Swelling inventories, rising incentives and a flat U.S. auto market are blemishing a record year of profit for General Motors Co. (IW 500/3), which expects to manage through these challenges and still match or exceed last year’s results.
The U.S. automaker emphasized new versions of the GMC Terrain and Chevrolet Equinox and Traverse models hitting the market this year as it posted $12.5 billion in adjusted earnings before interest and taxes Tuesday. GM will bank on those models helping to shore up shrinking North American profit margin, as Americans snub passenger cars now crowding dealer lots. Its shares fell as much as 5.3%, the most intraday in nearly a year.
Chief Executive Officer Mary Barra has accelerated cost reductions and laid off or dismissed workers making slow-sellers including the Chevrolet Camaro and Cruze models to begin the year. The production cutbacks contrast with the pressure President Donald Trump has put on automakers to build new U.S. plants. GM instead is taking steps to address inventory that would take about 108 days to work through at January’s selling rate -- more than a month’s worth of extra supply compared with this time last year.
“The key investor focus today will be on GM’s ability to meet 2017 guidance and whether GM’s growing U.S. inventories can be properly managed,” Brian Johnson, an auto analyst at Barclays Plc, wrote in a research note Tuesday.
Net income fell 71% in the quarter to $1.8 billion, in line with analyst estimates. The decline was mainly driven by a one-time $4 billion gain a year ago related to deferred tax assets in Europe.
By almost any measure, 2016 was a great year for $GM and I am confident we can achieve even stronger results as we move forward.— Mary Barra (@mtbarra) February 7, 2017
In the last three months of the year, GM’s North American profit margin narrowed to 8.4%, from 10% a year earlier. The shares fell 4.6% to $35.15 as of 10:45 a.m. in New York trading.
GM spent almost $4,600 a vehicle on incentives in January, about 12% more than a year earlier, according to Autodata Corp. Dealers are carrying as much as 11 months' worth of Buick LaCrosse sedans, the Woodcliff Lake, N.J.-based researcher said this month.
Boosting profits in spite of the supply challenges may be doable because GM can cut temporary workers at its U.S. plants without paying costly buyouts. The automaker has already eliminated shifts at factories making the Cruze and Camaro, as well as the LaCrosse and Cadillac CT6 sedans.
“We have been and we will remain committed to balancing supply and demand because that is what really leads to pricing discipline,” Chuck Stevens, GM’s chief financial officer, said on Bloomberg Television.
When GM dialed back production of the Lacrosse and CT6 at its plant in Hamtramck, Mich., it cut 638 temporary and 493 full-time staffers, according to a notice filed with the state in December.
GM has built up inventory in part to prepare for introductions of new models including the Terrain, Equinox and Traverse SUVs, Stevens said. New vehicle makeovers often require down time at plants and slower initial production to shore up quality of the initial vehicles coming off the assembly line.
“We will go from the oldest crossover SUV line to the youngest,” Stevens said.
In the fourth quarter, GM’s adjusted earnings before interest and taxes fell $153 million to $2.6 billion in North America. Revenue in the fourth quarter climbed almost 11% to $43.9 billion, topping the average projection for $41.2 billion. Adjusted earnings rose to $1.28 per share, exceeding the $1.17 average prediction by 21 analysts. Losses in Europe narrowed to $246 million in the quarter, a $52 million improvement from a year earlier, according to the Detroit-based company. GM’s income in China during the last three months of the year declined 8.2% from a year ago to $525 million.
The United Auto Workers union, which also represents workers at Ford Motor Co. and Fiat Chrysler Automobiles NV, said its GM members will each earn as much as $12,000 in profit-sharing bonuses. Stevens said the automaker hasn’t adjusted its production plans to take into account pressure from Trump.
“This is a long-lead decision,” he said on Bloomberg TV. “You just don’t change a footprint, manufacturing locations overnight.”
By David Welch