GM Profits Fall 27.9% in Quarter as Costs of Reorganization Mount
General Motors said Tuesday that its earnings fell 27.9% in the second quarter, prompting industry analysts to question whether GM’s corporate overhaul under Chairman Roger B. Smith is taking a toll on its financial performance.
Analysts agreed that the larger than expected decline to just over $1.16 billion from last year’s record $1.61 billion was due to a continuing squeeze on GM’s profit margins resulting in part from mounting labor and product-development costs.
In addition, they believe that GM’s costs have also soared because of a hurried reorganization of its domestic car operations, integration of its newly acquired Electronic Data Systems computer subsidiary into the GM system and creation of its new Saturn unit to build import-fighting small cars by the end of the decade.
‘Special Kinds of Costs’
“It is a cost problem we’re not seeing at Ford or Chrysler,” said David Healy, automotive analyst with Drexel Burnham Lambert. “GM is having more of these special kinds of costs than I expected.”
GM’s profit drop came despite a 16.1% rise in sales to a record $25.06 billion during the quarter and a 14.5% jump in worldwide factory sales of cars, trucks and other vehicles. But the sales gain was offset by a rise in total costs (excluding taxes) of 17.7%. As a result, GM’s profit margin fell to 4.6% on each sales dollar from 7.5% last year.
The second-quarter decline was magnified in comparison with the year-ago period because of a one-time tax credit of $422 million that GM received during the second quarter of 1984. Income before taxes this year fell 7.3% to $1.66 billion from $1.79 billion.
For the first six months of the year, GM’s earnings fell nearly 31% to $2.23 billion. The dramatic drop prompted GM executives to concede that they have been encountering serious difficulties in controlling costs.
Operating Costs Rise
In a joint statement, Smith and GM President F. James McDonald admitted that “we’re still feeling the impact of (the early development costs of) future model programs (including Saturn) as well as costs related to EDS” (which still contributed $42.5 million to GM’s second-quarter profits). They added that recent sales incentive campaigns designed “to stimulate the market” have also driven up operating costs. GM is currently offering 9.9% discount financing on some of its front-wheel-drive luxury models.
The massive organizational reshuffling taking place inside GM, which may increase when GM completes its planned acquisition of El Segundo-based Hughes Aircraft, appears to be contributing to the slow erosion of GM’s share of the car market, said Harvey Heinbach, automotive analyst with Merrill Lynch.
GM has had trouble keeping up with demand for its hottest cars while finding itself unable to unload some of its slower-selling models, he says.
“We are seeing the continuing impact of GM’s huge spending on products and on bringing new plants on line and renovating older ones and the disruptions that those things have caused,” Heinbach said.
“And the disruptions of the production system are hurting GM’s supply (of cars), which in turn is hurting its market share,” he added.
With Japanese imports battering GM’s entries in the smaller, lower-priced end of the market, the Europeans at the high end and Ford and Chrysler in the middle, GM’s market share (excluding the company’s own sales of Japanese imports) has dropped to 43.3% of all car sales in the first six months of this year from 46% in the first half of 1984. And while industrywide car sales in the United States rose 3.4% on a daily rate basis in the first six months of 1985, GM’s domestic sales fell 2.6%.
Even without the competition from the imports, however, GM has been losing out to Ford and Chrysler; GM’s share of domestic sales (excluding imports) fell to 56.4% in the first half from 59.3% last year.
John Hammond, an analyst with Data Resources in Lexington, Mass., said some of GM’s troubles stem from the discontinuation of some car lines and the rather tepid consumer response that has greeted some of its latest models. He noted, for instance, that since GM ended production of its troubled X-car line in May, Chevrolet has gone without a compact car to fill the hole between its subcompact Cavalier and its intermediate Celebrity. Meanwhile, GM’s new N-car compacts, introduced last fall and now offered by Pontiac, Oldsmobile and Buick, have not been quite as successful as GM hoped, he said.
Hammond predicted that GM will begin offering more widespread sales incentives next month in an effort to halt its market share slide.
“All of this is reversible for GM,” Hammond said. “GM will probably offer incentives, realign its production system (to increase the supply of popular models at the start of the 1986 model year this fall) and use its muscle to move the market.”
