old news
July 22, 2004
Detroit Profits Most From Loans, Not Cars
By DANNY HAKIM
ETROIT, July 21 - The General Motors Corporation and the Ford Motor Company may be two of the world's largest automakers, but they continue to make their money as banks.
So with interest rates rising, and competitors like the Toyota Motor Corporation far more profitable in the industry's core business of manufacturing cars and trucks, the market has reacted cautiously to the improved earnings reports by Ford on Tuesday and G.M. on Wednesday.
G.M. reported that second-quarter earnings totaled $1.3 billion, up 49 percent from the period a year earlier, an increase fueled largely by its financial services division.
Auto sales in Asia remain especially lucrative for G.M., which has capitalized more successfully on the surging Chinese market than has Ford. But car and truck sales in North America continued to produce only slight, albeit improving, returns for G.M. The company has been losing market share in the United States despite heavy spending on rebates as high as $5,000 and offers of no-interest financing for many of its vehicles.
And in Europe, G.M. has reported wider losses this year.
In New York Stock Exchange trading Wednesday, G.M. shares fell 25 cents, or 0.57 percent, to $43.35.
On Tuesday, Ford reported $1.17 billion in net income, much of it from its financing operation. It said it had a slight loss in its automotive operations. Ford's shares fell 2.5 percent in New York Stock Exchange trading. They fell another 7 cents, to close at $14.53 on Wednesday.
G.M., Ford and DaimlerChrysler's Chrysler unit are spending more on incentives than rivals like Toyota and Nissan.
"We still have much work to do to improve our automotive profitability to targeted levels," Rick Wagoner, G.M.'s chairman and chief executive, said in a statement.
G.M.'s considerable array of brands includes Chevrolet, Buick and GMC; more expensive brands like Cadillac and Hummer; and foreign-based brands like Saab.
Over all, and excluding special items in the second quarter, the company earned $2.36 a share, 12 cents above the consensus estimate of Wall Street analysts compiled by Thomson First Call.
Revenue rose 7 percent, to $49.1 billion, from $45.9 billion a year earlier. But global automotive market share slipped to 14.7 percent from 14.9 percent a year earlier.
Facing shrinking market share and bloated inventories in the United States, especially in sport utility vehicles and pickups, the company projected slimmer third-quarter earnings than analysts have been expecting. G.M. had already announced that it would trim production in the quarter.
John Casesa, an analyst at Merrill Lynch, said G.M. was making steady improvements "in the face of an increasingly competitive environment."
"However," he added, "the difficulty of improving results in an overcrowded North American market is a major factor limiting margin expansion."
In recent years, foreign competitors of G.M and Ford have entered the S.U.V. market in force and redoubled their efforts to sell large pickups, putting pressure on what was a considerably less competitive profit center in the late 1990's.
In its earnings announcement Wednesday, G.M. reiterated its earnings target of $7 a share for the year. But according to John M. Devine, G.M.'s chief financial officer, a new accounting rule proposed this week by the Financial Accounting Standards Board could reduce earnings by $1 a share this year.
The rule would require companies to dilute earnings immediately when they issue a relatively new kind of debt, called contingently convertible bonds, just as they do with other convertible debt.
G.M. is the largest issuer of these bonds, known as Co-Co's, and would have to adjust its 2004 earnings to comply.
"To be frank, this came totally out of the blue for us," Mr. Devine said in a conference call to discuss the company's earnings. "To say the least, this sort of thing is very disruptive to us. It's costly."
Out of G.M.'s $1.3 billion profit, $860 million came from the General Motors Acceptance Corporation, the company's financing division, up from $834 million a year earlier. G.M.'s automotive operations earned a net $529 million, up from $140 million a year earlier.
Within G.M.'s automotive group, the Asia-Pacific business earned $236 million. While the company's North American automotive operations earned $328 million, that profit came from far higher volumes.
In Europe, G.M. is in the midst of a reorganization. G.M. Europe reported a loss of $45 million in the second quarter, compared with a loss of $3 million a year earlier.
"Europe continues to be disappointing and really unacceptable," Mr. Devine said.
He said that in the European operations, "we're still not cracking the code in terms of being profitable."
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