General Motors CEO says vehicle profits rising in '02

October 9, 2002 New York, Bloomberg News reported that General Motors Corp. is boosting profit margins this year through cost-cutting and sales of more expensive models, said Chief Executive Officer Rick Wagoner.

The world's largest automaker is benefiting from rebates and no-interest loans that draw affluent customers to new models such as the Hummer H2 and Cadillac Escalade sport-utility vehicles, with prices that start as high as $48,000, he said.

"While pricing on a product has tended downward, what is interesting if you look at our average transaction price, it is going up," Wagoner said in an interview with Bloomberg News. "We're selling more trucks and SUVs, and within certain categories of vehicles, people are tending to buy up."

General Motors generated $20,223 in revenue for every car and truck it sold in North America during the second quarter, up 5.2 percent from $19,231 in the year-ago period. The company has estimated next week's third-quarter results will show profit of "slightly more" than 90 cents a share, including its Hughes Electronics Corp. unit and excluding some expenses, compared with a year-earlier loss of $368 million, or 41 cents.

That hasn't satisfied all investors, who have pushed shares to their lowest price since 1995 partly because about rising pension costs. General Motors fell $1.80 to $34.08 at 1:41 p.m. in New York Stock Exchange composite trading. Rival Ford Motor Co. fell 79 cents to $7.71 after the stock was downgraded to "neutral" from "outperform" at Credit Suisse First Boston.

"People are scared that they don't know how these companies will do when sales fall off," said Roger Hamilton, vice president and portfolio manager at John Hancock Advisors Inc., which manages $25 billion including shares in automakers. "Then you still have pension and health care costs hanging over their heads, and the weak stock market just makes that worse."

Changing Assumptions

By the end of the year General Motors will reevaluate its traditional assumption that assets held by its pension fund will generate a 10 percent return, Wagoner said. The 10 percent assumption is "increasingly under question," he said.

"If the equity markets go for their third year in a row of a major downturn, you basically get a hole in your balance sheet," Wagoner said.

Nine months ago, Wagoner was forecasting total U.S. auto sales of about 15.2 million vehicles for this year. Now his forecast is in the 17 million range. "I missed this baby by a mile," he said. Next year's industrywide sales will be about 16.5 million vehicles, he said.

Domestic automakers use no-interest loans on most models to help prop up sales and overcome consumer anxiety about a possible war in Iraq and a declining stock market, Wagoner said.

No-Interest Loans

General Motors pulled back on much of its no-interest financing last month, only to revive it last week for most 2003 cars and minivans after its September sales fell 13 percent. Ford's September sales rose 3.2 percent and DaimlerChrysler AG's Chrysler said increased 18 percent.

"Consumers are looking for reasons to buy and you need to give them a reason to buy right now," Wagoner said. "We're going to play that game."

Wagoner said he's hoping an improving U.S. economy will help him cut back on incentives in the next few months.

"We continue to believe that the most likely outcome for the economy is an expansion that will begin later this year," he said in a separate Bloomberg Television interview.

The company is still reducing costs. General Motors said yesterday that it is asking parts suppliers for price cuts of 4 percent to 6 percent in 2003, about the same as this year.

Consumers show no sign of ending their decade-long love affair with sport-utilities, Wagoner said. The automaker is in the midst of a $4 billion campaign to revive its Cadillac luxury brand. This campaign will include a Corvette-based luxury roadster called XLR to be introduced next year. In addition, the automaker is planning a $70,000-plus luxury sedan for Cadillac.

International Reach

Wagoner wants General Motors to seek more growth opportunities in China, a market that ranked third in August in vehicle sales behind the U.S. and Japan.

"It's not inconceivable that in the not-too-distant future it could be second-biggest auto market in the world," he said.

General Motors' main partner in China is Shanghai Automotive Industry Corp., the country's biggest carmaker. The two companies build sedans, minivans and compact cars in Shanghai. They earned a combined 809.8 million yuan ($97.8 million) before taxes last year on revenue of 11.5 billion yuan. General Motors is trying to quintuple its Chinese market share to 15 percent by 2005.

Wagoner said the automaker may complete its agreement to take control of bankrupt Daewoo Motor Co.'s South Korean auto operations about Oct. 17. General Motors agreed in April to buy the automaker's main assets in a $1.17 billion transaction.