GM Has a Hard Sell - Even to Itself

July 25, 2005

GM Has a Hard Sell - Even to Itself

Considering all its quality problems, it's not surprising so many once-loyal General Motors buyers abandoned the brand over the last few decades. Recent studies show GM now catching up to the best of the imports. Three of the giant automaker's brands actually passed vaunted quality trendsetterToyota in recent J.D. Power & Associate surveys. Yet getting that message out to the market hasn't been easy, concedes GM "car czar" Bob Lutz. "It still doesn't register with the public," he laments, adding that, "I can't even expunge the idea of superior Japanese quality from my own mind, even though we have the data that shows it's not true." The perceptive gap in quality is a particular problem for GM's cars, Lutz believes, but on the positive side, the solid quality of GM trucks has made it more difficult for new Japanese entries like the Toyota Tundra and Nissan Titan, both of which are selling under original expectations. Should buyers suddenly accept the idea that GM is worshipping at the quality alter? "We're in the third year of being reformed alcoholics," Lutz suggests, "so people still won't leave out the bottle of booze."-TCC Team

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GM Losses Widen in North America

General Motors Corp. struggled during the second quarter, running up a huge loss in its North American operations. The critical division reported a loss of $1.2 billion despite a highly touted promotion that boosted the company's sales by about 47 percent in June.

The big loss surprised analysts, who had expected the automaker to eke out a small profit of about 3 cents per share. Instead, GM wound up posting a net loss of $318 million or 56 cents per share. GM also lost $1.1 billion in the first quarter of 2005, primarily because of the company's troubled North American business.

"It's no secret GM has too many plants, people and nameplates and high legacy costs," Merrill Lynch analyst John Casesa said in a research note. In his note, Casesa also suggested that the poor results could make it easier for GM to obtain concessions from the United Auto Workers. Any concessions, however, would have to be shared with Ford and so far the UAW hasn't shown any inclination to move on GM's request for big changes in healthcare benefits.

John Devine, GM chief financial officer, said GM is continuing to discuss contract changes with the UAW but declined to offer any guidance on when they might be completed. Devine, however, said cutting the company's annual bill for healthcare would have a huge impact on profitability.

GM North America lost $1.2 billion versus earnings of $355 million in the second quarter of 2004 on the heels of a double-digit decline in production and rising costs for healthcare and material purchased from outside suppliers, Devine said.

Richard Wagoner, GM's chief executive officer, said the second quarter results also reflected a mix of some important pluses and minuses. "On the positive side, sales were up in all regions and global market share increased. ... But, importantly, on the minus side, GM North America's financial performance continued to be very disappointing."

On a positive note, GM Europe swung to a profit of $37 million in the second quarter from a loss of $45 million a year ago. It marked that operations' first profitable quarter in five years.

GM's U.S. sales had jumped 47 percent in June - their highest monthly total in nearly 19 years - thanks to the heavily promoted discount that allowed customers to buy cars and trucks at the employee rate. Ford and Chrysler followed after lackluster sales in June.

The success of the employee discount sales program means that GM's efforts to revamp its marketing are succeeding, Devine said. He added that the promotion appears to be creating strong sales again in July and has reduced GM's inventories of unsold vehicles to more manageable levels. In fact, GM has all but sold out of some 2005 models, Devine said.

GM cut production by 11 percent in the first half of 2005 from a year ago, and plans to continue the trend in the third quarter by as much as 9 percent, added Devine.

Besides cutting costs, Devine said GM also is counting on the launches of a new generation of trucks to help boost profits. He disclosed for the first time that production of new full-size SUVs will begin in December.

Other GM vehicles such as the new Chevrolet Cobalt and HUMMER H3 already are off to promising starts sales-wise, he said.

Devine also noted that GM's cash, marketable securities and available assets from an employees' healthcare trust totaled $20.2 billion on June 30, up from $19.8 billion on March 31. -Joe Szczesny

Daily Edition: Jul. 20, 2005 by TCC Team (7/20/2005)
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Merrill Upgrades Nissan and Honda

Merrill Lynch's auto analysts upgraded shares of Nissan and Honda to "buy," while downgrading Toyota from "buy" to "neutral."

