For GM and Ford, home is where the profits are

For General Motors Co. and Ford Motor Co., home is where the profits are. That’s a source of heartburn as U.S. auto sales stall.
Ford CFO Bob Shanks put it plainly when explaining the company’s quarterly financial results Wednesday: “Effectively, every dollar we earned in the automotive segment was earned in North America.” It’s a similar story at GM, which reported all but about $200 million of adjusted profit came from the region.
The dependence on homegrown sales leaves both companies vulnerable. Ford cut its forecast for annual industrywide U.S. deliveries Wednesday, weeks after GM dialed back its own projection. Collapsing demand for sedans is overwhelming strong deliveries of crossovers, SUVs and pickups, helping explain Ford’s drop in pretax profit from North America in the second quarter. GM’s earnings from the region are in jeopardy in the second half as it cuts output to retool for new models and rein in bloated vehicle inventory.
“North America is going to be the primary profit driver for both companies for a long time to come,” said David Whiston, an auto analyst with Morningstar Inc. “The risk for both is that they’re dependent on the U.S. remaining reasonably healthy and they need gas prices to stay relatively cheap.”
While fuel prices are expected to remain low, the U.S. auto market is declining for the first time in eight years. GM and Ford still expect industrywide car and truck sales to top 17 million this year, though that’s down from last year’s record 17.55 million.
That’s a still-healthy level of demand and includes booming deliveries of more profitable crossovers, SUVs and trucks. But signs of trouble have emerged: Ford’s North American operating margin declined to 9 percent from 11.3 percent a year earlier.
GM’s second-half earnings will be hurt by more than a dozen weeks of downtime to prepare plants making new pickups and crossovers. It’s also cutting shifts to reduce stockpiles of slow-selling cars like the Chevrolet Cruze and Malibu.
While both companies beat analyst estimates for profit, their respective shares traded down the days they posted results this week.
“Earnings in GM’s main businesses may be past their peak,” Emmanuel Rosner, an analyst for Guggenheim, wrote in a note to investors. He said the “muted reaction” to GM’s results “reflects investor concerns GM’s performance was largely a pull-forward of North American earnings.”
Big bets
Some of the billions of dollars GM and Ford are making is being funneled into developing self-driving vehicles. Payoffs on those bets aren’t assured, as the U.S. automakers will be taking on Silicon Valley stalwarts like Alphabet Inc. and Apple Inc. that are aiming to dominate the autonomous age.
CEO Jim Hackett, who took over Ford’s top job in May after the board ousted his predecessor Mark Fields, promised to provide more clarity this fall on his plans for the company. Credited with reviving office-furniture maker Steelcase Inc., he has a mandate to both clarify and accelerate Ford’s strategy to take on Silicon Valley in the race to driverless cars.
“I don’t think we have to cede the future of transportation” to tech companies in Silicon Valley, Hackett said during a conference call Wednesday. “They may need us more than we need them.”
American dependence
GM and Ford have long attempted to break their dependence on the U.S. market. GM has become a market leader in China, though it’s exiting Europe, a source of more than a decade of losses. It’s also pulling the Chevrolet brand this year from India, a market where Ford is losing money and considering its own retreat.
Ford has managed to claw back to profitability in Europe, where its pretax profits fell to $88 million in the second quarter, down from $467 million a year earlier. But Shanks said Europe is unlikely to ever rival the profitability of the U.S. and its high-margin truck, crossover and SUV sales.
“We need to have both a broader geographic base of profitability and product base of profitability,” Shanks said. “We need to get these businesses moving forward much more positively on a trajectory that will have them contribute more meaningfully.”
Fuente: Automotive News