Ever wonder why GM CEO Dan Akerson wants to raise The General’s profitability? The answer is simple: because GM is, at best, half as profitable as its most direct rivals — including Toyota and Volkswagen.
General Motors made $7.6 billion in profits in 2011 while selling more cars around the world than any other automaker (given that you include sales of its joint venture partners in China). Indeed, 2011 was a great year for GM — especially considering that only two years before that, the automaker was riddled with financial problems that led to the infamous bankruptcy; but while GM out-sold its competitors and regained the brag-worthy number one volume status last year, a title it will likely lose in 2012, it was still out-earned by Ford, Volkswagen, and Toyota.
The trend, unfortunately, is continuing into 2012: for the third quarter of the year, GM earned a respectable $1.5 billion, while Toyota and VW made $3.2 billion and $3 billion, respectively. That makes for an enormous profitability gap — as GM’s closest rivals are earning twice as much profit during an extraordinarily close sales volume race. What, exactly, does this mean? That GM is doing the same amount of work, but is walking away with a lot less.
MEASURE/COMPANY | GM | TOYOTA | VW |
---|---|---|---|
REVENUE | 37.6 | 64.1 | 64.6 |
PROFIT (NET) | 1.5 | 3.06 | 3 |
OPERATING MARGIN | 3.99% | 4.77% | 4.64% |
*Currencies in billions of US Dollars; Toyota and VW results converted from Yen and Euro, respectively.
Why is GM earning less per vehicle than its competitors? Here are the three main reasons.
1. Towering Complexity
There’s a reason VW and Ford make it a point to offer globalize their product portfolio. The result is products that not only cost less to develop (engineer, design) and build, but that are also of a higher quality. And it’s precisely the quality aspect that leads to vehicle desirability among consumers and results in higher transaction prices with fewer discounts (read: higher profitability). In effect, a global vehicle portfolio leads to better economies of scale and better products overall.
In its defense, GM is well on its way to offering a global line of vehicles — especially when it comes to Chevrolet and Cadillac. But it still has a huge amount of tech-based overlap causing massive inefficiencies and unnecessary complexity. To fix this, GM is working diligently to reduce the number of platforms and engines by 2018, while its latest most recent vehicles are of the global nature (Sonic/Aveo, Cruze, Malibu). Unfortunately that doesn’t apply to the entire lineup quite yet, as the Equinox, Traverse, Orlando, and Trax are not truly global products.
The solution: decrease complexity and increase efficiency by reducing platforms and powertrains.
2. Slim International Profits
General Motors is highly successful and profitable in North America, having earned a $1.8 billion profit in the region during the third quarter of 2012. That’s a luxury that VW doesn’t enjoy in North America; but the roles are flipped when it comes to the rest of the world.
To our dismay, and that of many other analysts, The General has been losing money in Europe for years. The lackluster performance has been of concern of many a GM executives, even though losses today are mostly the result of weak market demand, leading to severe capacity underutilization and ensuing price wars triggered by a stumbling European economy. Luckily, GM isn’t alone in making a loss in Europe — as Ford, Peugeout-Citroen, and even VW are affected by Europe’s woes. But it’s still a fiscal reality for GM, which lost $500 million in its European operations during the third quarter of 2012. The General is taking steps to restructure its European operations, but we won’t see the fruits of that labor until 2015 — if that.
Meanwhile in China, GM is the market leader, selling more vehicles in the country than any other automaker thanks to the popularity of Buick and Chevrolet. However, GM’s joint venture partner Wuling, which markets light commercial vans and trucks, makes up for half of The General’s sales volume in China. That might make for some good on-paper numbers and give the automaker occasional bragging rights on the street and in the media, but the relationship doesn’t really help its bottom line: profits on the cheap Wuling vans and trucks are slim, even before Wuling takes its joint venture cut. And that has us, along with other analysts, worried — since VW is catching up to The General in China in overall sales volume while out-earning GM when it comes to profits.
GM’s sales mix in China is to blame for this, since its astronomical sales volume only allowed it to earn about $600 million in the third quarter of 2012 in the Land of the Red Dragon, while VW earned nearly the same amount selling roughly half of the units during the same time period.
As is the case in Europe, GM’s South American ops are also a work in progress. The region brought in a measly $100 million during the third quarter of 2012, something The General’s North American operations earn in a matter of a week.
