Five Reasons GM Is Rebounding Faster Than Ford


The Big Three. We tend to think of the three domestic automakers–General Motors, Ford, and Chrysler–in lock step. And, yes, all suffer from common problems: aging infrastructure, outdated technology, overreliance on big trucks and SUVs, and huge healthcare and "legacy" costs that pump up the expense of every vehicle they make.

But the pace of change varies throughout Detroit–as third-quarter earnings reveal. Ford had a disastrous quarter, losing $5.8 billion, its worst financial performance in 14 years. And CEO Alan Mulally predicted more tough times ahead. Chrysler, the American arm of Germany's DaimlerChrysler and a success story until recently, posted its own $1.5 billion loss, citing flagging interest in big vehicles and steep discounts. GM bucked the trend. Overall, it lost $115 million, but it also posted record revenues and a tidy operating profit of $529 million, more than expected.

So why does GM seem to be turning itself around faster than its crosstown rivals? Several reasons:

GM tanked earlier, and bigger. GM lost $10.6 billion in 2005, a year when Ford earned $2 billion. The howls from investors forced GM to start addressing its problems in earnest, and results are starting to filter down to the bottom line. A deal with the United Auto Workers is supposed to shave about $15 billion in healthcare costs, for instance, including $6 billion this year. And an aggressive buyout program is helping GM pare its workforce, close factories, and approach its goal of 100 percent manufacturing capacity by 2008. Ford, by contrast, is essentially pleading for a fresh start. Mulally came on board less than two months ago and is still gauging the depth of his new company's woes.

An activist GM investor is cracking the whip. That would be billionaire Kirk Kerkorian, who owns nearly 10 percent of GM stock and is pressuring CEO Rick Wagoner to pull off a turnaround or hit the road. Kerkorian's right-hand man, Jerry York, abruptly resigned from GM's board earlier this month. But rather than letting Wagoner off the hook, that has arguably increased pressure on him. If GM doesn't speed up cost cuts and turn a profit, Kerkorian may gain enough shareholder support to nominate a new slate of directors less answerable to Wagoner, and perhaps oust the CEO.

GM is succeeding overseas. While China still represents a small portion of revenues, GM got a big morale boost recently when it overtook Volkswagen as China's top car seller. GM is growing in South Korea too, and its once-stalled Europe division is shaping up. Ford's Mazda division is strong, but overall it is losing money in Asia and in Europe.

GM's trucks are pulling their weight. Ford and Chrysler are rapidly losing buyers who are fleeing big vehicles, but GM actually sees an uptick in demand for its SUVs, as gas prices drift downward. That's largely because of a new lineup of full-size SUVs, like the Chevy Tahoe and GMC Yukon, that have earned plaudits from critics and buyers. GM may still have to limit production to keep from discounting the new merchandise, but that's better than the huge giveaways of past years.

GM's high end is holding up. The Cadillac luxury division has been a bright spot for GM, while Ford's luxury makes–including Lincoln, Mercury, Volvo, Land Rover, and Jaguar–have been money losers for years. Ford's "Premier Automotive Group," as it's called, lost $593 million in the third quarter, way worse than the $108 million loss from a year ago. Many analysts believe Ford needs to offload Land Rover and Jaguar and conduct major surgery on the rest of the group.

Despite the upbeat news, however, GM should be wary of celebrating. Rival Toyota is reaping record profits and pouring billions into new models, and racing toward a once-unthinkable milepost: displacing GM as the world's biggest carmaker. And regardless of pole position, GM still faces a series of barriers to sustained profitability. Its passenger car lineup remains weak, it is way behind on crossovers, and the company continues to burn an alarming amount of cash. GM might be leading the wayward parade in Detroit, but there's still a long way to march.

--Rick Newman