GM, Ford cut costs to make second-quarter profits

July 8, 2002 Bloomberg news reported that General Motors Corp. in May dropped a longtime supplier in Europe when Michelin & Cie., maker of a fifth of the world's tires, wouldn't meet its price demands.

"It's quite a big step for General Motors to dump someone like Michelin," London automotive consultant Gary Beecroft said.

General Motors and Ford Motor Co. are shaving costs to compete with overseas-based rivals who are keeping vehicle prices low to gain market share. Cost-cutting paid off in the second quarter as General Motors' profit rose and Ford returned to profit from a year-earlier loss linked to replacing Firestone tires. Both depend on discounts to fight rivals like Toyota Motor Corp. as total demand slips in a slow U.S. economic recovery.

"We're not all that excited about auto sales in 2002 or 2003," said Bruce Morrison, vice president and senior portfolio manager at Davidson Investment Advisors, which manages about $900 million and owns shares of DaimlerChrysler AG, the third-largest automaker in the U.S. "They've been pretty strong so far but we don't think there's going to be a great surge."

U.S. vehicle sales fell 2.6 percent in this year's first six months, a smaller drop than automakers predicted. Sales weakened as economists estimate the U.S. economy slowed to a 2.7 percent growth rate between April and June from a 6.1 percent pace in the first three months, and General Motors, Ford and Chrysler this week revived no-interest loans to clear out 2002 models.

Other large auto markets also shrank. Sales in Western Europe probably fell 5 percent to 3.9 million vehicles in the second quarter, said Arndt Ellinghorst, an analyst at WestLB Panmure. First-half sales declined 5.8 percent in Japan.

Detroit-based General Motors' profit may rise to $2.42 a share, based on the average analyst estimate in a Thomson First Call poll, from year-earlier net income of $477 million, or $1.03. Net income may be less than $2.42 a share if the company records expenses for new European recycling laws.

Ford went from a net loss of $752 million, or 41 cents a share, to an estimated profit of 26 cents a share, its first quarterly profit in a year. The Dearborn, Michigan-based company had a $2.1 billion in expenses has year to replace tires.

General Motors reports results July 16, followed by Ford the next day. General Motors' shares rose $1.54 to $51.69 today and are up 6.4 percent so far this year. Ford's shares gained 39 cents to $15.69 and are little-changed this year.

DaimlerChrysler will report that adjusted net income rose 23 percent to 1.1 billion euros ($1.07 billion) as the U.S. Chrysler unit posts its second operating profit in a row, WestLB Panmure estimated. The Stuttgart, Germany-based company cut jobs and closed factories last year at Chrysler to reduce costs, and Chief Executive Officer Juergen Schrempp has said the company may raise its profit forecast.

General Motors' sales slipped just 1.7 percent so far this year, compared with declines of 3.3 percent for Chrysler and 12 percent for Ford. The company gained 0.3 point of market share to 28.2 percent, taking advantage of its cost advantage over Ford and its more recently redesigned trucks.

"There can be little doubt about the way GM is pursuing its business in North America today -- it is making a bid for market share," said Saul Rubin, an analyst at UBS Warburg.

General Motors is having a tougher time in Europe, where it may lose about $88 million in the quarter as sales slow, Burnham Securities Inc. analyst David Healy estimated.

Ford is cutting jobs, closing factories and reducing other costs to lop about $700 from each vehicle it builds in North America by 2005. The automaker will earn $16 million in North America and $446 million overseas, mostly in Europe, Healy said.

Overseas-based automakers have taken advantage of a better quality image, lower costs or favorable exchange rates to grab U.S. sales from Ford and General Motors. Japan's top three automakers, Toyota, Honda Motor Co., and Nissan Motor Co., all had record profits in the fiscal year ended March 31 and expect to exceed those marks this year.

Analysts expect Volkswagen AG, Europe's largest carmaker, to say quarterly profit was little changed at 625 million euros as sales slumped. The company is trying to cut manufacturing costs to meet its target of matching last year's earnings.

Bayerische Motoren Werke AG's second-quarter profit rose an estimated 27 percent to 666 million euros. "BMW remains Germany's strongest carmaker," said Ellinghorst, the WestLB analyst, who rates the shares "outperform." The No. 2 luxury carmaker's U.S. sales rose 11 percent in this year's first half, aided by the new Mini model.

Paris-based PSA Peugeot Citroen benefited from demand for fuel-efficient diesel engines. Its first-half net income rose to 3.33 euros a share from 3.02 euros, JP Morgan analysts estimated.

Honda is the only one of Japan's 11 automakers whose sales rose at home in this year's first six months supported by the Fit compact car. Mitsubishi Motors Corp. had the biggest jump in U.S. sales in the first six months, rising 13 percent to 173,590.

Japanese automakers, who derive as much as 90 percent of their operating profit from North America, may lose some of their pricing advantage. The yen strengthened by 10 percent against the dollar in the quarter.

"The recent strengthening of the yen probably won't have a big impact on their earnings for their first quarter (April 1-June 30), but we may see some negative factors after the second half, which starts from Oct. 1, if the yen continues to strengthen against the dollar," said Dai Nishiyama, who helps manage about $8 billion at SG Yamaichi Asset Management Co.