General Motors says it will finish the year strong, in part because of its strategy in dealing with a worldwide shortage of semiconductor chips.
In an unusual move, GM CEO Mary Barra issued a Letter to Shareholders simultaneously with GM’s first-quarter earnings results Wednesday. In it, Barra said GM expects to have a strong first half with adjusted earnings before interest and taxes of around $5.5 billion and GM is reaffirming its full-year guidance, “based on what we know today,” coming in at the higher end of the $10 billion to $11 billion EBIT-adjusted range that it shared earlier this year.
“Our supply chain and manufacturing teams are maximizing production of high-demand and capacity-constrained vehicles,” Barra wrote in the letter. “Our engineering teams are creating effective alternative solutions, and our sales teams, together with our dealers, are finding creative ways to satisfy customers despite lean inventories.”
The automaker reported a first-quarter net profit of $3 billion, up from $294 million for the first quarter a year ago. Its EBIT was $4.4 billion, up from $1.3 billion. Net revenue was slightly down at $32.5 billion, compared to $32.7 billion.
GM credited a solid first-quarter to its ability to manage the complex production problems created by the chip shortage, as well as the strength of the auto markets in North America and China, and robust revenues at GM Financial, even while it continues to face the industry-wide challenge of the chip shortage that is crippling production.
GM said it plans to spend $9 billion to $10 billion in capital expenditure this year. About $7 billion of that is focused on electric vehicles, self-driving cars and engineering, Barra said during a media briefing following the earnings results announcement.
“We have not taken our foot off the pedal,” Barra said. “The electric vehicles that we planned to launch are on track and doing very well. The challenge with semiconductors is not impacting the transformation.”
Analysts reacted positively to GM’s results.
“GM had an excellent quarter that would have been even more great had the semiconductor shortage not caused a large working capital headwind to cash flow,” said Morningstar auto analyst David Whiston. “The stark contrast in tone from Ford’s rest of 2021 outlook is a good sign that GM is, as it says, highly confident in its outlook, and backs that up by not changing its estimate of the semiconductor shortage impact.”
In its earnings last week, Ford warned that the next three months will see serious parts supply problems related to semiconductor chips that could cut planned production by 50%.
Demand for the chips, made mainly by a few big suppliers in Taiwan, has been strong in part because of the COVID-19 pandemic and an increased use of laptop computers, 5G phones and other IT equipment that use the chips. Cars use the chips in a variety of electronics systems, too.
Barra told reporters that the chip shortage will still impact GM’s annual EBIT, but she stopped shy of reconfirming the $2 billion to $2.5 billion estimated hit GM forecasted the chip impact would have, which GM made earlier this year. Barra said GM’s supply team is working to minimize the financial impact.
“Not sure if GM had stockpiled more chips than Ford or if GM is getting faster access or some other workaround,” Whiston said. “Given Ford’s news last week, the market was just wanting to see if GM cut its outlook and the fact that it did not is great news.”
The results give Clarkston-based Chevrolet dealer Katie Bowman Coleman hope that in the third-quarter, her inventory will rise, along with her sales.
But Coleman said she believes the chip shortage will dissipate by the third-quarter and she will start seeing big loads of new cars from the factory come rolling onto her lot. She knows if she can get it, she can sell it.
Coleman has about 204 new cars on her lot at Bowman Chevrolet, when she usually has 600 to 800. It’s “not terrible” compared to some dealers who have far less cars in stock. Still, customers notice a scarcity on the shelves.
“Customers do ask all kinds of questions about the shortage. GM is scrambling,” said Coleman. “In the fall of 2019, GM had the strike, then we were getting up to normal levels again, then COVID hit. Now we have the chips shortage. GM is doing pretty well, as best it can, but it’s still a challenge.”
GM’s quarterly performance
Part of GM’s stellar results are due to the fact that this time last year the car industry was in the pits.
