General Motors Posts Profit Despite Huge European Loss

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The largest US automaker General Motors (NYSE: GM) posted better fourth quarter profit compared to the prior year figures. The positive results from its US business helped in offsetting the widening European loss, which more than doubled in 2012 compared to 2011 numbers. The company’s losses from its European operation continue to be a matter of concern, though the Detroit maker expects to breakeven by the middle of the decade. The issue faced is how long the carmaker’s profit from its US and China operations will be large enough to compensate the European misery, particularly with rising competition in the domestic and other markets. Let’s check the figures closely.

What do the numbers say?
GM recorded a net income of $900 million in the fourth quarter against $500 million a year earlier. The revenue for the quarter increased to $39.3 billion, up 5% from last year. Solid sales in the domestic market resulted in a pretax profit of $1.4 billion, which helped the company absorb a huge loss of $700 million suffered in Europe. However, the company had to cut prices and offer incentives to reduce the inventory of trucks in North America. It was essential to offer it at such a reduced price since these vehicles are getting replaced. Other than Europe, GM experienced decent success from the rest of its markets including Asia and South America where it saw a modest profit of $500 million and $100 million, respectively.

For the year, the automaker recorded a profit of $4.9 billion, down 36% from 2011 figures. The bottom-line fell drastically due to large losses from the European region and a one-time accounting charge. The top-line saw a marginal rise of 1% to $152.3 billion for 2012. The company’s most lucrative market, North America, brought $6.9 billion profit before tax, which made up for the $1.8 billion loss in Europe. The European outlook remains weak this year and could further stress the bottom-line. GM is not the only automaker experiencing bad times here; other automakers are suffering as well. Fellow rival Ford Motor (NYSE: F) witnessed a similar situation. While its pretax profit in the domestic market was $8.3 billion in 2012, Europe pulled it down by a $1.75 billion loss. The second largest US automaker estimates 2013 loss to increase further to $2 billion.

Other than North America, there is another market which GM is tapping to compensate Europe’s dismal performance. GM posted record sales in China in 2012 where its operating profit grew to $473 million from $373 million in 2011. The company is off to a good start this year with January sales reaching 300,000 vehicles, the highest in any month.

Looking ahead
As competition is intensifying in the domestic market, particularly after Toyota’s (NYSE: TM) comeback, it is extremely essential for the carmaker to strengthen itself with a strong product line. As per Autodata Corp., the company’s US sales improved 3.7% to 2.6 million vehicles last year against the industry rate of 13.4%. Its market share also shrank to 17.9% in 2012 compared to 19.6% in 2011. Both Japanese and European automakers are eyeing the US market. While Japanese auto giants expect to benefit from the weakening yen, European players are trying to earn some profits to compensate for the sluggish domestic market.

The US auto giant has plans to cut down its annual European expenses by $500 million in the next three years. It proposes to shut down a German factory in an effort to reduce capacity as demand in this region has remained weak for six years in a row. Other than this, the company plans to launch 23 new models by 2016 to revitalize demand.

While the European market has been a complete failure, the Chinese market is showing long term growth potential where GM is the top foreign automaker, closely followed by Volkswagen. Both GM and Ford recently benefitted from the political turmoil between China and Japan which made Chinese buyers to shun Japanese brands including Toyota, Nissan and Honda. Toyota’s sales fell 49% in September, 44% in October and 16% in December in the mainland.  Dull outlook for the Japanese automakers gives GM the opportunity to boost sales. In addition, China Association of Automobile Manufacturers forecasts the industry to experience 7% growth and cross the 20 million vehicle mark this year.

The bottom-line
The largest US automaker GM, which recently lost its world title for the top automaker to Toyota, has to take serious measures to take care of the European losses. Though the US and Chinese markets are lucrative, the European market loss keeps eating away the profits earned. The company expects to breakeven in the European market by 2015, until then it has to make sure that the other regions earn large enough revenue to offset severe setbacks in Europe.


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