Will GM Profits Really Stay Flat in 2013?
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The European Automobile Manufacturers' Association reported Wednesday that new car registrations in the European Union fell 16.3% in December. That’s the steepest decline since 2008, and it brought car demand in Europe to its lowest levels since 1995 last year. The decline over the last 15 months has led Ford (NYSE: F) to cut jobs and close plants in Belgium and Britain to curb its European expenditures. Many other manufacturers have followed suit. Meanwhile, General Motors (NYSE: GM) is only slowly reducing its exposure to the region, causing the company to report modest profit expectations for 2013 on Wednesday.
Expectations are that the European market will continue to decline in 2013 by about 4%. Still, GM expects to cut losses in the region by one-third to one-half through efficiencies and capturing more market share while others see weakness and exit more aggressively. The company also started rolling out new products catered toward Europeans at the end of last year, leading to increased sales and market share.
While American car makers struggle to stay afloat in Europe, Toyota (NYSE: TM) has done a great job recovering in the region since the Fukushima tsunami caused a disruption in the company’s supply in 2011. In the third quarter of 2012, the company reported a 13% increase in sales and a modest $44 million profit in the region. Sales were led by its Yaris Hybrid line, which is both affordable and fuel efficient, making it a top choice for cost conscious European shoppers.
While Toyota may be faring relatively well in Europe, the company, along with other Japanese manufacturers, is still struggling in China. A territorial dispute between Beijing and Tokyo caused many Chinese consumers to jump aboard the “Buy American” campaign. Both Honda (NYSE: HMC) and Toyota saw massive declines in sales in the last quarter of 2012. While tensions have relaxed, they’re still far from dissipated, and I expect Japanese automakers to continue to suffer through 2013.
This creates a great opportunity for both Ford and GM. China is far and away the fastest growing auto market with sales forecasts reaching figures as high as 20 million for 2013. GM has been investing in China for years, and now actually sells more cars in the country than it does in the United States. Meanwhile, Ford’s new concentration on the region has led to dramatically improved sales in China, including a 43% increase last month.
As infrastructure improves and expands throughout China, GM has decided to focus on increasing its presence in smaller regions in an attempt to take advantage of untapped markets. The company has plans to open more than 400 new dealerships in 2013, mostly in small cities.
GM’s largest competitor in China, Volkswagen, also has plans to invest more than $13 billion in growing its presence throughout the country. It has had great success with its luxury Audi line, allowing Volkswagen to overtake GM in sales for the last two quarters. The shift toward luxury cars in China is gaining momentum as the middle class comes into its own; however, GM’s Cadillac sales were flat last year. This ought to be another focus for the company in 2013.
1 – 1 = 0
GM CFO Dan Ammann said on Wednesday that he expects earnings and margins to remain roughly flat during 2013. It’s easy to see why, as the company remains exposed to the dismal European Market and has excellent presence in the booming Chinese market. It’s taking a long-term approach poised for when the European economy picks up and rural Chinese consumers start buying cars of their own.
However, the company still expects upside in North America, particularly in its luxury line. If it can get its luxury vehicles to catch on in China as well, the company may see more growth than it expects. Of course, it’s not uncommon for companies to under-promise and over-deliver, as analysts still expect earnings to rise to $3.89 from $3.27.
For my money, however, I like Ford over GM. The company is growing aggressively in China, taking advantage of Japanese automakers woes, and capturing more of the expanding market every year. This good growth in the fastest growing market, coupled with its aggressive cost-cutting efforts in Europe, makes it a safer play until Europe’s economy begins showing signs of turning around.
adamlevy has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!