The target price for Nissan, says the brokerage, is Y1290 to 1400, up from Wednesday's close of Y1152. Honda's target is Y6200, up from Wednesday's close of Y5700. Toyota was downgraded by Merrill largely because its shares are already fairly valued.

Merrill analyst Tatsuo Yoshida noted that Nissan is still hammering at production costs and turning out compelling designs, while its management shift to four groups under CEO Carlos Ghosn should make the company less dependent on its charismatic leader who is also assuming the post as head of Renault, which owns a controlling interest in Nissan.

The analyst said Honda's success with the Ridgeline pickup in North America, as well as the benefits of the Odyssey minivan overhaul, and growth in China will pump profitability.

Honda said Wednesday that it expected sales to rise at least 16 percent by the year ending in March, 2008, with unit sales rising to four million vehicles. Honda will have sales of more than Y10 trillion, or $89 billion, in fiscal 2007, said the president, Takeo Fukui. Last fiscal year, the company had sales of Y8.65 trillion. Honda may have to rely more on the United States, where it earns up to 64 percent of annual operating profit, as sales growth slows in Japan, the world's second-largest vehicle market.

Meantime, Yoshida was very pessimistic about Subaru parent Fuji heavy Industries, downgrading the company's shares from neutral to "sell."

The analyst noted Fuji's "weak cost structure and the new Legacy losing momentum." He also said the company "cannot be too optimistic" about the prospects of the B9 Tribeca SUV, which recently launched in the U.S.

Fuji Heavy Industries shares fell 0.6 pct or 3 yen to 464 after the company said its worldwide production in May fell 12.5 pct from a year earlier to 43,058.-Jim Burt

Ford Posts Q2 Profit

Ford Motor Co posted a profit for the second quarter but its financial report for the period exposed the weakness of its automotive business in North America.

Ford reported earning $936 million or 47 cents per share for the
second quarter on sales of $44.5 billion in the second quarter,
compared with the $1.2 billion or 57 cents per share the company earned on sales of $42.9 billion the company earned in the same quarter a year ago.

But on a pre-tax basis, the automaker lost $245 million worldwide, down $342 million from a $97 million profit during the same period a year ago.

Ford's North American automotive operations also reported a pre-tax loss of $907 million, down $1.4 billion from a $454 million pre-tax profit a year ago. Higher costs and lower volumes contributed to the decline. Sales were $19.9 billion, down $568 million from the same period a year ago.

"Despite profitability in most regions, our global automotive results were disappointing, reflecting the fiercely competitive environment in which we continue to operate, particularly in North America," said William Clay Ford Jr. in a statement.

"We are responding to this tougher operating environment through actions aimed at improving our cost structure, optimizing our global footprint, strengthening our balance sheet and making essential investments for the future. We'll continue to share our plans as the year progresses," the Ford CEO said.

Don Leclair, Ford chief executive officer, said overcapacity remains an issue throughout the industry, but refused to say if Ford was prepared to close additional plants. "We realize we have excess capacity," he admitted.

Leclair also said Ford has been hurt by rising steel and oil prices, which has made life extremely difficult for suppliers. "The supply base is very fragile," he said.

The turmoil among suppliers also blunted the company's cost-cutting drive, which the company hopes to get back on track during the second half of the year. Leclair also acknowledged that Ford had been hurt by General Motors Corp.'s successful employee-discounts-for all promotion. Ford's own offers of employee discounts have boosted sales this month and reduced inventories of unsold vehicles, which will help sales and profitability in the future.

In addition, the company's financial services sector reported a pre-tax profit of $1.3 billion. The profit was down $229 million from the second quarter of 2004 due to rising interest rates.

Leclair said despite the setback in the company's North American automotive operations the company did make several moves in the second quarter that will yield significant improvements in the future such as the restructuring of the automaker's relationship with Visteon.

In addition, Ford also has now completed the consolidation of its Jaguar unit in the United Kingdom and is bringing several new products to market in the United States, he said.

