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GM Blunts Impact of Production Plunge with SUV Shift, Cost Cuts

Oct. 24, 2017
General Motors has cut annual costs by more than $5 billion since the beginning of 2014, keeping profits up even as production and sales are down. The company also took $5.4 billion in charges related to the sale of Opel and Vauxhall.

General Motors Co. masked the effects of big production cuts it warned were coming by boosting sales of more lucrative SUVs and reducing costs.

The automaker reported adjusted profit of $1.32 a share for the quarter ended last month, beating the $1.11 average adjusted profit analysts had estimated. Strong demand for the new Chevrolet Equinox crossover helped top expectations despite the company cutting North American vehicle output by more than a quarter.

The earnings add to the momentum GM has been building by changing perception of its technology. CEO Mary Barra has taken a page from the book of Tesla Inc.’s Elon Musk this fall by generating buzz about electric and autonomous vehicles hitting the market. Wall Street has grown more optimistic that GM’s test fleet of self-driving electric cars can be converted into a lucrative robo taxi operation worth billions.

“The progress we’ve seen in the stock price, certainly we’re pleased,” GM CFO Chuck Stevens told reporters Tuesday. “It’s the strength of the core business. Secondly, we also have been out very actively talking about the assets, the capabilities and the approach we have been bringing to bear relative to autonomy and personal mobility.”

GM shares climbed 4.2% to $47.04 as of 8:37 a.m. in New York, before the regular start of trading. The Detroit automaker’s shares are up 30% this year, doubling the gain by the benchmark Standard & Poor’s 500 Index.

Cost Cuts

The largest U.S. automaker has cut annual costs by more than $5 billion since the beginning of 2014, which has helped keep profits up even as production and sales are down, Stevens said.

Investors have been interested in GM’s potential to develop its own ride-sharing business using self-driving cars. The company’s core business has also been resilient amid a weaker car market, Barclays analyst Brian Johnson wrote in a report to clients Monday.

“GM arguably has the most positive sentiment of any name in our space at the moment,” Johnson said. “Investors are looking for reasons to own GM.”

Although some analysts have speculated that GM will spin out some businesses, especially self-driving car and personal mobility units, Stevens downplayed the possibility for now, saying it makes sense to keep those businesses under one roof.

While Wall Street has been excited about GM’s future technology, the past quarter was one of retrenchment. Production cuts were the biggest factor in revenue falling 14% to $33.6 billion.

Curbing Cars

The automaker has been reducing output at passenger car plants as sales slow, including cutting a shift at its compact car plant in Lordstown, Ohio, and one at its sedan plant in Detroit. Even a sport utility vehicle plant in Tennessee will be cutting jobs next month to reduce inventory at dealers.

The automaker also lost production at an SUV plant in Ontario, Canada, where workers building the hot-selling Chevrolet Equinox went on a monthlong strike that ended last week. GM’s factory in Fort Wayne, Indiana, which makes its high-margin full-size pickup trucks, and its Arlington, Texas, full-size SUV plant also shut down temporarily in the third quarter to get ready for new versions of the vehicles they build, a company spokesman said.

Beyond production hits, GM also took $5.4 billion in charges related to the sale of its European units Opel and Vauxhall to France’s Peugeot SA. The charges included about $4.3 billion in unrealized deferred tax assets and another $1.5 billion in pension-related costs. GM has proceeds coming in from the deal that offset some of those losses.

GM also continues to spend about $150 million a quarter to help its San Francisco-based Cruise Automation unit develop self-driving vehicle technology, a spokesman said. The automaker recently said its self-driving Chevy Bolt electric car is ready for mass production and that it will have 20 new electric vehicles by 2023.

By David Welch

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