GM sounds the alarm, in advance

Under CEO Mary Barra, the “new” GM, tempered by a brush with death nearly a decade ago, is determined to keep investing in strategic, but costly, programs such as electrification and autonomous driving technology. Photo credit: BLOOMBERG

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DETROIT — Is it the best of times or the worst of times?

General Motors is broadcasting a seemingly bipolar message, reporting a $2.5 billion third-quarter profit and a 25 percent rise in pretax earnings last week, and then following up with news of voluntary buyouts, an inkling of layoffs and a warning about the need to control costs before they overwhelm the company.

Bean counting
As global sales declined 15 percent, GM’s cost discipline paid off in its third-quarter results:

  • Net income: $2.5 billion vs. a nearly $3 billion loss due to sale of its European operations)
  • Pretax profit: $3.2 billion, up 25%
  • Revenue: $35.8 billion, up 6.4%
  • Profit margin: 8.8% globally, 10.2% in North America
  • GM Financial: $498 million, up 61%

But the underlying message to Wall Street and the rest of the industry is more cohesive: The “new” GM, tempered by a brush with death nearly a decade ago, is determined to keep investing in strategic, but costly, programs such as electrification and autonomous driving technology. And it’s determined to ensure it has enough money to sustain those investments during an “eventual downturn” in the economy.

Barra: Get more agile and faster.

“To achieve what this company is truly capable of — and to win — we need to be even more agile and faster to market,” GM CEO Mary Barra wrote in an email to employees last week addressing the buyouts and cost cuts. “We need to get ahead of headwinds, rather than let them happen to us.”

The headwinds, Barra and Wall Street analysts note, already are swirling. GM’s global sales are weakening, especially in China and the U.S., the company’s remaining strongholds.

In her message, obtained by Automotive News, Barra detailed internal and external factors, such as trade policy and global economic conditions, that the company cannot control but must be prepared to address.

She said the company needs to increase free cash flow by cutting structural costs and nonessential investments, such as building renovations that were expected to cost hundreds of millions of dollars.

‘A different company’

The actions and tone were typical of a time of operational and financial chaos for the 110-year-old automaker. This time, though, they are being framed as proactive steps for GM to be able to weather a downturn without shortchanging its future.

Barra and her executive team know well how financial strains can threaten forward thinking. One of GM’s technological breakthroughs, the Chevrolet Volt plug-in hybrid, emerged in production form amid an internal financial crunch and a global credit crisis that put the project’s viability in question ahead of GM’s 2009 bankruptcy.

Pointed talking points
GM CEO Mary Barra’s lengthy message to employees explained the need to cut costs despite solid 3rd-quarter profits. Highlights of the letter:

  • ” … there is still much more to do in transforming General Motors into the automotive company of the future. Our industry is subject to significant technological, economic and regulatory disruption.”
  • “No matter what challenges we face, we are accountable for how we run our business, both in the day-to-day and in anticipating the road ahead.”
  • ” … those outside our company are skeptical of our ability to manage through an eventual downturn in the economy — skepticism we see in our stock price.”
  • “I understand that what I shared today may be difficult news to hear. In keeping with our values, the [senior leadership team] and I commit to provide updates as we move forward in a transparent and respectful way.”

“We’re working hard to prove every day that we’re a different company,” Barra said last week during a televised interview.

She was comparing present-day GM with its past. But she may as well have been speaking of rival Ford Motor Co., which in October announced the outlines of an $11 billion global restructuring that would include unspecified salaried job cuts, even as it committed $740 million for an office campus in Detroit.

Bank of America Merrill Lynch research analyst John Murphy wrote in a research note that Ford is “struggling to perform amid a more challenging operating environment.”

GM, he said in a separate note, “has already taken material actions to get ahead of the curve and is now well positioned to perform amid the storm that is wreaking havoc for others.”

‘Intense focus on cost’

Third-quarter results back up Murphy’s assessment. While Ford experienced a 37 percent drop in earnings due to poor results in China and other markets, GM significantly outperformed Wall Street’s expectations on strong profits in China and North America, despite lower sales.

As Ford pushed back its target of 8 percent global profit margins — currently at 4.4 percent — by 2020, GM reported an 8.8 percent margin for the third quarter.

GM’s cost cutting isn’t over.

“We’re going to have an intense focus on cost, and we’ll find more opportunities to take cost out of the system and maintain a low break-even point,” CFO Dhivya Suryadevara said last week.

She said GM will achieve its previously announced goal of realizing $6.5 billion in cost efficiencies from 2015 to 2018. Additional goals or cost-cutting measures could come when the company announces its guidance for 2019, she said. Those measures could include layoffs of salaried employees if not enough workers take the buyouts.

The buyouts will be available to roughly 18,000 salaried employees in North America and “most” global executives who have 12 years or more of experience. They have until Nov. 19 to make a decision.

GM’s willingness to cut costs at headquarters could help the company make a more convincing case for trimming production capacity when it negotiates new contracts with the UAW next year.

GM’s capacity utilization rates in the U.S. are the lowest of all automakers. Of its 12 U.S. assembly plants, five are operating on three shifts; three are on two shifts; and four are on a single shift.

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