GM’s 1st-Quarter Earnings Rise 42.2% to $1.55 Billion
Despite poor domestic car sales in early 1989, General Motors said Thursday that its first-quarter earnings rose 42.2%, to $1.55 billion. It was GM’s best financial performance for any three-month period in nearly five years.
The profit gain at the world’s largest industrial corporation came on record worldwide revenues of $29.6 billion, due in part to booming European sales of its cars and trucks.
Analysts attributed GM’s dramatic increase in its earnings both to cost cutting and to relatively strong factory sales of its cars and trucks to its dealers.
GM makes money by selling cars to its dealers rather than to retail customers, and despite a sharp decline in its retail car sales in the quarter, GM’s sales to dealers were actually up significantly over last year.
But that led to bulging inventories of unsold cars on dealer lots by the end of the quarter, forcing GM to offer broad sales incentives, which are continuing in the second quarter.
But now, analysts warn that GM’s current incentives seem to be falling short and might not boost sales enough to allow GM to avert production cutbacks to reduce inventories.
84-Day Supply of Cars
At the end of the quarter, GM had an 84-day supply of unsold cars--with inventories on some individual car lines much higher. A 66-day supply in the domestic auto industry is considered normal in March.
“The incentives are working, but not enough,” said Thomas O’Grady, president of Integrated Automotive Resources, a research firm in Wayne, Pa. “It’s a matter of production not matching up with sales.”
“You have to conclude that they are simply building too many cars,” agreed Maryanne Keller, automotive analyst with Furman Selz, Mager Dietz & Birney, a New York investment firm.
Still, GM is showing a new ability to maintain a strong bottom line in the face of its struggles in the U.S. car market. Its major subsidiaries--Electronic Data Systems, Hughes Aircraft and General Motors Acceptance Corp.--are all improving their contributions to GM’s profits.
EDS, the Dallas-based computer services unit, posted record first-quarter earnings of $100 million. Hughes Electronics, the GM subsidiary that includes Hughes Aircraft, said it earned $210 million in the quarter. GMAC, the huge financing arm that provides loans to car buyers, turned a profit of $356 million.
GM’s overseas automotive business is also soaring, thanks to a booming automotive market in Western Europe. GM said its car and truck sales overseas, not including Canada, rose to 597,000 in the quarter, up 5% from last year.
Costs Reduced $1 Billion
Cost cutting--through Draconian measures such as plant closings, layoffs and production cutbacks--is also paying off financially for GM. The company said it reduced its costs by $1 billion in the first quarter, meaning that it doesn’t have to sell as many vehicles to make a profit. Since 1987, GM said it has reduced its cost structure by a total of $9.5 billion.
Now, most of its old plants have been closed, its cars are being built in more efficient and productive factories, and GM is starting to reap the benefits of having downsized itself.
“General Motors is a dramatically different company than it was only a few years ago,” GM Chairman Roger Smith and President Robert Stempel said in a joint statement.
GM was the first of Detroit’s Big Three auto makers to report first-quarter earnings.
Ford, which will announce its profits late next week, continues to run its factories at close to full capacity, impressing Wall Street analysts. Keller predicts that Ford will post earnings of about $1.6 billion, close to last year’s record.
She believes that Chrysler, which is expected to announce its results in early May, made about $340 million in the period, up substantially from a poor performance in last year’s first quarter.
