Hobbled by chips and other shortcomings, GM profit falls 40% in the second quarter

DETROIT (AP) — General Motors’ second-quarter net income fell 40% from a year earlier as shortages of computer chips and parts cut factory output and reduced the company’s U.S. sales. more than 15%.

The Detroit automaker earned $1.67 billion from April to June, in part because it was unable to deliver 95,000 vehicles because they were built without one part or another. A year ago, he made $2.79 billion.

Although the company said it is bracing for an economic downturn, it stuck to its previous full-year earnings guidance.

Unlike Walmart, which lowered its earnings forecast for the year on Monday and said consumers are cutting back on discretionary spending, GM said demand for its vehicles remains strong.

“Right now, we can’t build enough full-size trucks and SUVs,” CEO Mary Barra told analysts on Tuesday. “A lot of these vehicles, we have customers waiting for them.”

And even as pent-up demand begins to wane, Barra said GM still has to build inventories closer to normal levels. The company has only a 10- to 15-day supply on dealer lots, when automakers used to aim for 60 days. Barra said GM will restore inventories, but not to traditional levels, as it tries to move more toward a customer-order model.

GM expects full-year sales to dealers to increase 25% to 30% from last year as semiconductor supply improves throughout the year and into 2023.

But it is not certain that the year will go exactly as planned. Barra said there are economic concerns, so GM is taking steps to manage costs, including cutting discretionary spending and limiting hiring to critical positions needed to support growth. “We have also modeled many recession scenarios and are prepared to take deliberate action when necessary,” Barra said in a statement.

Chief Financial Officer Paul Jacobson said the company has already started phasing out vehicles that were made without some components and would sell them all before the end of the year.

He said the company was restructured years ago, so he doesn’t anticipate layoffs like Tesla, Rivian and other automakers. Crosstown rival Ford is reportedly considering cuts in salaried workers to help finance the transition to electric vehicles.

Despite the profit drop, GM held its full-year net income guidance steady at between $9.6 billion and $11.2 billion. The company still expects pre-tax income of $13 billion to $15 billion.

GM shares fell 2.4% in early trading on Tuesday.

The company reported an adjusted profit of $1.14 per share, below Wall Street expectations of $1.27. Revenue for the quarter rose 5% to $35.76 billion on strong pricing, beating estimates of $33.9 billion, according to FactSet.

JD Power estimates that the median sales price of a new vehicle for the first six months of the year reached nearly $45,000, a record that is 17.5% higher than a year ago.

Like other automakers, GM has been forced to slow down its factories since the end of 2020, largely due to a global shortage of semiconductors, but GM was hit particularly hard in the second quarter.

GM earned $2.3 billion before taxes in North America, its most profitable market, a drop of 21% from a year earlier. The company said strong demand, coupled with production cuts, continues to limit dealer inventory.

The company reported a $100 million loss of capital income during the quarter from its China joint venture, largely driven by pandemic-related lockdowns. But GM said production began to pick up in June.

The company’s liquidity, measured by available cash and credit lines, fell more than 10% from the end of the year to $33 billion.

Jacobson said the cash burn was temporary, largely caused by the timing of expenses, including increased capital investment. The company entered the quarter thinking it would produce more vehicles than it did, he said. “Essentially all of those vehicles will come back in the second half,” he said.

More patience will be needed before GM shares, which are down more than 40% this year, turn around, CFRA analyst Garrett Nelson wrote.

“We now see full-year results sitting at the lower end of the guidance as it struggles with inflation, supply chain issues and weaker volumes than a year ago,” Nelson wrote.

Also Tuesday, GM announced that it has commitments for all the raw materials needed to reach its goal of building 1 million electric vehicles per year by the end of 2025.

The company also said it has an agreement with LG Chem to supply nickel, cobalt, manganese and aluminum to make cathodes for electric vehicle batteries. LG Chem will supply more than 950,000 tons of material over the next eight years. The two companies will explore a North American cathode materials production facility by the end of 2025, they said in a statement.

GM also announced a contract with Livent to supply battery-grade lithium hydroxide from a brine operation in South America for a six-year period beginning in 2025. The Philadelphia company’s lithium will also be used in cathodes.

Cathodes are the negative terminal of a battery.

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