Howes: GM, Barra step on the gas, deliver the results

Daniel Howes
The Detroit News

A few years before General Motors Corp.’s collapse into bankruptcy, former CEO Rick Wagoner confided that if he had to pick two places to bet the company’s future it’d be the United States and China.

He was right, if the automaker’s gangbuster second-quarter numbers are any indication — and they are. GM posted a record $2.8 billion adjusted earnings in North America and delivered adjusted profit margins of 7.5 percent company-wide, more than twice what it produced in the same time last year.

“Pretty impressive margins” in North America, the longtime Deutsche Bank analyst, Rod Lache, said in a conference call with GM executives Thursday. “Great execution in a variety of areas,” added the analyst from Credit Suisse.

“Really good quarter,” said John Murphy of Merrill Lynch & Co. “It looks like the underlying performance is even stronger than perceived.”

Emphasis on those last three words — stronger than perceived. As GM guts through the aftermath of its ignition-switch debacle, the sickening death payouts associated with it and, now, a new probe by the Federal Trade Commission, it would be a mistake to overlook the performance of a machine that is hitting on just about all its cylinders and is gearing to do more.

Consider these three points, courtesy of CEO Mary Barra: first, GM has produced eight straight quarters of year-over-year growth in its profit margins; second, the next-generation Chevrolet Malibu midsize and Cruze compact are expected to deliver $1,500 more per vehicle in variable profit than their predecessors; third, the Opel Corsa subcompact and Astra compacts in Europe are expected to add $900 and $1,200 more in profit per unit, respectively.

Translation: Continual re-engineering amid good times, especially in the United States, is paying dividends. Core products in GM’s North American and European car lineups, sourced out of union-represented plants, are poised to pump even more into the bottom line in critical regions of the world.

In North America, adjusted profit margins hit 10.5 percent. In Europe, a perennial albatross, operations are on track to break even on schedule and as promised. In South America, job cuts and capacity reductions are beginning to right-size GM’s operations in that volatile region. In China, rocked by gyrating equity markets and the central government’s panicky interventions, SUV sales nonetheless are up more than 80 percent, Cadillac sales are up and Buick sales are up.

Top-of-the-cycle stuff? Sure. The new normal? Jein, as the Germans would say, meaning yes and no. The robust U.S. market, now in its six consecutive year of expansion, is not likely to maintain its blistering pace indefinitely. And China’s double-digit growth rates are likely to become a thing of the past, as the market downshifts and the ability to raise prices (and revenue) becomes more difficult.

Judging by Thursday’s results, and the reaction to them, four things are clear. First, the bellwether U.S. market, epicenter of GM losses for decades leading up to its 2009 Chapter 11 bankruptcy, is the automaker’s profit machine. Barring a U.S. economic collapse, it’s likely to stay that way given dramatically lower break-even points at GM and Ford Motor Co., particularly.

Second, China’s market dynamics, growth rate and macro-economic environment are critical to both GM’s short-term and long-term strategic performance. Management knows it: China is “by far,” according to CFO Chuck Stevens, the biggest single concern investors raise with members of the senior executive team.

Third, the industry in general and GM in particular are in the early stages of a technological revolution that is likely to change the paradigm of personal mobility and its intersection with what we understand today as “connectivity.” The race, less obvious to outsiders, is on to see who can tightly connect Detroit with Silicon Valley — not necessarily a rival automaker.

Finally, no one asked about Fiat Chrysler Automobile NV CEO Sergio Marchionne’s effort to woo GM into merger talks. But with performance like GM delivered in the States, its $34.9 billion cash and credit hoard, its 23.4 percent return on invested capital (a Marchionne obsession) and its market position in China, you can see why he covets a tie-up that would create a global automotive behemoth.

Or, with numbers like those, you also could understand why GM shareholders might be wary of any potential merger with any would-be automotive suitor should it threaten to undermine the kind of momentum GM has not seen in a long time.

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Daniel Howes’ column runs Tuesdays, Thursdays and Fridays and can be found at