Making Cars Is Cheaper, More Profitable For GM

The cost of making vehicles has decreased significantly for General Motors and the proof is in the pudding financial results. Our favorite automaker posted its first profit in recent memory for the first quarter of 2010. GM reported an $865 million profit despite losing $5 million in its European arm, Opel/Vauxhall. The fact that GM has $1.75 billion in cash doesn’t hurt its financial position either.

But the real changes at GM are less obvious than Equinoxes and LaCrosses on public roads They are, however, more obvious on the balance sheet. Plant closings, employee buyouts, and lower incentive spending have made a huge difference in GM’s fixed costs per vehicle.

Fixed Costs

Last year GM averaged $10,400 in fixed costs per vehicle. This was reduced to $7,280 at the beginning of 2010. Analysts expect that fixed costs will continue to decline and see them at a low of $5,772 per vehicle by the end of 2010. GM has also reduced manufacturing costs by approximately $3,000 per vehicle.

Fixed costs represent a huge advantage for GM going forward, with labor costs coming in lower than any Japanese automaker in the U.S. These are huge improvements for GM: for years, healthcare costs and union contracts kept the company’s costs above those enjoyed by automakers like Toyota and Honda.

Profitability Despite Lower Market Share

And even though employee buyouts and plant closures have the potential to hurt the American economy in the long run, there is an upside. Vehicles like the upcoming Chevy Cruze can be produced profitably in the Midwest instead of in Mexico. Vehicles can also be sold at a profit even at lower sales levels, allowing for profitability even at a lower market share.

Such cost cutting has brought General Motors much closer to Ford’s levels than many would believe. And despite GM’s market share slip from 19.2 percent last year to approximately 18.7 percent today, it’s important to keep in mind that market share remains strong despite The General’s elimination of four brands from its portfolio, including Saturn, Hummer, Pontiac, and Saab. And according to a JD Power executive, “Post-bankruptcy there is some hangover, but people are no longer as concerned about whether these companies will be around a year from now.”

It will be interesting to see how GM will handle the restructuring of its European operations after announcing that it will fund these efforts all by itself. Perhaps we will see the same cost advantages GM has realized in North America carried over to Europe? Let’s hope this to be the case.