Chrysler Profit Plunges 29% During 1st Quarter; GM Earnings Slip 0.7%

Plagued by a glut in car production, as well as sluggish domestic sales, General Motors and Chrysler both reported declines in their first-quarter earnings Tuesday.

Chrysler suffered the biggest setback by far, with its net income falling to $356.9 million, down 29.7% from the $507.6 million posted in the first quarter of 1985.

GM, by contrast, said its earnings fell just 0.7% to $1.064 billion, down from the $1.072 billion reached in the same period last year.

Ford, meanwhile, is expected to post a first-quarter profit of about $675 million, down nearly 14% from last year’s earnings of $783.3 million, when it reports later this month, analysts said.

Higher Tax Payments Cited

In a statement, Chrysler Chairman Lee A. Iacocca blamed rising production and labor costs, sharply higher tax payments and increased capital spending for what analysts said was an unexpectedly large drop in net income for the No. 3 auto maker.

In fact, Chrysler’s effective tax rate rose to 41% during the latest quarter from 31% last year as it exhausted tax benefits that it had built up in its earlier brush with bankruptcy.

But equally important was the fact that Chrysler’s sales of U.S.-built cars plummeted 17.7% during the first three months of the year at a time when GM’s car sales fell 3.6% and industrywide sales, including imports, fell just 1.6%.

To counter its sales slump, Chrysler has been forced to offer extensive cash rebate and discount financing programs, which have added to its costs and cut into profit margins.

Still, analysts were pleased by GM’s performance, which was slightly better than many on Wall Street had predicted. “You had one company (Chrysler) that was slightly negative compared to the forecasts and one (GM) that was moderately positive,” noted Joseph Phillipi, automotive analyst with E. F. Hutton.

GM’s earnings were boosted in part by the success of many of its biggest subsidiaries, such as Hughes Electronics, which includes El Segundo-based Hughes Aircraft. GM’s Hughes unit earned $137.2 million on sales of $2.6 billion during the quarter, up slightly from the pro-forma net income of $126.1 million on sales of $2.3 billion for last year.

Meanwhile, the auto maker’s big financial arm, General Motors Acceptance Corp., earned a record $276.6 million, up 22.2% from last year’s $226.3 million, while GM’s computer services unit, Dallas-based Electronic Data Systems, posted net income of $55.6 million, up 46.3% from 1985’s $38 million, thanks mainly to sharply higher sales to other GM divisions.

Analysts warned Tuesday that GM’s automotive operations may turn in another lackluster performance in the second quarter. GM’s car sales are not likely to be helped very much by its latest discount financing program, since those incentives have been offset by recent sticker price hikes averaging 2.9%.

Further Cutbacks Expected

In fact, some analysts predict that GM will be forced to make further cutbacks in second-quarter production to reduce its bulging inventories--a move that would sharply reduce its profit.

GM’s dealers currently have an 85-day supply of unsold cars on hand; no more than a 60-day supply is considered normal in the industry.

While Chrysler is also burdened by an 89-day supply of cars, the auto maker has already scheduled temporary shutdowns of two of its big assembly plants for retooling during the quarter, and analysts believe that those production cutbacks should eliminate much of its excess inventory.

In part because of those plant shutdowns, Chrysler acknowledged in its statement Tuesday that second-quarter earnings are likely to decline.

“I’m more concerned about inventory at GM, and I don’t think the incentives will help,” said Michael Luckey, automotive analyst with Shearson Lehman Bros. “GM has cut second-quarter production somewhat, but our view is it will have to cut more.”

Iacocca Defends Pay

With just 57 days’ worth of cars in its dealers’ lots, Ford should be the only member of the Big Three that can avoid production cuts in the second quarter. It escaped the car glut over the last few months because it was just beginning to build some of its newest products, including the Ford Taurus and Mercury Sable intermediate models, and so its assembly lines were not cranked up to full speed.

Separately, Iacocca said in Washington on Tuesday that he may be overpaid but that he doesn’t feel guilty about making so much money at Chrysler, which paid him a total of $1.6 million in salary and bonuses last year. In addition, he has made more than $15 million from Chrysler stock over the last five years, he revealed.

“In salary and bonuses, I’m probably overpaid,” he said. But he defended his right to his big profit from Chrysler’s stock. “What the hell is wrong with that?” Iacocca asked. “Isn’t that the American system? They (the stocks) grew with the company. We shouldn’t be ashamed of that.”

And he said that if the company’s board of directors wants to give him so much money in salary, he will take it. “I’m not a socialist,” he said.