Champagne surely is flowing in the buttoned-down offices of the General Motors Renaissance Center, where the company reported $1.1 billion in net income for the second quarter of 2015, up from $0.9 billion for Q2 of 2014. This result comes despite a slight drop in global sales to 2.4 million and a dip in net revenue to $38.2 billion for the quarter, compared with sales of 2.5 million and $39.7 billion in revenue, respectively, for the previous second quarter.
Wall Street responded as it rarely does for the auto industry, pushing GM stock up by $1.77 per share just before midday Thursday, to $32.07 per share. The stock had been sliding from the mid-$30s since mid-June.
But second-quarter results surprised and impressed analysts, who had expected earnings before income taxes (EBIT) of $2.5 billion. GM, instead, reported EBIT of $2.78 billion. On Tuesday, Apple reported a third fiscal quarter 2015 net profit of $10.7 billion on $49.6 billion in revenue, and its stock plummeted because the tech giant’s 59 percent profit improvement was less than Wall Street expected.
What’s interesting about GM’s Q2 performance is that the equation of better profits despite fewer sales and lower revenue hints at some culture change at the world’s third-largest automaker. Like its domestic rivals, GM is benefiting from exploding pickup truck sales as well as a large consumer shift to crossover/utility vehicles and the few remaining traditional sport/utility vehicles (highly profitable Chevrolet Tahoes, Suburbans, and variants).
GM also continues to improve profitability on its mainstream compact and midsize sedans, models that broke even, at best, before the 2009 bankruptcy.
GM will see “an estimated variable profit improvement of about $1,500” on the all-new 2016 Chevy Cruze and Malibu, CEO Mary Barra said on a conference call with Wall Street analysts. In Europe, Opel expects a variable profit improvement of $900 for the new Corsa subcompact and more than $1,200 for the new Astra compact, Barra said.
Those figures reflect the average profit over the vehicle lifecycle, which usually is five years for such models. How is GM squeezing such large profit increases out of small and midsize sedans? With lower material and production costs, and better “mix,” which means, basically, more cars sold with higher trim levels and with more options, like the Apple CarPlay/Android Auto connection available on many 2016 GM models.
GM’s bottom line will take a hit in the fourth quarter of this year, as it starts up production of the redesigned 2016 Chevrolet Spark, Cruze, Malibu, Camaro, and Volt, and it launches the Cadillac CT6, and then again in early 2016 when it spends on marketing and advertising for the new models and also begins to import the Buick Cascada from Germany.
Barra is confident that GM will meet its goal of a 10 percent annualized margin in 2016, with that number already at 9.7 percent for the first half of this year. These profits are good news for enthusiasts, because big profits from mainstream models means the company has more to spend on performance and halo models. Perhaps GM could revive the RWD Buick Avenir.
But it’s Cadillac that really needs the revival. Luxury cars provide much higher profits, but Cadillac hasn’t been carrying its weight, with U.S. sales off by 1.5 percent for the first half of the year. The fortunes of Mercedes-Benz parent Daimler illustrates how much better profits are for a company that primarily sells luxury vehicles (and big trucks). On the same day GM reported net profits of $1.1 billion on revenue of $38.2 billion from 2.4 million vehicles sold, Daimler AG reported net profits of $2.6 billion on revenue of $41.3 billion from 714,800 vehicles sold.
Other takeaways from GM’s Q2 earnings report:
* Global deliveries of about 4.8 million vehicles for the first half of the year are about even with the first half of 2014.
* Though global deliveries fell by 2.7 percent from Q1 of ’14, North America was up 3.8 percent and Opel/Vauxhall was up 3.4 percent. China fell 1.4 percent, and South America dropped 27.3 percent.
* Cadillac sales were up in China, year over year, says chief financial officer Chuck Stevens, and the Buick Envision and Baojun 730 and 560 took advantage of an 80-percent-plus industry growth in SUV sales in the region. GM’s Chinese sales are roughly half American brand sales and half Wuling and Baojun, which do well in rural and smaller urban areas.
* Annual auto industry sales in China are expected to reach 35 million in 10 to 15 years, about twice the current annual rate in the U.S.
* GM’s global market share was 11.1 percent, down 0.2 point; its U.S. share was 17.6 percent, down from 17.9 percent; and its European share was 6.3 percent, down from 6.8 percent.