Bailed out by the federal government just three years ago, General Motors Co. has set its sights on a once unthinkable goal: making more than $10 billion a year.
It already is headed in that direction. On Feb. 16 [2012], GM is likely to report 2011 net income of about $8 billion, its highest ever, according to people who have seen the figures. Behind the gain to nearly twice 2010’s $4.7 billion are growth in China and strong profits in North America, where GM has shed billions of dollars of costs and lately has been able to command higher prices.
GM has loftier ambitions still. It aims over the next several years to raise its profit margin the portion of revenue left after paying expenses to 10% Daniel Ammann, chief financial officer, said in an interview. That would be a significant jump from the current margin of about 6% and would be among the highest in the auto industry . . . .
The bailout and restructuring helped GM to shed nearly $40 billion in obligations to become debt – free. It was a contrast with Ford Motor Co., which didn’t have a bailout and is still paying off $23 billion it borrowed to survive. GM will pay almost no federal corporate taxes for years as one condition of the bailout . . . .
Now, “we are targeting our best-in-class peers,” said GM’s Mr. Ammann, referring to South Korea’s Hyundai Motor Co. and Germany’s BMW AG, both of which are estimated to have had a 10% return on sales for 2011. . . .
Mr. Ammann acknowledged that GM has a ways to go, particularly when it comes to leveraging the company’s global scope to generate saving. “We have gaps when it comes to our best- in-class peers, and we are clear that we know where those gaps are,” he said.
Adam Jonas, an auto analyst at Morgan Stanley, expressed skepticism that GM can achieve higher margins in their near future because of troubles in Europe and stiffer competition at home, as well as likely lower pickup-truck production. . . .
In South America, where GM’s models are outdated, the company is struggling to avoid losses. “Consumers are demanding very good, up-to-date product there and GM is behind,” said Brian Johnson. An analyst at Barclays Capital.
In Europe, where GM is weighed Down by high labor cost, the company has been losing money for more than a decade. The company still has bloated costs in its engineering and manufacturing operations there. “Clearly we have more work to do,” Mr. Ammann said.
GM also faces what promises to be a tougher 2012 in its home market. Toyota and Honda Motor Co. are back to full production after struggling with shortages last year after the Japanese earthquake and tsunami.
Mr. Ammann is setting out to cut billions more in costs while boosting revenue through global sales growth and reduced incentives on some models, he says.
One goal is fewer auto “platforms.” GM aims tobuild vehicles all over the world that are made from the same basic parts and assembled in plants that use the same type of tooling thus wringing savings out of its massive engineering budget. GM in 2010 had 30 auto platforms. It aims to reduce this total to 24 by 2014 and to 14 by 2018. . . .
Volkswagen and Ford are further down this road. Ford plans to rely on just five common platforms to deliver 75% of sales by the middle of the decade. Globally, Ford made roughly $300 more profit per vehicle sold than GM through September.
“Ford is light years ahead of GM, [which is] just at the beginning,” said Morgan Stanley’s Mr.Jonas.
The process “is expensive and disruptive and will hurt profits for the next couple of years. There is a reason GM had not attacked this before.” Though GM’s bankruptcy helped it shed debt and excess models, it didn’t help the company consolidate vehicle architectures.
Besides cutting costs, GM needs to change its culture. For decades the company focused on selling as many cars as possible, and propping up its U.S. market share, sometimes at the expense of the bottom line.
At the beginning of 2011, GM executives wanted to get sales off to a quick start, and offered plump in centives on Chevrolet trucks, Cadillacs, and GMC sport-utility vehicles. Sales jumped 20%, but soft profit in North America disappointed investors and caused some to fret that GM was back to its old ways.
In December 2011, GM’s North American chief, Mark Reuss, huddled with top sales executives to discuss a strategy for the beginning of this year. The group knew it couldn’t go heavy on incentives again, but worried that holding the line on them would displease dealers, turn off some customers, and mean a weak monthly sales performance.
“We all had to sit back and think about it and decide how comfortable we were with wat was going to happen,” recalled sales chief Don Johnson.
In the end, Gm chose to cut incentives. On Jan. 30, the night before auto makers would report their January sales totals, Mr. Johnson barely slept, knowing GM would be the only major auto maker to show a decline from a year ago. The next day, Chrysler said its sales had risen 44% in January from the year before, and Ford had a 7.3% rise. Gm’s sales fell 6%.
“It is so important for the company to guard against focusing on [market] share over profitability,”
Said harry Wilson, who was a member of the Obama administration’s automotive task force when it oversaw the restructuring of GM. Losing that focus, he said, would be one of the biggest threats to GM’s profitability. . . .
Amid the turnover, GM slimmed down dramatically. It cut its global work force to 208,000 from 263,000 in 2008. The number of union workers in the U.S. fell to 49,000 from 62,000 GM closed 15 plants in the U.S., shed four of its eight brands and trimmed its model line to 49 cars and trucks from 86.
According to GM executives, achieving a healthier margin is becoming the company’s main focus. For salaried executives, for example, annual bonuses are based largely on the company’s margin.
Recently, when GM released global sales figures showing it had regained from Toyota the title of world’s largest auto maker, Mr. Akerson was asked about his feelings on reclaiming the crown.
GM. He replied, needs to focus “on profits and margins and not necessarily try to post numbers on the board.”