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General Motors sees strong 2019 despite headwinds from China, factory downtime

General Motors Co. said Feb. 6 that the company has a strong outlook for 2019 even as headwinds impact global performance.

Executive Vice President and CFO Dhivya Suryadevara said the automaker expects diluted-adjusted EPS in the range of $6.50 to $7, along with adjusted automotive free cash flow in the range of $4.5 billion to $6 billion. Suryadevara spoke during a call to discuss the company's fiscal fourth-quarter and full-year 2018 earnings.

The Detroit-based automaker does expect to face headwinds during the 2019 calendar year related to tariffs, production downtime in conjunction with the launch of full-size SUVs and lower equity income in China year over year, Suryadevara said. But the company anticipated tailwinds from cost-savings in other areas to more than offset higher costs from headwinds.

The CFO said higher costs related to tariffs and commodities are expected to total approximately $1 billion in 2019 on a year-over-year basis.

"We're obviously watching the [Section] 301 tariffs very closely because that will have an impact," Suryadevara said, referring to the tariffs imposed by the U.S. on certain Chinese imports following an investigation by the Office of the U.S. Trade Representative.

Suryadevara said the automaker also needs to look at the mix of which commodities are going up and down.

"So it's difficult to provide any more specificity on the topic that is pretty volatile," the CFO added.

As GM ramps up for the launch of full-size SUVs, the transition will cause production downtime as the company readies its manufacturing facilities for new SUV models.

"We will take downtime to the tune of 25,000 units as we prepare for the launch of our all-new full-size SUVs," Suryadevara said.

The CFO said the company expects the first quarter of 2019 to be the weakest because most of the SUV downtime will be taken during that time.

"[First-quarter] cash flow is expected to be meaningfully below our historical averages," Suryadevara said.

In China, Suryadevara said, GM will have lower volumes, while equity income is expected to be down moderately year over year. GM earned $2 billion in equity income in 2018.

Throughout 2019, however, the company expects to see improvements in China equity income after reducing inventory levels and introducing a "strong product launch cadence later in the year," Suryadevara said.

Chairman and CEO Mary Barra said: "While we expect macro issues and flat industry performance will impact our results this year, we remain confident in the long-term position in China. We expect China industry sales to be roughly in line with 2018 levels based on expected GDP growth and our current assessment of market conditions."

GM is also facing headwinds from depreciation and pension income, expected to be about $1 billion.

"Offsetting these [headwinds] are a number of tailwinds specific to GM," Suryadevara said.

The full-year benefit of GM's truck launch will provide tailwinds in volume, mix and price in 2019, the CFO said. The company also expects year-over-year growth in high-margin "adjacencies," including aftersales and OnStar, GM's vehicle-emergency subsidiary.

"When you layer on top of that the transformational cost savings of $2 billion to $2.5 billion through 2019, we expect these tailwinds to more than offset the headwinds, assuming a similar macro environment," Suryadevara said.

Barra said the favorable outlook is based on a robust mix of new products worldwide, cost efficiencies and restructuring initiatives. The automaker announced in November 2018 that it was reducing car production, closing plants in the U.S. and Canada as well as cutting salaried staff as it focuses more on electric and autonomous vehicles.

"We believe there will continue to be macro uncertainties, but we expect to manage through them based on current market conditions," Barra said.

The automaker reported strong fourth-quarter and full-year 2018 earnings Feb. 6. For fiscal 2018, the company reported adjusted diluted EPS of $6.54, beating the mean consensus estimate for normalized EPS of $6.30, according to Market Intelligence.

Shares of GM were up 1.56% at $39.92 midday on Feb. 6.