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.
*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.
- 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.
- 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.