Despite record first-half profit, GM plans major cuts

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General Motors Headquarters in Detroit.

General Motors' $6.3 billion first-half profit wasn't enough, said CEO Dan Akerson. (Photo Credit: CC BY-ND/Michigan Municipal League/Flickr)

First-half profits for General Motors Co. reached $6.3 billion, reports Automotive News. However, according to CEO Dan Akerson, despite the best half the automotive has had in more than 20 years, in no small part due to the large increase in auto loans, it wasn’t good enough. GM cutbacks will soon follow.

GM making a case for cuts

GM CFO Dan Ammann has been explaining for months that the automaker will have to cut expenses, as its 6 percent margins – calculated by Morgan Stanley using earnings before interest and taxes – are almost at the bottom of the industry. Only Toyota, Renault SA and PSA Peugeot Citroen have lower operating margins.

Determined to recapture the lead in global sales, GM is currently aiming at Ford Motor Co. and Volkswagen AG’s 7 percent margin as the next hurdle, said GM spokesman Jim Cain.

Programs across the board are being examined for possible cutbacks at GM, notes ABC 7 Action News Detroit. Marketing cutbacks, production consolidation, job cuts and even turning down the thermostats in corporate offices are all on the table.

“Ford’s North American margins are easily 2 percentage points better than GM’s,” said Morgan Stanley analyst Adam Jonas. “We think that gap can narrow.”

Third quarter net income forecasts are low

A team of industry analysts told Bloomberg that GM’s third-quarter net income would likely drop $2.16 billion from the previous year, to $1.6 billion.

Escalating commodity prices, engineering and marketing costs have severely cut into profits, noted Jonas. With higher dealer inventories on hand, more lucrative buyer incentives and production cuts are expected.

Scaling back models

GM Senior Vice President for Global Product Development Mary Barra told Automotive News that the automaker also plans to cut back from 30 models to only 14 by 2018. As only 31 percent of GM sales in 2010 came from core compact and mid-size cars – compared with more than 70 percent by Ford over the same period – General Motors will likely cut back production significantly.

Similarly, the company plans to use fewer engine models. Currently, 16 engine models are in production. GM has targeted 10 by 2018.

Beating back entropy

“A lot of the cost focus at GM is about discipline,” said Detroit-based consulting firm principal Jim Hall. “The company has to make a statement to employees. If you don’t, then corporate entropy will creep back in.”

Last quarter was better for GM

Sources

ABC 7 Action News Detroit

Automotive News

Bloomberg Businessweek


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