Detroit Three challenged with tighter margins
The Detroit Three's first-quarter earnings position the automakers for a historic challenge as they seek to revolutionize their industry with autonomous and electric vehicles.
Trucks and SUVs are driving the Detroit Three's investment into automation and electrification. But the first quarter’s mixed results show that growth is slowing as automakers see industry sales continue to soften: profits are falling and margins are tightening, making the allocation of resources to the future even trickier.
"That is a challenge they have never had to face before," said Michelle Krebs, an analyst for Autotrader. "While they have to maintain today’s business under more challenging circumstances, they also have to be investing in technologies of the future, and yet there’s no clear path to when those will reach a tipping point to pay off the dividends of that investment. They have to carefully walk that balance of today and the future."
That means cutting costs and improving efficiencies where possible, especially since the traditional automakers now are competing with Silicon Valley tech companies such as Google parent Alphabet’s Inc.’s Waymo LLC with billions in free cash available.
General Motors Co.'s profit margins of 6.6% slipped 0.6 percentage points from the first quarter of 2018. Fiat Chrysler Automobiles NV's 6.5% pre-tax margin in North America fell from 7.4% a year earlier on a 47% decrease in profit.
Ford Motor Co. exceeded expectations, and restructuring helped boost its North America operating margin to 8.7% from 7.4% year over year. But profits slid 34%. Executives say they want to see North America’s margin at 10%. If trends continue as predicted, it will face increasing obstacles to do so.
Meanwhile, FCA said Friday that first-quarter profits were cut nearly in half as the automaker ended production of the previous generation Jeep Wrangler and changed strategies in Europe.
The Italian-American automaker predicted its $567 million (508 million euro) profit in the first three months of 2019 would be its worst of the year. It maintained its projection for 2019, sending shares up more than 6% to $15.94 Friday morning.
The results did not include the $6.5 billion sale (5.8 billion euro) of its automotive components business Magneti Marelli SpA, a transaction with Japan's CK Holdings Co. Ltd. that closed on Thursday.
In the first quarter of 2018, FCA sold both the old and new models of the Jeep Wrangler. Only the new version was produced for the first three months of this year, contributing to a 14% decrease in shipments worldwide.
"This quarter is in line with our expectations," Manley said during a call with investors, "and I think if you look at the work in North America, for example, in terms of our costs and our pricing, you see that despite the fact our shipments were down, we continue to make sure that business remains strong."
The automaker said it booked $27 billion (24.5 billion euro) in revenue, down 5% year over year. Profits were driven by the Ram truck brand. The Ram 1500 surpassed General Motors Co.'s Chevrolet Silverado to notch the No. 2 position in the light-duty segment for the quarter with 23% market share.
The new heavy-duty Ram pickup, whose production is ramping up, is expected to continue the momentum, Manley said. FCA also launched its much-anticipated Jeep Gladiator pickup in April — and there are around 25,000 orders from dealers for the vehicle as production increases.
"Pickup trucks are good news, they've been a cash cow for all three Detroit companies," said Jessica Caldwell, an analyst for automotive resource website Edmunds.com. "You take those away, and it's a much different story."
Meanwhile, Manley also emphasized the work FCA is doing to bring 17 electrified nameplates to market by 2022.
In February, the carmaker said it was investing $4.5 billion into five Michigan plants, including an expansion at Mack Avenue Engine Complex on Detroit's east side for the next-generation Jeep Grand Cherokee and a three-row full-size Jeep SUV. Upgrades there and at nearby Jefferson North Assembly, which makes the Dodge Durango and Grand Cherokee, also will allow for hybrid versions of the vehicles and eventually all-electric models. Production is expected by late 2020 or early 2021.
Manley said the company also made agreements costing $2 billion (1.8 billion euros) over the next three years to buy emissions-related regulatory credits in North America and Europe. The automaker said last month it had reached a deal to pool its fleet with Tesla Inc. to comply with stricter European Union rules on carbon-dioxide emissions.
Manley did not say with whom the regulatory credit deals were made, but that they would shrink compliance costs related to countries requiring portions of fleets be electric and other non-polluting vehicles. He estimated the company would have to pay a fine of $437 million (390 million euros) without dramatic changes.
"It will bridge the period until we see the combination of market acceptance, technology and infrastructure development reaching the point that makes the sale of heavily electrified vehicles rationally feasible," he said.
FCA reported pre-tax earnings of $1.2 billion (1.1 billion euro), down 29%. Adjusted diluted earnings per share was 40 cents (0.36 euro), down 42% from the first three months of 2018. FCA's industrial free cash flow notched a negative $301 million (270 million euro), a 127% drop.
FCA's 6.5% pre-tax margin in North America fell from 7.4% a year earlier with $1.2 billion (1.0 billion euro) earned. The automaker's U.S. vehicle shipments fell 14%.
Amid restructuring in Europe, the company lost $21 million (19 million euro) before taxes there. It also lost $10 million (9 million euro) in Asia as its Chinese joint venture struggled with industry contraction and competition in the segment. Latin America, however, was a bright spot with a 42% increase in earnings to $117 million (105 million euro).
Earnings from the Maserati brand fell to $12 million (11 million euro), an 87% drop, after a 41% decrease in shipments from planned inventory management. The company has hired more sales and marketing staff to help rebuild the luxury brand's image.
FCA’s results fell shy of its crosstown rivals, which also benefited from their truck sales. Ford reported a $1.1 billion profit on $40.3 billion in revenue, saying its decision to shift from sedans and small cars to larger, more profitable vehicles propelled its earnings. GM made $2.1 billion, a 93% increase, on $34.9 billion revenue.
The results also come after FCA announced Wednesday that it is joining the other Detroit Three in reporting sales quarterly instead of monthly starting Oct. 1, a move initiated by GM following an internal study.