The solution:
- Increase international sales volume, especially in Europe and South America
- Increase international efficiencies
- Focus on selling more of its own (higher-margin) products in China, rather than the not-very-profitable Wuling vehicles
3. Lagging Sales Of Luxury Vehicles
Perhaps GM’s higher-than-average complexity and international weaknesses wouldn’t be as pronounced on the income statement if it had significant sales of luxury vehicles. Unfortunately, Cadillac, The General’s global luxury brand, only sells in decent quantities in the United States, with sales in Europe and China being non-existent and very low, respectively. So with limited success in the highly-profitable luxury market, GM’s profitability is severely hampered.
By comparison, VW’s Audi has set 23 consecutive months of record-setting sales in the United States through November, while Toyota’s Lexus — having recently undergone a repositioning in the luxury space — has been earning accolades left and right from sources that would have scoffed at the brand’s offerings not five years ago. Couple that with Audi’s roaring success in China — where it is the luxury brand of choice of wealthy influencers and high-profile politicians — and the reason that VW has such huge margins compared to GM, even by selling less vehicles, becomes abundantly clear. So while Audi and Lexus earn sales the world over, Cadillac is limited by luxury car sales in America.
The solution:
- GM is right in the middle of turning Cadillac into a viable sport luxury brand. The highly-acclaimed BMW-beating ATS is here, the ELR is on its way, and the new CTS is due for the 2014 model year, with more class-leading Cadillacs on the horizon. Meanwhile, the SRX and ATS will pay the brand dividends for years to come
- The situation with Cadillac in Europe is not very clear, as GM seems to have adopted a conservative strategy in the region rather than carrying out a full-fledged assault on BMW and Audi; but GM has big plans for Cadillac in China, and is building plants in the country to avoid hefty import penalties
A Work In Progress…
As is the case with many GM-related topics today, the automaker is undergoing a monumental transformation. But the good news is that it has already taken the steps necessary to correct all three of these nagging issues. Spearheaded by Akerson, the automaker is undertaking major initiatives to decrease complexity, bring international operations into the black, and make a world-class luxury brand out of Cadillac. All of these initiatives should save GM billions of dollars while resulting in better products that are more popular and that carry higher margins. Bean counting? Hardly. Sound business? Totally.
Kicking off these efforts is GM’s most aggressive product offensive, which is set to take place over the next two years. This new and more competitive product portfolio will improve pricing power and reduce reliance on discounts. However, the improvements are of the long-term nature, with international programs expected to take years (at least until 2015), while Cadillac may be an even more long-term play.
What’s perhaps most important is for GM to continue getting the product right, which isn’t a given. However, once GM completes its platform and powerplant consolidation and builds a proper IT department that can provide real decision-making power, we expect everything else at the automaker to fall into place.
What’s also noteworthy is that even the New GM is still burdened with some of the poor decisions lingering from the Old GM, ones that drove Old GM to bankruptcy. Sure, the New GM emerged stronger, leaner, and meaner than ever before; the company is more focused, but not without its challenges. However, the steps the automaker is taking now are exactly what needs to be done for a better payoff in the long term. With higher profits, a streamlined portfolio of technology (platforms, engines), and the withdrawal of government ownership, The General’s products should be nothing short of world-class — resulting in the ability to develop even better vehicles that result in more sales.
Comments
Couldn’t Buick be included in the globalization? After all the Regal, Encore, and Verano share platforms with Opel.
Tim, as far as decreasing complexity — Buick/Opel absolutely qualify. However, the efficiencies aren’t entirely realized, as the brands are obviously different, and the product likes aren’t entirely unified. For instance, LaCrosse and Enclave, mild-hybrid engines, etc. Perhaps that’s a temporary thing, though.
Alex, awsome article…
Great article. Anyone ever been to that restaurant on the 75th floor of the Ren Center? Scary outside elevator ride at night.
I did in 1989 but during the afternoon. I visited Detroit with two co-workers for training with Tandem Computers. On Saturday of that week, we went to this building, but saw that the elevator ride cost money. So we went up by the regular elevator, climbed up one flight of stairs to the restaurant floor (It rotates slowly), and took the panoramic elevator down for free. No one stopped or asked us how we did it.
New GM looks/feels to me like they are in many ways simply copying the Toyota formula? While an admiral pursuit from a business/bean counter perspective it’s a different world today. Toyota has a full menu of bland, boring cars and trucks that are average or below average in their segments. Big discounts are the norm, but the sheeple/clueless masses still have an appetite for the brand because of it’s perceived superiority? In reality, most Toyota models are in no way superior, but if the masses think / perceive that you are, then you are. Toyota is a “safe” choice? You probably won’t get “clowned” on social media if you get a Toyota, you might if you get a Regal?
