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Elusive Profits Punish GM


GM lost $722 million in the fourth quarter of 2007. It needs to continue to cut costs and develop more hit cars to get back in the black

General Motors (GM) has a few hit cars, and sales overseas have sent revenue soaring, but profits remain elusive.

The struggling auto giant lost $722 million in the fourth quarter of last year and made a scant $64 million profit for the year, after accounting for special items. But even that small profit is due to a one-time tax windfall of $1.6 billion that stems from the sale of its Allison Transmission business last year and a reduction in retiree liabilities.

In other words, GM has a long way to go. The company is still losing money in its home market where pressure on sales and profits is getting tougher. Throw in the continued losses from the subprime mortgage business of lender GMAC—of which GM owns 49%—and losses keep piling up.

For the year, GM reported a record $38.7 billion loss, which stems mostly from a $39 billion charge taken in the third quarter. GM racked up huge tax credits in money-losing regions like the U.S., Germany, and Canada. But the company can only recover those tax credits if it can verify that it will make money in those markets. Since the company can't verify that it will make money soon, it had to take a massive paper loss. Its operations did show a slight improvement.

"Last year's results were an improvement," Vice-Chairman and Chief Financial Officer Frederick "Fritz" Henderson said. "But there are still a number of challenges."

Chief among them is dragging the U.S. business back into the black. GM's landmark labor contract, (BusinessWeek.com, 9/18/07) signed last fall, will bear most of its fruits in 2010 and 2011, Henderson said. By then, the contract should help GM's profits by $4 billion to $5 billion.

Better Prices Help Bottom Line

In the meantime, recession-level auto sales keep hammering GM's recovery attempt. In the fourth quarter alone, GM's revenue in North America fell by almost $400 million. Market share fell half a percentage point last year, to 22.7%. At home, losses grew to $1.1 billion for the quarter and the company lost $1.5 billion for the year. "The North American auto business was significantly worse than expected," Morgan Stanley (MS) analyst Jonathan Steinmetz said in a research note.

GM, for its part, is making some of the right moves at home. The company's new cars, such as the Cadillac CTS luxury car, Chevrolet Malibu sedan, and Buick Enclave SUV have been well received. Better prices helped GM's bottom line by $400 million last year.

But Henderson says GM needs to cut more. The company has offered generous buyout deals to 46,000 union workers, valued at $45,000 to $140,000, in order to cut more jobs. Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich., estimates GM could cut more than 20,000 workers.

"Dicey Couple of Years" Ahead

Production costs should help the company weather this year's weak car market, but it won't be much help to the bottom line until the second half of the year. Henderson concedes 2008 will be tough and GM has to keep looking at its costs. But he says the car market could turn up in 2009.

If the market does improve and GM needs more workers, the company can fill many of those vacancies with $14-per-hour workers. That's one reason GM must wait to reap the benefits of the labor contract. "It'll be a dicey couple of years," McAlinden says. "We'll have to be patient."

GM continues to burn cash, too. The company's automotive operations burned through $1.3 billion in the quarter. This year doesn't look much better. A weak income statement makes cash generation tough. Throw in the fact that GM will be buying out workers, and cash will be precious. Many of the buyouts will cost an average of $100,000 per worker. The good news, Henderson says, is that most of the workers will opt for early retirement deals, which are funded by GM's overfunded pension plan.

The GMAC Profit Drain

GM's headlong charge for growth overseas has been a bright spot for the company. But the profits are dwarfed by GM's other problems. GM made almost $500 million in the fourth quarter in growth markets such as Asia and Latin America, but a $215 million loss in Europe makes overseas growth a less exciting story.

Meanwhile, GMAC continues to be a trouble spot. Once a cash cow for GM, GMAC's ResCap mortgage business has become a giant profit drain. The lender lost $700 million in the fourth quarter and $2.3 billion for the year thanks to huge losses in the mortgage business.

GM is looking ahead to 2010 and 2011 when the health-care deal cut last fall with the United Auto Workers unloads its retiree-medical-plan burden on a union-led trust fund. GM's labor costs should also be lower, Henderson says. But between now and then, GM has a tough road to ride.

Welch is BusinessWeek's Detroit bureau chief.

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