Slowing market looms over Detroit 3 profits

Detroit’s Joe Louis monument Photo credit: REUTERS

DETROIT — The Detroit 3 posted relatively healthy second-quarter profits last week, but their revenues were essentially flat from a year ago, and trouble may be on the horizon as U.S. auto sales continue to cool.

General Motors’ net income dropped 42 percent to $1.66 billion, and it predicted lower earnings through the end of the year as it slows production to retool several plants and reduce inventory.

Ford Motor Co. reported second-quarter net income of $2.04 billion, up 3.7 percent from the same period a year ago because of a favorable tax rate. But Ford lowered its pretax profit guidance in what analysts say is a move by new CEO Jim Hackett to temper the expectations set by his predecessor.

And Fiat Chrysler Automobiles’ net income for the second quarter more than tripled to $1.36 billion. Its operating profit increased 15 percent to $2.19 billion, despite roughly flat shipments and revenue. But CEO Sergio Marchionne said he expects the market will soften through the end of 2017.

The source of most of the three companies’ profits continues to be North America. Ford generated 88 percent of its $2.51 billion pretax profit in the region, while GM made 94 percent of its $3.68 billion in adjusted earnings before interest and taxes there.

That reliance on U.S. sales has made many investors skittish even as the companies remain well in the black. Despite beating analysts’ expectations, all three companies’ share prices fell the day they reported their second-quarter finances.

Hackett: “No one” is satisfied.

For Ford, crafty work to lower its taxes masked the fact that it earned less money per vehicle sold. Ford’s second-quarter profit margin of 5.9 percent was down from 7.7 percent a year ago and well below GM’s 10 percent margin.

“No one here is satisfied,” Hackett, who replaced Mark Fields on May 22, told analysts and reporters. “We all know we have a lot of work to do.”

Ford said its tax rate in the second quarter drop-ped to just 10 percent, less than a third of the 32 percent rate it paid in all of 2016.

That’s because the automaker, in anticipation of corporate tax-reform efforts by Congress and the Trump administration, chose to bring foreign tax credits onto its U.S. balance sheet now rather than later.

Its pretax profit fell 16 percent in the quarter to $2.51 billion because of higher steel costs, an unfavorable foreign-currency exchange rate and lower U.S. sales, among other factors. Revenue rose 0.9 percent.

Stevens: Fewer vehicles in second half

GM, meanwhile, is working to cut back on inventories that have risen to their highest level in a decade.

“Clearly, second-half production is going to be lower than the first half because of the downtime that we anticipated, and clearly second-half earnings are going to be lower than the first half, which is totally consistent with the guidance we provided earlier this year,” CFO Chuck Stevens said.

GM, Stevens said, expects to build 150,000 fewer vehicles in the second half of the year than it did in the first. That would amount to a 15 percent decline vs. the second half of 2016, when it built 1.9 million vehicles, according to estimates from the Automotive News Data Center.

GM’s revenue from continuing operations fell 1.1 percent and could decline more in the second half because the figure is based on shipments to dealers.

Despite lower profits than its rivals, Marchionne insisted FCA was in the most “amiable position of all U.S. automakers” because of its lean inventory.

Michael Wayland contributed to this report.

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