Ford has launched the new 2006 Mercury Mariner Hybrid and will introduce the new Ford Fusion, Mercury Milan and Lincoln Zephyr this coming fall. -Joe Szczesny

CAW, GM Open Talks

General Motors Corp. isn't looking for concessions but it doesn't want any increase in labor costs in any new contract with the Canadian Auto Workers union. Allen Green, GM of Canada vice president of human resources, said the company's labor costs increased 5.7 percent each year under its last three-year CAW contract, and it can't afford those kinds of increases now. "We have to control our labor costs," said Green.

Buzz Hargrove, the CAW president, said he is concerned about GM and the intense competition in the industry. However, his members have earned the improvements in wages and benefits they are seeking with improvements in both quality and productivity, he said.

"Canada's the crown jewel of the General Motors Corporation worldwide," Hargrove said.

Hargrove reiterated the union also is looking for major improvements in pensions both for current retirees and older workers who will be retiring in the next few years. The current contract expires in September and Hargrove said the union will pick its target shortly in early September.-Joe Szczesny

Morgan Stanley's Girsky To GM

General Motors Monday said it hired leading automotive industry analyst Stephen J. Girsky from investment bank Morgan Stanley to be a special advisor to GM Chairman and Chief Executive Officer Rick Wagoner, and GM Vice Chairman and Chief Financial Officer John Devine. He starts August 1 at GM.

The announcement took industry watchers by surprise, as Girsky is widely considered to be the top Wall Street analyst covering the auto sector. He is a sought-after speaker and presenter at industry conferences, among the most quoted analysts and one of the few who still do regular interviews with the news media.

"We are pleased to have Steve join General Motors. His deep knowledge and experience in the global auto industry will enable Steve to contribute significantly in support of our key business strategies, including the turnaround of GM North America," said the GM chairman and CEO Wagoner. Girsky not only knows Wagoner and Devine from his years as an analyst, but he was also, at one time, an analyst in GM's Treasurer's Office.

Girsky has been managing director at Morgan Stanley and the senior analyst of the Morgan Stanley Global Automotive and Auto Parts Research Team. Prior to joining Morgan Stanley, he was managing director of PaineWebber's Automotive Group.

Morgan Stanley has been in a period of tumult. Its CEO Philip Purcell was forced to retire recently. And he was succeeded by John Mack four years after forcing him out as president. More than 55 traders, bankers and managers have left the firm in the past three months, including five members of the 14-member management committee.

While Morgan Stanley has jumped to first in mergers and acquisitions for the first time in five years, the New York-based firm has slipped in businesses such as initial public offerings and high-yield debt underwriting. Second-quarter earnings fell 24 percent, the steepest drop in more than four years, as trading slumped.-Jim Burt

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Dealers Paying Up For GM's Blowout

The automotive employee-discount deals may be an expensive program for participating dealerships, according to analysis by auto buying information Web site Edmunds.com.

According to Edmunds, in June, the discount from GM's average sticker price increased $952 compared with May. GM dealers shouldered 71 percent of that difference, says Edmunds.

"In essence, GM dealers purchased most of the sold vehicles at invoice price, expecting to sell them above that amount, but the employee discount deal dictates that those vehicles be sold for approximately three percent below invoice price," says Jesse Toprak, Senior Analyst for Edmunds.com. "This represents a painful cut in dealer profits, especially for models that are in high demand compared with supply." The reduction in profit is not as great as it may appear. For each vehicle sold, dealers collect a "holdback" from the manufacturer. In the case of General Motors dealers, the holdback typically equals three percent of the total MSRP. During the "Employee Discount for Everyone" program, GM has increased the payment to five percent of MSRP. Many consumers opt to buy a more expensive vehicle instead of taking a lower price on the vehicle they set out to buy.

GM enjoyed a 47-percent increase in June sales compared with the prior year. Ford and Chrysler have followed the automaker with competitive offerings of their own in July. The deals will probably be extended through August. But GM dealers have reported that the crush of showroom traffic in June has already backed way off.-Jim Burt

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