General Motors on Wednesday reported sharply lower adjusted operating profits for the first quarter.
Photo: rebecca cook/ReutersCar makers’ acute vulnerability to a crisis has been on vivid display in first-quarter results this year. As the immediate funding emergency created by the Covid-19 shutdowns abates, the worries will change but won’t disappear.
U.S. auto makers started shutting down U.S. production on March 18, less than two weeks before the end of the quarter. But that brief period of stasis came at a high cost. On Wednesday, General Motors reported adjusted operating profits of $1.2 billion for the first quarter, down from $2.2 billion in the same period of last year. That was actually a strong result compared with its Detroit peers: Fiat Chrysler barely broke even, while Ford Motor slipped into the red.
All three companies reported cash outflows. Stay-at-home orders froze sales to dealerships even as they continued to pay suppliers for parts. The unwinding of working capital was particularly ferocious at Fiat Chrysler, which on Tuesday said outflows in the quarter totaled $5.5 billion. GM got off surprisingly lightly with outflows of just $900 million.
This working-capital effect, combined with the limited margin for error imposed by substantial fixed costs, exaggerates the performance of auto makers in both downturns and upturns. Such an operationally leveraged business model is all the more unfortunate because vehicle sales are infamously cyclical: In bad times, consumers defer purchases.
Given the havoc caused by just a couple of weeks in March, April must have been an extraordinary ugly month for Detroit. Companies spent the month raising cash: Ford sold bonds worth $8 billion; Fiat Chrysler opened a $3.5 billion bridge credit facility; even GM, in a sign that its first-quarter resilience may not tell the full story, extended a $3.6 billion facility.
The companies’ access to funds—which follows aggressive support for credit markets provided by the U.S. Federal Reserve—paired with a gradual recovery in sales through April have done much to restore investors’ confidence in the sector. They now seem to be looking beyond a disastrous second quarter to a robust second half.
There are three big reasons for caution. Above all, visibility on the road to recovery is low. Some hope that social distancing will buoy vehicle use at the expense of public transit. But against a backdrop of high unemployment, that may lift the secondhand market more than the market for new cars, which is roughly one-10th of the size. A 2009-style cash-for-clunkers program would make a difference, but Washington isn’t there yet.
Second, the industry’s success in raising liquidity over the past six weeks will turn into a burden on its balance sheet. The debt piles of GM and Ford both more than doubled in the first quarter, even before April’s actions.
Finally, this crisis may play out very differently for different players. In the first four months of the year, Ford lost almost 7 percentage points of market share in full-size pickup trucks—a particularly lucrative segment for Detroit—to GM and Fiat Chrysler, according to an analysis by brokerage Jefferies. This may also explain the poor first-quarter performance of Ford, the sector laggard of recent years. In a crisis, the weak tend to fall even further behind.
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