What it all comes down to is making desirable products efficiently, and selling them around the world (which contributes to even higher efficiencies). Toyota is definitely the king of bland, so GM definitely has an opportunity to offer more value and differentiation by having vehicles designed and engineered with passion… in fact, VW is doing just that as part of its plan to be #1. We’ll see how that plays out, though.
Toyota sells “disposable” vehicles. You drive them for a few years, them toss them in a junker and buy another. That is why they sell so many!
Have a Toyota with almost a quarter million miles, still running strong…
There are a lot of things I dont like about Toyota, but to say they are “junk” is overdoing it.
Perhaps a more accurate description would be uninspired.
Sure, there are some exceptions (GT-86/FR-S, Supra, MR2, and a few Lexuses)… but for the most part, Toyota seems to make cars for people who don’t like cars and don’t feel a connection to them. Contrast that with VW, whose executives have stated that on its way to “world domination”, its cars will still retain the fun-to-drive and entertaining characteristics of the past. Luckily, GM is closer to VW than it is to Toyota.
Alex I might add a fourth problem GM has compared to Japanese manufacturers who assemble here. The issue is Toyota isn’t having to constantly battle a powerful labor union. I believe in the workers GM has, but I believe the union goes too far at times. I read an article once that Toyota pays $20 per hour less in labor costs compared to the big 3. My understanding is that the Japanese manufacturing workers also make the same money as a UAW worker.
Super article, Alex…..yes, maybe the unions? Hard to say exactly, but I do think GM is finally doing a much better job than when all the financial problems tore it up. I think it will only get better with the superior products being produced……I know I will buy GM again…Buick or probably, Cadillac 🙂
Actually Chevrolet Trax and Orlando ARE global vehicles.
And they share their platform with models in the Opel/Buick lineup (Mokka/Encore and Zafira).
I guess that the Chevrolet Traverse and its cousin Buick Enclave will be replaced by new, global cars based on a new version of the Epsilon platform.
“Actually Chevrolet Trax and Orlando ARE global vehicles.”
With the exception of not being available in the world’s largest and most profitable automotive market…
This isn’t so much a “choice” by GM as it seems to be a production capacity issue…
Hoping that you’re right about the next-gen Traverse and Enclave moving to the next-gen Epsilon (and shrinking in size, while they’re at it).
The Orlando isn’t marketed in North America? That surprises me. Its predecessor, the HHR was available there.
I knew that the Trax is not marketed in the USA (but in Canda and Mexico) in order not to damage sales of the Chevrolet Equinox. But what when that model needs a successor? Will the Theta platform survive the rationalisation of the GM platform jungle?
Yupp, the Orlando isn’t sold in the U.S. Surprising, right?
Also, given that the Orlando is an MPV, I wouldn’t classify it as a direct HHR replacement, but that’s neither here nor there.
The Theta is going to be merged to the next-gen Delta, finally making the Equinox a global offering and making it a compact CUV (rather than an in-betwee mid-size or compact offering):
http://gmauthority.com/blog/2012/06/next-generation-chevy-equinox-2015-delta-platform/
When is the last time Toyota or VW had the kind of model redesign and launch GM is having now? New launches are very expensive, and the development costs are just as high taking a significant chunck of cash from reported profits. As launches settle down, profits will rise. Also, I hope people remember the $400M charge GM is taking this quarter when Q4 numbers are released
VW is launching many new cars – their US lineup (Jetta and Passat are fairly new). The Golf (which you would admit is a very big deal for VW) has just been launched. The Up was launched not that long ago.
I agree with the points raised about needing to reduce complexity, increase luxury car sales etc. But the statement “because GM is, at best, half as profitable as its most direct rivals — including Toyota and Volkswagen.” is misleading. You need to look at the % profit margin figure, which you do provide. GM is then only around 20% less profitable, not 50%. They make only half the profit amount, but their revenues are much lower than Toyota or VW on a similar volume. Because of low luxury car sales, Wuling etc.
How much taxes did GM pay vs Ford, Chrysler, VW and anyone else… especially in the USA? Seems the situation is worse than presented….?
GM should think about changing the gear shift place in its the 4×4 trucks: Tahoe, Sierra, etc… from behind the steering wheel to the side like other normal cars. That’s how most of its competitors are doing it especially in the Arab part of the world, Middle East specifically.