Ford in Profits Warning as GM Surges Ahead
General Motors (GM) has announced that it expects to make its first profits in Europe for more than ten years by 2016. It also said that it expects to hit its targets in North America in the same year.
GM's positive predictions came only days after Ford Motor Co issued a profits warning that confirmed it would make losses this year in its European operations. Ford said that its European business would lose around $1.2 billion this year, with smaller losses of $250 million in 2015. Daimler Benz also cut its growth forecast for the year, and VW CEO, Martin Winterkorn, added to the gloom by predicting that total car sales in Europe would be flat at 13.5 million this year and would never return to the pre-financial crisis levels of 15.5 million.
GM, in contrast, firmed up earlier predictions that it would make a profit by the middle of this decade. It also took the opportunity to reveal other targets and strategies, including its plans for the vital Chinese market, as it addressed an investor meeting at a company test-track facility just outside Detroit. Investors remain wary of GM after the recent financial crisis, and the market is keen for solid evidence that GM can meet its targets, as market analyst, Brian Sponheimer explained: “General Motors is still very much at the ‘show me’ stage with its investors. That it has the confidence to promise profits in Europe is encouraging, but solid delivery by GM's relatively unproven management team will be the thing that wins over investors.”
GM shares rose by 2.6% by midday on the day of the announcement, reaching $32.78. The stock, however, is still down by 20% on the year and is trading marginally below its $33 initial public offering price at the autumn 2010 launch. Market analysts have also suggested that the company may be at the peak of its model cycle, having recently completed revamps of its profitable SUV and pickup ranges. GM, however, has disputed this, countering with the fact that it is planning to release no fewer than 178 new or refreshed models between 2015 and 2019. A company spokesman insisted that GM has an 'absolute onslaught' of new models in the pipeline, claiming that this was just the beginning rather than the end.
GM also said that any cash that was to be returned to its shareholders would be in the form of increased dividends. This March, GM paid out its first quarterly common-stock dividend for more than five years. Some industry analysts have also tipped the company to embark on a stock buyback strategy, using some of its $39 billion cash pile.
Ford, meanwhile, blamed its profit warning on high recall costs in its US business and also larger than expected losses in South America and Russia. The company also predicted disappointing profits in 2015. GM did not update its forecast for its overall 2014 performance but said that it was on track to deliver currently predicted results. It has said it expects to deliver marginally improved results over 2013's $8.6 billion operating profit. The company is aiming for 10% operating profit in North America by 2016. GM has been hit by significant costs arising from the scandal of its failure to recall cars with a faulty ignition in a reasonable timescale. This has resulted in a $400 million charge and the CEO, Mary Berra, says that this could rise by another $200 million as the company establishes a fund to compensate victims of the fault, which led to at least 23 fatalities.
GM said it hopes to achieve its predicted rise in operating profit margin from the current 6.3% to 10% by introducing a number of new initiatives. An important project will be to reduce costs by slashing the number of core platforms it uses to build its cars from the current 14 to just four in 2025. It will also make major investments in China, opening five new plants and spending $14 billion. The company also hopes to transform its luxury Cadillac brand into a global marquee by introducing new models to suit international markets.