Financial outlook sours for Detroit 3

Financial outlook sours for Detroit 3
Disappointing quarter stems from metal tariffs, overseas trouble

Not since the Great Recession have the Detroit 3 automakers given so bleak a financial outlook as they did last week, though unlike a decade ago, all three remain solidly profitable.
Michael Martinez Twitter Facebook RSS feed
Automotive News | July 30, 2018 – 12:01 am EST
DETROIT — Not since the Great Recession have the Detroit 3 given so bleak a financial outlook as they did last week in reporting their latest earnings. But unlike a decade ago, all three remain solidly profitable.

General Motors, Ford Motor Co. and Fiat Chrysler Automobiles all scaled back expectations for the remainder of the year as second-quarter earnings fell, and investors battered their stocks.

GM cited rising metal prices due to the Trump administration’s tariffs on imported steel and aluminum as it slashed its full-year outlook. FCA cited problems in China for cutting its own forecast.

Ford’s results might have been the most troubling. Its quarterly earnings tumbled 48 percent, and it lowered its guidance after CEO Jim Hackett said he was “very disappointed” by unexpectedly poor results in China and Europe. The automaker said it needs to undergo a global restructuring that could cost $11 billion over the next three to five years.

During Ford’s earnings call, Morgan Stanley analyst Adam Jonas hammered Hackett and CFO Bob Shanks for providing too few details on what that restructuring effort might entail and postponing a September investor conference, saying the company’s communications strategy “just isn’t good enough.”

Shares below $10

The next day, Ford shares fell below $10 for the first time since October 2012, and CFRA Research downgraded Ford to “hold” from “buy.” Barclays analyst Brian Johnson estimated that Ford might give up 30 to 40 percent of its revenue by exiting markets and cutting unprofitable vehicles.

Q2 net income
Ford –48%
FCA –35%
GM –2.8%
“We’re worried Ford does not have a good handle on either the operational or strategic levers of the global business,” Johnson wrote in a note to clients.

Ford said rising metal prices could cost it $500 million to $600 million this year, though the issue did not factor into the lower guidance because it expects to offset that cost in North America.

FCA was similarly unaffected, with CFO Richard Palmer saying the company had so far been able to escape most of the pressures from rising commodity costs, including steel, because of long-term contracts it holds, pushing the issue into 2019.

That wasn’t the case at crosstown rival GM, where CFO Chuck Stevens said the issue is expected to increase GM’s costs by $1 billion this year, double an earlier estimate.

Although GM sources more than 90 percent of its steel and most of its aluminum domestically, the tariffs of 25 percent on steel and 10 percent on aluminum are causing domestic suppliers to raise prices in response to market demand.

“The challenge has been greater than anticipated,” Stevens said during a conference call to discuss GM’s results, describing the market for those materials as “uncertain and volatile.”

Pickup problems

Each of the three automakers experienced some sort of challenge last quarter with the full-size pickups that typically generate a large percentage of their profits.

Ford took a $591 million hit from a May supplier fire that crippled F-series production for more than a week.

FCA said it spent $300 million in the second quarter — the same as in the first quarter — addressing issues with production of the redesigned Ram 1500. CEO Mike Manley said the production rate of the new-generation Ram had reached 85 percent, allowing FCA to incorporate the full line of optional trims and available powertrains, and that it would be at full strength in the fourth quarter.

GM also is in model-changeover mode with the Chevrolet Silverado and GMC Sierra, which has reduced production and earnings. Its redesigned 2019 full-size pickups are now being shipped to dealers and expected to have their first buyers in August, Stevens said, on track with previously announced plans..

Other automakers had gloomy financial news last week:

Hyundai Motor Co. posted its lowest quarterly net profit in five years and warned that lower demand in the U.S. and China would hamper its performance in the second half of the year.

Daimler said its second-quarter net profit fell 27 percent amid trade tensions, weaker pricing and delayed diesel vehicles.

Nissan Motor Co. reported a 29 percent drop in its quarterly operating profit due to foreign exchange rate losses, rising commodity costs, and lower sales in the U.S. and Europe.

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