GM: Winning the turnaround race
Newspaper reports of the Detroit duo's third-quarter earnings don't tell the whole story, writes Fortune's Alex Taylor III.
(Fortune) -- If you believe what you read in the newspaper, you'd think that Ford had put on a late surge and was speeding ahead of General Motors in their race for profitability.
"Ford Motor Co., not General Motors Corp., suddenly appears to be on a faster track to profits," the Wall Street Journal declared last week. "Their respective turnaround efforts are running in different gears."
But if you dig a little deeper into their respective results at core North American operations, you might come up with a different conclusion. Despite GM's frightening $39 billion loss (due mostly to an accounting adjustment), most indicators put it in the lead.
First, let's take a look at Ford's results. No question, it performed much better than in 2006. Its third quarter pre-tax loss in North America amounted to $1 billion vs. a loss of $2.1 billion in the same quarter a year earlier. True, Ford's market share shrank significantly from 15.5% in 2006 to 13.4% in 2007. Likewise its retail share also declined, from 11.7% to 10.5%. But a slightly richer mix of vehicles -- more high-priced Lincolns, for example -- produced a $1 billion bump. And Ford sold fewer cars to low- or no-profit fleet buyers.
Surprisingly, however, Ford (Charts, Fortune 500) showed no benefit from cost-cutting. Gains in manufacturing, engineering and overhead were offset by higher product costs and stiffer warranty expenses, despite what the company calls "dramatic improvements" in quality.
Now let's look at GM's performance in North America. It lost money pre-tax too, but a lot less: $292 million vs. $916 million a year ago. Its market share also sank, but again, not as much: from 24.5% a year ago to 24.3% in 2007. Part of that is due to higher fleet sales; GM (Charts, Fortune 500) showed less discipline than Ford and its sales to rental fleets and others rose significantly. Finally, GM benefited too from a richer mix, but it also got a lift from lower warranty costs and reductions in its manufacturing costs.
Looking ahead, Ford has a relatively weak lineup of new or redesigned products for most of 2008. The compact Focus, on which Ford makes little or no profit, won't make much of a dent. The all-new Flex, a crossover that replaces the minivan, will make a larger impact but it won't be huge, at least initially. And while a redone version of Ford's profit engine, the F-series, arrives late in the year, it will face a weak market for pickups and competition from the redesigned Dodge Ram.
General Motors, by comparison, has already launched the Cadillac CTS, the highest-volume model of this high-margin luxury brand, and is about to release the much-heralded Chevy Malibu. GM promises that the Malibu will be more profitable than its predecessor.
While praising Ford's better-than-expected results, analysts have been careful to point out areas where it's falling short. Jonathan Steinmetz of Morgan Stanley wrote that Ford's inability to deliver any cost-related improvements was "a disappointment," adding "This suggests Ford will need to accelerate its cost reduction in...advertising, engineering, material cost and employment related items."
Mark Warnsman of Calyon Securities, part of the Credit Agricole Group, made some sharper comments. "Improvement in North America remains central to the recovery of both companies," he wrote. "And on this metric, General Motors is well ahead."
Which is not to say that GM is cruising. In some biting remarks, Morgan Stanley's Steinmetz pointed out that, while GM has reduced its benefits to hourly labor by $8 billion over the past five years, its pre-tax profits have declined. He noted too that, despite the new models, GM disappointed in the third quarter, its cash burn was worse than expected, and its mix was weakening on some of its new pickups and SUVs.
Still, simple logic dictates that GM has the edge. Rick Wagoner became CEO in 2000 and put together the key members of his management team several years ago. By comparison, Ford CEO Alan Mulally only landed in Dearborn 14 months ago and is still recruiting talent. If he's made any impact on Ford operations so far, it is only on the margin. Several more years will be required before his global product development program can pay off.
Profits, of course, are the final arbiter. While most analysts expect GM to return to black ink next year, Ford isn't expected to turn positive until its promised date of 2009. This may be a road race between two clunkers, but one is still clearly in the lead.