company has solid profits represents significant progress over where it was when it exited bankruptcy in mid-2009.
Still, GM has a lot of work yet to do, and its current management doesn't yet inspire the confidence like that at rivals like Ford. More than the reports on GM's 2012 results, the big news from Thursday's earnings presentation is likely to be GM's forward guidance: Are things improving?
If not, then GM shareholders -- and I'm one -- will need to do some hard thinking.