General Motors Company (NYSE:GM) has excited investors with its lower European losses in the first quarter. It also earned brownie points for outperforming rival Ford Motor Company (NYSE:F), which has posted more than double the losses of GM. Huge round of applause to General Motors Company (NYSE:GM) for making this happen–but the story is not yet over.
Both GM’s and Ford’s losses of $175 million and $462 million, respectively, tell the story of an economy that is faltering. And if you factor in the 38% dip in Volkswagen AG (FRA:VOW)’s after-tax profits you would appreciate the depth of the turmoil that is making these giants falter.
What lies behind GM’s lower losses?
In the words of Brian Johnson, an analyst with Barclays, “General Motors Company (NYSE:GM), while still beset with issues, is generally executing better than investors give it credit for.”
The company is benefiting from the cost savings that it has managed to achieve. In the first quarter it had lower depreciation of $100 million, and saved $200 million in engineering expense and other fixed costs.
Also, after two sequential quarters of decline, General Motors Company (NYSE:GM) did not lose any market share. This is a very critical aspect of any turnaround strategy. It is not in any company’s hands alone to change the course of the economy. But it is definitely the effectiveness of management strategy that can help a company preserve its market share in a challenging environment.
In the first quarter, the company estimates its European market share to be at 8.3%, the same level as the fourth quarter and 0.1 percentage points higher than the year-ago quarter.
There is good demand for its Opel Mokka and the Opel ADAM cars, which have order totals of 100,000 and 30,000, respectively. Meanwhile, the Vauxhall brand is outperforming the industry in the UK, where quarterly sales surged by a solid 19% y-o-y.
Simply put, the company intends to launch more new cars to drive demand and cut costs aggressively. With this plan in action it will get back in the black by 2015.
General Motors Company (NYSE:GM) will roll out 23 new models and 13 new engines by 2016. The company will be investing $5.24 billion in Europe during this period.
On the cost reduction front, the company has stalled pay hikes in four of its German factories. At the only other German plant at Bochum, where employees did not agree to a wage freeze, the company has decided to shut down the plant by the end of 2014. Last month it announced a wage freeze at its factory near Zaragoza in northern Spain. By 2012 General Motors Company (NYSE:GM) had reduced its annual costs by $300 million, and plans to step this up to $500 million annually for the next three years.
If the company succeeds in its strategy, by mid-decade an era of 16 years of consecutive losses will finally come to an end. Since 1999, GM has accumulated losses of an astounding $18 billion in Europe.
How Europe will shape up?
Any hope of a recovery in the second half of the year is becoming a distant possibility. The European Central Bank has just announced a cut in key interest rates from 0.75 to 0.5 in an effort to boost the economy.
Meanwhile, Greece, Spain, and Italy are all experiencing pronounced economic downturns, while Portugal faces deep uncertainty. Unemployment rates are rising to record levels. In Greece the unemployment rate is around 27%, in Spain around 25%, and Portugal 18%. Overall the unemployment rate is around 12% for the Euro countries.
This is causing a great reluctance for people to buy new cars. March marked the 18th consecutive month of sales decline in the continent as registrations slumped 10% y-o-y. The latest fall in demand has been in Germany, where, despite lower unemployment levels and good discounts, sales have fallen.
The market is straddled with significant overcapacity. According to IHS Automotive, Europe has a capacity for manufacturing 26.1 million cars, while car makers are planning to build only around 18.7 million this year.