All carmakers shut down factories in North America due to the COVID-19 pandemic. In many states, too, car dealers were limited in operations. In Michigan last year, car dealers could not even sell any cars for nearly three weeks.
Last month, GM reported its first-quarter new car sales inched up 4% in the United States on demand for full-size and midsized pickups and SUVs.
GM said it sold 642,250 total new vehicles in the first three months of the year compared with 618,335 sold in the same period a year ago. Still, pressure on supply due to parts shortages, then some severe weather forcing plant shutdowns, took its toll and inventory remains tight. Still, GM set a first-quarter record with average transaction prices at $40,353.
In China, GM’s second biggest market, the carmaker sold 780,000 vehicles compared to 462,000 a year earlier. GM’s China operations gained $300 million compared to $167 million.
“We are pleased with the recovery at China,” Barra said. “We’ve continued to optimize our cost structure and optimize on adjacent businesses there. The Cadillac brand continues to grow sales and we have a good product line there. As we start to launch Ultium line of EVs and see the battery costs come down, we’ll see those benefits, too.”
Ultium is GM’s proprietary battery platform that underpins all its EVs. GM is building two Ultium battery plants in the United States with its joint-venture partner LG Chem. One is in Lordstown, Ohio and the other will be in Spring Hill, Tennessee.
Barra said the chip shortage has had a lesser impact on GM’s vehicle production in China.
GM ended the quarter with $37.2 billion in automotive liquidity, down from $40.5 billion at the end of last year. Pretax profits in North America were at $3.1 billion compared to $2.2 billion reported in the same period in 2020.
‘The Wild West’
But GM battles the worldwide shortage of chips used in various car parts. Since February, GM has temporarily idled several plants across North America and stopped production at facilities in Korea and Brazil because it, like cross town rivals, Ford Motor Co. and Stellantis, can’t get parts. Ford and Stellantis have had to idle production across many plants too.
Barra said GM expects chip supplies to return to normal in the second half of the year.
“We’re looking at solutions,” Barra said Wednesday. “The team is being super creative. We do think the second quarter will be the weakest and we’ll start to see recovery in the third quarter and strength in the fourth quarter.”
GM was also hit with severe winter storms in February, forcing it to shut down some factories for several days, including those that make high-profit pickups and SUVs.
The resulting tight inventory is why Bowman Chevrolet is being proactive with customers, Coleman said.
“We are calling all our customers and saying, ‘hey you’re six months out of a lease so let’s make a plan,’ ” Coleman said.
In April, Bowman Chevrolet sold 259 new cars, a 900% increase from the 26 it sold last year at this time in the pandemic. But during a normal year, she would sell 300 to 400 new cars a month. To hang in there, Coleman said the dealership continues to sell off of invoices and usually every car that rolls off the delivery truck from the factory onto her lot is already sold.
“It’s kind of the Wild West really,” Coleman said. “But everyone seems to understand that this is a worldwide shortage and we’re doing our best and do anything we can to help our customers get through it.”
Ford reported its first-quarter earnings last week and exceeded Wall Street’s expectations. It reported $4.8 billion in earnings before interest and taxes — with net income of $3.3 billion — for the first three months of this year.
By contrast, in the year ago period, Ford reported an earnings before interest and taxes loss of $632 million, which was the company’s first such quarterly loss since 2009 during the Great Recession. The company saw a net loss of $2 billion a year ago.
Stellantis, the company formed when Fiat Chrysler Automobiles merged early this year with Peugeot maker PSA Group, reported its first-quarter results Wednesday, too.
For the quarter, Stellantis reported net revenues of $41.2 billion (34 billion euros) since the merger on Jan. 17, and that if the merger had happened on Jan. 1, the company would have had net revenues of $44.45 billion (37 billion euros). That would have represented a 14% increase over the same period last year.
Stellantis lost 11% of planned production, or 190,000 vehicles, during the quarter and the company expects a bigger hit in the second quarter before things improve later in the year, due to the chip shortage.
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