Home was where the hemorrhaging happened three years ago when two Detroit automakers headed for bankruptcy and a third suffered record losses. Now North America has become a money machine for the Detroit Three, which earned $4.5 billion there in the first quarter on surging U.S. sales.
General Motors Co., Ford Motor Co. and Chrysler Group LLC exceeded estimates with first quarter net income that totaled $3.2 billion. The most pleasant surprise was healthy North American operating margins of 11.5 percent at Ford, 7 percent at GM and 4.5 percent at Chrysler. Even combined losses of $405 million in Europe for GM and Ford were better than analysts anticipated from a region in an intractable financial crisis.
Such pleasant surprises would have been unimaginable in 2009 as GM and Chrysler filed Chapter 11 and Ford was coming off $30 billion in losses in the three previous years. Now with gasoline prices approaching $4 a gallon, U.S. car buyers are embracing fuel-efficient new offerings, such as the Ford Focus, Chevrolet Cruze and Chrysler 200. And Chrysler and Ford predict better days ahead as they roll out more new models this year.
“The indications for the remainder of the year continue to be absolutely positive,” Chrysler Chief Executive Officer Sergio Marchionne said on an April 26 conference call. Chrysler introduces the Dodge Dart compact car this quarter and the company is “expecting great volume” from that model through the rest of the year, he said.
New Malibu, Fusion
GM is introducing a redesigned version of its top selling car, the Chevy Malibu, which gets up to 37 miles (59.5 kilometers) per gallon in highway driving. And Ford has new versions of its Fusion family car and Escape small sport-utility vehicle about to debut.
“Those two product launches are extremely important,” Bob Shanks, Ford’s chief financial officer, said in an April 27 interview. “By the way, they will be profitable as well, which is really important.”
Making money on new models might sound obvious, but it’s a relatively new concept in Detroit. Throughout most of the past two decades, GM, Ford and Chrysler made most of their money on SUVs and trucks. Cars were loss leaders that they put out mostly to comply with U.S. fuel-economy regulations. That’s the business model that broke down so spectacularly when gas prices soared in 2008 and car buyers turned away from the big rigs Detroit depended on to make money.
Now with gas prices high again and U.S. auto sales still running at a rate 10 percent slower than 2007’s, GM, Ford and Chrysler are posting some of their best North American earnings. Ford, for example, had pretax operating income of $2.1 billion in North America in the first quarter on sales of 651,000 vehicles. Ford earned the same amount in the first quarter of 2004, when it took sales of 1 million vehicles, most of them trucks and SUVs.
“What both GM and Ford have shown is the ability to be profitable at unusually low levels of auto sales in North America,” Peter Nesvold, an analyst with Jefferies & Co., said in an interview. “Both companies have fully transitioned away from the dependence on SUVs and to some degree pickups. So both are thriving even when small cars are sort of what’s in demand.”
Detroit’s new formula for making more with less may help GM and Ford find a way to make money in Europe. Each did better than estimated by holding the line on prices in Europe, where many automakers are deeply discounting to try to attract business. Ford’s $149 million loss was less than the $190 million or more it had warned it might lose. GM’s $259 million loss was below the $410 million deficit Wall Street projected, said Brian Johnson, an analyst with Barclays Capital.