GM Net Off 33%; Costs Rise Faster Than Sales
Crimped by rising product development costs and a decline in its market share, General Motors reported Tuesday that its earnings fell 33.6% to $1.072 billion during the first quarter, down from last year’s record of $1.614 billion.
GM blamed the decline on its increased spending for advanced engineering programs related to the modernization of its plants and its car and truck lines. Although GM’s worldwide sales rose 5.7% to a record $24.18 billion during the quarter, its costs rose almost twice as fast, increasing 10.7% to $22.65 billion.
GM’s engineering and related costs rose in part because of a new company policy of accounting for much of the spending on future products at an earlier stage in their development. Included in GM’s higher first-quarter expenses, for instance, was spending for the Saturn project, GM’s effort to develop and build a low-cost small car for the late 1980s that could be competitive with Japanese imports.
Cost Pressures
A GM spokesman also noted that GM’s increasing use of costly employee training programs and a growing reliance on automation at its facilities--including newly renovated plants in Lansing, Mich., and Baltimore--have added to the cost pressures on GM.
But analysts, who were somewhat surprised that the earnings drop was so large, also noted that GM’s market share is eroding in the face of stiff competition from Ford, Chrysler and imports. Both Ford and Chrysler posted significant sales gains during the quarter after they began major incentive programs, and GM was forced to follow suit with incentives of its own.
But GM’s share of the market, including imports, still slipped to 43.3% during the quarter, down from 45.5% for the same period last year. At the same time, Ford’s market share rose to 19.9% from 19%, while Chrysler’s rose to 12.3% from 10.2%. As a result, the No. 1 auto maker’s profit margin also dropped to 4.4%, compared to 7.1% for the first quarter of 1984.
‘Market-Share Problem’
“There is a market-share problem at GM over and above the cost problem,” said Harvey Heinbach, automotive analyst with Merrill Lynch. “GM is not getting the share that it should in this kind of (strong) market.”
Heinbach, who had earlier forecast that GM would earn $4.3 billion in 1985, said he now thought GM might fall short of that target this year. In 1984, by contrast, GM posted record earnings of $4.52 billion.
GM’s profit squeeze came despite a slight increase in the firm’s unit sales of cars, trucks and buses for the quarter. Although its Canadian sales fell 24.3%, GM’s car sales were up 3.8% in the United States, while U.S. truck and bus sales rose 9.2%. Meanwhile, its total worldwide unit sales were up 2.8%.
GM was the first of the Big Three auto makers to report results for the first quarter, but both Ford and Chrysler are also expected to post significant declines in net income when their earnings are announced later this week.
