GM Posts Increased Q1 Loss, Blames American Axle Strike

General Motors (GM) posted its first-quarter 2008 earnings yesterday, announcing a net loss of US$3.3 billion globally on decreased revenues of US$42.7 billion. That compares to a US$42-million loss on revenues of US$43.4 billion in the same period of 2007. “We continue to leverage our global product portfolio to take advantage of tremendous growth in key emerging markets, while at the same time taking the appropriate actions to deal with the challenging economic conditions in the U.S.", GM Chairman and Chief Executive Officer (CEO) Rick Wagoner said in a statement.

However, the loss for the quarter belies some improvements in the North American cost structure and business. Adjusted automotive earnings before taxes were a positive US$392 million, a US$161-million improvement that occurred despite the negative U.S. auto market and the production stoppage due to the ongoing strike at supplier American Axle Manufacturing (AAM). That downturn and loss at GM North America (GMNA) was more than offset by earnings before taxes of US$1 billion in GM Latin America, Africa, and Middle East (GMLAAM), GM Asia Pacific (GMAP), and GM Europe (GME).

Special items dragged GM's total earnings down for the quarter, to the tune of US$2.9 billion. This included a US$1.45-billion charge to record a non-cash partial impairment for the company's equity investment in GMAC, basically an accounting loss. An additional US$731 million was booked to increase GM's liability for estimated net costs associated with its involvement in supplier Delphi's bankruptcy and restructuring. The company booked a further US$324 million towards restructuring actions in North America and Europe, and a US$394-million charge towards non-cash, tax-related valuation allowances related to deferred tax assets in Europe (basically, an accounting adjustment).

In North America, a budding recession and a two-month-long strike at AAM that has shuttered most of the company's truck production seriously affected revenues, which fell from US$28.1 billion in the first quarter of 2007 to US$24.5 billion in the most recent quarter. Nearly 100,000 units of truck production were lost at GMNA, and are unlikely to be made up later this year. In Europe it was a very different story, with revenue up 17% to US$9.9 billion and earnings ringing in at a positive US$75 million. GME posted record sales for the first quarter, with a volume of 572,000 units. GM's Latin America, Africa, and Middle East unit more than doubled its first-quarter earnings from a year ago, with revenue up 33% to US$4.8 billion and earnings coming in at US$517 million. GM Asia Pacific also did well, with revenue up almost 20% to US$5.5 billion and earnings at US$286 million.

Outlook and Implications

GM performed better than Wall Street had anticipated during the first quarter, which sent GM stock soaring during the day's trading yesterday. Overall, the performance was not a surprise in terms of strengths and weaknesses; like Ford, the company is doing well everywhere except North America, posting record sales and revenues in several regions. However, the continued headwinds blowing through the U.S. economy are hurting the company‘s turnaround plan, and the additional trouble caused by the AAM strike seems to be yet another blow to the automaker's bottom line. It is a good thing that GM has worked so hard to integrate its operations and bring far-flung divisions much closer into the fold; without the profitability and support of its global income, its North American results would have dragged GM down even further.

Thus, it seems that GM is actually weathering the AAM strike and concurrent downturn in truck sales relatively well. It recently announced another 140,000-unit reduction in production of its big full-size trucks and sport utility vehicles (SUVs), on top of the 100,000-plus units of production already lost as a result of the strike. As surmised by Global Insight some weeks ago, the loss of production hit GM's North American revenues severely, contributing to the US$3.6-billion reduction compared with the same period of 2007. Since GM books revenue as a vehicle is completed and rolls off the assembly line, North American revenue is likely to suffer again throughout the year as the company voluntarily reduces production in the wake of an increasingly rapid shift among consumers away from traditional truck segments and towards cars and crossovers.