Hold the applause for GM
NEW YORK (Fortune) -- While there is some genuinely encouraging news in
General Motors' announcement today of $891 million in second-quarter
profits, a closer look at today's earnings announcement provides a
glimpse of the challenges that GM is going to face in the future.
And it isn't encouraging.
The problem area, as ever, is North America, source of two-thirds of
GM's sales. GM's continuing issue is an inability to convince shoppers
to buy its cars, and that manifested itself again in the second quarter
as North American automotive revenue sank by $1.276 billion
The big picture here is clearly visible: The overall industry is running
at a slightly slower rate than a year ago and GM lost market share, down
1.3 percentage points in North America to 22.6 percent.
Some of that loss in market share is deliberate. GM (Charts, Fortune
500) is weaning itself from its dependence on rental fleets to absorb
excess production. Selling rental cars is a low-margin operation that
impacts the prices of cars that retail customers buy and GM is smart to
back away. So far this year, its percentage of fleet sales has dropped
to 26.7 percent from 28.1 percent.
But GM is also getting badly hurt in its sweet spot: full-size pickups
like the Chevy Silverado and big sport utility vehicles like the
Cadillac Escalade. These vehicles enjoy that magic combination of high
volume and high profit. But buyers continue to move away from big sport
utilities because of high gas prices and changing consumer fashion. And
the big pickups have been impacted by the sharp falloff in residential
and commercial construction. Yesterday, GM began offering zero percent
financing for sixty months on the pickups, which were totally redesigned
a year ago.
Unfortunately, GM can expect more of this in the future. At the same
time that it is getting its operations shipshape and its costs in line,
its core business is deteriorating and undermining its profit structure.
This may serve GM well as it begins to bargain with the United Auto
Workers over a new contract. The union leadership and its members may be
more willing to grant a weak GM the concessions it needs to regain
But the change suggests that GM is going to have to overhaul its product
line more quickly than it expected and reach for something that it
hasn't been able to achieve in three decades: a really profitable small car.
An advance peek at this changeover is provided by the current issue of
Automotive News. Its unofficial analysis of GM's future product plans is
all about smaller and smarter.
Cadillac gets a new rear wheel drive sedan. Chevrolet plans for a
microcar in 2011. Hummer is downsizing, putting out a Jeep
Wrangler-sized SUV for 2009.
Even GM's truck division is getting more car-like. The old-style GMC
Envoy, built on a pickup truck chassis, is expected to be replaced by a
car-based crossover utility vehicle.
At the same time GM is expanding its green lineup by rolling out more
models powered by hybrids, diesels, and eventually, fuel cells.
All that costs money, and there is absolutely no evidence that consumers
will pay up. Which is why watching the revenue line at GM has become
such a preoccupation.
Chief financial officer Fritz Henderson tried to put the best spin on
the shift during Tuesday's conference call with analysts and
journalists. He noted that every time GM introduces a new model, it gets
another chance to improve the profitability of that car line.
That's why, he added, the launch of the Chevy Malibu this fall is so
important to GM. The compact sedan, which carries one of Chevy's most
hallowed names, has been totally redesigned and is perhaps the
handsomest high-volume car GM has produced in decades.
But if it falters in the marketplace and has to be sold with special
incentives or funneled into rental fleets, destroying any possibility of
profits, GM's future as an automaker in North America is cooked.
GM needs to learn how to sell profitable small cars and if it can't with
the Malibu, the outlook is dark indeed.