Wednesday, October 27, 2021

Amid a computer chip and car parts shortage, GM third-quarter profits plummet 40%

 

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General Motors reported Wednesday that its third-quarter net income plummeted 40% as it struggled against production constraints and thin new car inventory.

the tower of the city with Renaissance Center in the background: The Renaissance Center in downtown Detroit sits in the background along the Detroit RiverWalk on March 11, 2021.© Ryan Garza, Detroit Free Press The Renaissance Center in downtown Detroit sits in the background along the Detroit RiverWalk on March 11, 2021.

The auto industry has faced a global shortage of semiconductor chips since February. The chips are used in many car parts and, without them, production at many GM plants has either slowed or stopped completely, leaving dealers' new car lots bare.

The automaker reported a net income of $2.4 billion, down from $4 billion in the year ago period. Its adjusted earnings before interest and taxes (EBIT) was $3 billion, down from $5.3 billion. Revenue sank 25% to $26.8 billion compared to the year ago quarter when it was $35.5 billion.

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In a letter to shareholders Wednesday, GM CEO Mary Barra assured Wall Street that GM is positioned well for the future with its strategy to introduce 30 new electric vehicles by 2025 and a promise to double revenues in the next decade with EVs and other diversification the company outlined earlier this month.

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But she acknowledged the struggles GM faced this quarter. 

"The quarter was challenging due to continuing semiconductor pressures," Barra wrote. "But it also includes very strong results from GM Financial, the recall cost settlement we reached with our valued and respected supplier and JV partner LG Electronics, and ($300 million) in equity income from our joint ventures in China." 

Barra ended by saying GM is tweaking its estimate for its full-year results, saying it will approach the high end of GM's earlier guidance, "which is for EBIT-adjusted in the range of $11.5 billion to $13.5 billion, well above the $10 billion to $11 billion outlook we shared in February."

Warning signs

GM's results shouldn't be a surprise to Wall Street, after all the warning signs were  there.

"GM made it through the early part of the year relatively unscathed, keeping its all-important pickup truck and SUV factories running by allocating computer chips to those more popular and more profitable models instead of installing them into less popular, less profitable and more abundant models, mostly cars," said Michelle Krebs, executive analyst at Cox Automotive.

But by the third quarter, the chip shortage caught up to GM, forcing it to drastically cut production of all models across the board, Krebs said.

In September, GM warned Wall Street that the third quarter would be challenging because of the chips deficit. GM's CFO Paul Jacobson said, at the time, the automaker's second-half vehicle sales and production would be down 200,000 units compared with the first half, largely in the third quarter. GM delivered 1.1 million vehicles in the first half.

Then on Oct. 1, GM reported its new vehicle sales in the U.S. plummeted 33% from the year-ago period. It sold 446,997 vehicles in the U.S. compared with 665,192 a year ago. The U.S. accounts for the bulk of GM's revenues and profits.

The good news for the automaker is GM's average transaction prices are up 16%, surpassing $50,000 for the first time, to $50,392, Krebs said. GM cut incentives by 46% to an average of $2,994 per vehicle, according to Cox Automotive calculations.

But Barra told reporters as product availability increases when the chips crisis improves, "the incredibly strong pricing will mitigate some, but we’re going to be more efficient than we’ve been in the past.”

That could mean GM will offer less inventory, thereby less consumer discounts, in the future even as it starts building more cars.  

Eye on the future

“The ongoing disruption to supply chains created by the chip shortage has been particularly harsh to GM," said Ivan Drury, Edmunds’ senior manager of insights. 

Drury noted that GM has been "applauded" for its investor day earlier this month when it said it would double annual revenues by 2030 and grow earnings before interest and taxes (EBIT) adjusted margins as it transitions to an all-electric future.

GM talked about a future all-EV lineup at that time and gave Wall Street a peek at the Chevrolet Silverado E, the all-electric pickup it plans to debut at the Consumer Electronics Show in Las Vegas in 2022. GM showed a picture of its all-glass roof.

GM will show the glass roof of the Silverado E, the all-electric pickup it plans to debut at the Consumer Electronics Show in Las Vegas in 2022.© Provided by General Motors GM will show the glass roof of the Silverado E, the all-electric pickup it plans to debut at the Consumer Electronics Show in Las Vegas in 2022.

But, said Drury, "All eyes will be on how GM weathers these more immediate shortages, which should serve as a key indicator of whether the company can actually deliver on its loftier future goals."

More: Everything you need to know about the chip shortage that's plaguing automakers

A bright spot for GM is that consumer demand remains strong for pickups and big SUVs, which carry fat profit margins, even amid inventory woes, Drury said.

"GM also dodged a bit of a bullet in that the bulk of the battery issues with its Bolt EV seemed to fall more on LG’s shoulders instead of the automaker itself, particularly at a time when the industry has been distracted by other headlines," Drury said.

Earlier this month, GM reached an agreement with its battery supplier, LG Electronics Inc., over the heavy costs to recall nearly 140,000 Chevrolet Bolt EVs and EUVs globally. LG will reimburse GM for $1.9 billion in costs associated with the Bolt recall due to manufacturing defects in battery modules that LG supplied.  

GM said Tuesday it will restart production at its Orion Assembly plant in Orion Township where it builds the Bolts on Nov. 1. The plant has been idle since Aug. 23. GM will operate it for two weeks to make some vehicles to serve as courtesy loaner cars for Bolt owners who have to leave their cars with dealers for the recall repairs.

Starting Nov. 1, it will be the first time since early February that nearly all GM plants will be operating.

Barra expects the chips shortage to improve by next year, but it will not clear up until late 2022. Barra said she’s had conversations with the CEOs of nearly ever semiconductor manufacturer and, “you’ll definitely see changes to ensure we have the right supply and some of it will be added capacity and some of it will be how we work together in the supply chain."

GM is the first of the Detroit Three to release its third-quarter earnings. Ford Motor Co. is expected to release its results later Wednesday and Stellantis early Thursday.

This story was edited for content after publishing.

Follow Jamie L. LaReau on Twitter @jlareauan.

This article originally appeared on Detroit Free Press: Amid a computer chip and car parts shortage, GM third-quarter profits plummet 40%

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