The Big 3 put together their most profitable quarter ever in the second quarter ended June 30, shrugging off weaker car sales, higher incentives and strikes at General Motors and Chrysler Corp.
Ford Motor Co., which avoided labor problems, had 'the most profitable quarter ever in the auto industry,' bragged CFO John Devine.
As a group, the Big 3 earned about $5.1 billion in the quarter, about 1.5 percent better than a year ago. Ford and GM reported earnings Wednesday, July 16. Chrysler reported July 11.
The second quarter is typically the most profitable quarter of the year. That should hold true this year, too, Devine said.
General Motors also had a record quarter, not counting spun-off businesses like Electronic Data Systems Corp., said CFO Mike Losh. GM made about $2.1 billion for the quarter. That was only about 1 percent better than the year-ago quarter, but higher than Wall Street forecasts.
Reflecting a $490 million hit for strike-related production losses, net income for North American Operations fell 33 percent from a year earlier. However, one-time gains from the sale of assets offset nearly the entire amount for the corporation.
STRIKE CUTS PROFITS
Chrysler earlier reported that the effects of a 29-day strike at an engine plant in Detroit cut its second-quarter profit roughly in half, to $483 million.
Ford earned just over $2.5 billion in the second quarter. In the 1980s, that would have been a year's average profit for Ford.
On the down side, Ford said credit-quality problems continued, but with some improvement in delinquencies. Devine also said residual values fell short of projections on two-year leases.
Ford pioneered the short-term lease business, and Ford Motor Credit Co. has the highest lease penetration of the Big 3, an average of about 27 percent of retail sales.
'We have demonstrated we can improve our profitability, even without volume growth,' Devine said, addressing one of Wall Street's biggest concerns about the industry. He pointed out that while Ford's unit sales were up 3.8 percent, the second-quarter profit was 33 percent higher than a year ago.
Ford got there by cutting costs, mostly by adding up relatively small savings on individual material costs, Devine said.
'There are no big bangs. If we had those, we used them long ago. The reduction in material costs is the biggest part, and there are design savings ... investment efficiency, manufacturing efficiency. None is very enormous,' he said.
Ford began 1997 with what now looks like a low-ball cost-cutting goal of $1 billion. Devine said the company achieved $1.8 billion in cuts in the first half, and should exceed $2 billion this year.
That makes it sound as if costs were $1.8 billion lower than the year-ago quarter. But it's more complicated than that, Devine said in a follow-up interview in New York last week.
In fact, the 'total costs and expenses' line in Ford's quarterly report dropped only $538 million for the half.
The higher '$1.8 billion cost savings' figure is more of a barometer, adjusted for the fact that costs declined while unit volumes increased, Devine said. 'That's not $1.8 billion you can spend somewhere else,' he said.
Nevertheless, the first and second quarter of this year marked the first time in modern history - 'You'd probably have to go back to the Model A,' Devine said - that Ford's costs declined vs. a year earlier, as opposed to a decline in the rate of increase.
GM also cited cost-cutting as the key to maintaining earnings, even though volume was lost to the strikes. 'The important thing is, we continued to improve the cost picture,' Losh said.
Savings include lower per-unit costs to build a new generation of products being introduced this year, plus a smaller work force for GM's North American Operations.
Compared to the year-ago quarter, North American Operations employment was down 13,000 to 243,000. Losh said attrition accounted for the smaller work force. 'We have not laid any people off,' he said.
Higher incentives offset some of the gains.
GM said retail incentives for North American Operations reached $1,060 per unit for the quarter. That should be the highest level of the year for GM, Losh said, since GM hopes the new models being introduced for the 1998 model year will not need that support.
Chrysler incentives averaged $980 for the quarter. Ford refuses to disclose its per-unit incentives, but its marketing costs increased as a percentage of sales from 9 percent to 9.2 percent, including incentives and advertising.
Ford expects sales in the second half to be slower than the first half, but still decent. Devine stuck with a 1997 forecast between 15 and 15.5 million units, including medium and heavy trucks.
The annual selling rate for the first half was about 15.3 million, he said. That translates to about 15 million light vehicles. Devine said the second half should be in the 'low 15s.' He said Ford has not made an official 1998 forecast, but he expects 1998 to be 'a repeat of this year.'