Doubts cast on GM's prospects

By Ken Bensinger

Nov. 8, 2007 12 AM PT

Times Staff Writer

Two years into its efforts to execute a U-turn, General Motors Corp. has hit a $39-billion wall.

GM reported the massive loss Wednesday, its worst quarterly return and the fourth-largest for any company since 1990.

The stunning result set off alarm bells on Wall Street and raised serious questions about the ability of the world’s largest automaker to complete its much-heralded turnaround in an increasingly brutal market.

The Detroit company’s third-quarter loss was nearly double its previous worst quarterly shortfall, $21 billion in 1992. The major component in the loss, a write-down of tax credits, overshadowed some good news: GM raked in $43.1 billion in automotive revenue, a quarterly record for the company.

GM’s loss stood in contrast with the results from Toyota Motor Corp., which on Wednesday reported a $4-billion profit for the July-September period.

To industry observers, GM’s numbers -- which reflected a $1.6-billion loss ($2.80 a share) even without the accounting charge -- bode ill for the automaker at least through next year and early 2009, if not longer.

“They haven’t yet felt the full force of the slowdown and gas prices,” said Peter Morici, business professor at the University of Maryland, referring to the economy and rising energy costs. “GM has been losing money in North America, and now it’s going to get worse.”

Wall Street had been expecting a much smaller loss and reacted strongly to the GM results, with Moody’s cutting its recommendation from positive to stable, and Standard & Poor’s cutting its 12-month target for the stock by nearly 20%.

GM shares fell $2.21, or 6.1%, to $33.95.

Until this week, GM had seemed to be on a bit of an upswing. The company had posted four consecutive quarters of profit (including an $891-million gain in the second quarter), undertaken two years of cost-cutting and recently scored a significant victory in negotiations with labor unions that will allow the company to remove some hefty pension and healthcare costs from its books.

But it seems the auto giant just can’t reduce overhead fast enough. That problem was at the heart of the decision to write down the tax credits, which can be taken only to offset taxes on future profits.

By removing them from the books, GM was essentially expressing doubt that it would have any such profit any time soon.

“The future prospects of utilizing those credits are not looking good,” said Ken Elias, a partner at automotive consultant Maryann Keller & Associates. “Just operating at break-even over the next few years looks optimistic.”

GM found reasons to be enthusiastic about the results, noting it had strong sales in Latin America and Asia, where it had operating profit of $340 million and $138 million, respectively.

But in Europe GM lost $90 million, and in North America, its largest market, GM fell $247 million short because of what it called “challenging” conditions.

“The U.S. market will look a lot in 2008 like it has in 2007,” said John M. McDonald, a GM spokesman. “You really have to look at the confidence of consumers and how much income is available to purchase cars.”

Consumer confidence has been sapped lately by rising fuel prices, with oil creeping close to $100 a barrel, and the mortgage crisis, which affects GM in two ways: indirectly because falling housing prices and tighter lending standards have made it harder for people to use home equity to purchase cars, and directly because GM holds a 49% stake in lender GMAC, which showed large losses in ResCap, its mortgage business, leading to a $749-million drag on GM earnings in the third quarter.

“My feeling is that the ResCap problem is probably very big and will keep getting bigger,” Elias said.

In the long term, the biggest problem may be auto sales. GM said it expected 16 million new vehicles to be sold in the entire U.S. market this year, down nearly 1 million from last year, and forecast 16 million for 2008.

But industry analysts expect 2008 sales to be significantly lower. Aaron Bragman, an analyst at Global Insight in Detroit, said his firm projected about 15.6 million cars to be sold next year, leading to a fierce struggle among automakers over what amounts to a shrinking pie.

“It’s going to be cutthroat,” he said. “There will be no excuses anymore.”

For nervous car dealers, the hope is that GM can use new products such as the highly regarded Malibu to hold its ground in the U.S. market through late 2009, when it begins to reap benefits from its new contract with the United Auto Workers.

That agreement will allow GM to take large employee healthcare and retirement obligations off its books.

As of Nov. 1, GM held 25% of the U.S. market, the largest of any manufacturer but far below the more than 60% share it held in the 1960s.

“The question is whether GM will hold share in a smaller market,” said Mike Maroone, president and chief executive of AutoNation Inc., the country’s largest publicly held dealership group. “There are certainly significant head winds.”

Even though Toyota sells in the same markets, its results would hardly indicate the same difficulties.

Toyota has been vying to oust GM from its long-held position as the world’s largest automaker, and although its current U.S. sales are not as strong as some expected, the Tokyo automaker says it is on track to record a 5.5% increase in North America this year.

This and other factors led Toyota on Wednesday to raise its forecast for 2007 earnings and to increase its sales projection by 40,000 units.

Unlike truck and SUV-reliant GM, Toyota has found much of its growth on the back of sedans and coupes such as the Camry and Corolla.

But the key difference, said business professor Morici, is found in margins.

“In 2006, Toyota showed $1,266 in profit for each car sold, while GM lost $1,436 per car,” he said.

“That’s the big story. And that has to change for GM.”

ken.bensinger@latimes.com

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Biggest losses

General Motors Corp.’s third-

quarter loss is not only its worst

ever, it’s the fourth-largest quar-

terly loss on record since 1990.