GM, future-minded, has nagging near-term challenges

DETROIT -- By the time her term as General Motors CEO ends, Mary Barra wants the automaker to be recognized as an undisputed technology leader rather than just an automaker and onetime ward of the federal government.

"That is my goal. That is what drives me," she said Monday during a Q&A at the CityLab urban advancement conference in Detroit.

GM has won some praise for a long-term vision that includes bold investments in electrification and autonomous driving technology.

But to fully change the narrative on GM, Barra will have to slog through some near-term operational headaches, the very type that landed GM in trouble a decade ago.

Wednesday's third-quarter earnings report could shed more light on those challenges, and how GM plans to navigate them.

Metrics such as sales, headcount and production capacity may begin testing the automaker's resilience heading into 2019 and beyond. Those are in addition to new challenges associated with GM's determination to lead the development and deployment of autonomous and electrified vehicles.

Both sets of challenges are headwinds Barra and GM's management team may want to address while the industry is level instead of on the decline. It's something Ford Motor Co. is undertaking with an $11 billion restructuring that includes reducing its salaried workforce of 70,000.

GM has a salaried workforce of 77,000 people, according to its 2017 annual filing. That's down from 90,000 a year earlier, before GM sold its European operations to PSA Group.

This year also marks the end of GM's plan to squeeze $6.5 billion in cost efficiencies from 2015 to 2018. It hasn't announced a new goal for after this year, but domestic headcount and plant utilization could be a place to start.

GM's manufacturing footprint may be the most daunting of the issues, as the company has the highest underutilization rate in the U.S. Of its 12 domestic assembly plants, five are operating on three shifts; three are on two shifts; and four are on a single shift.

The most underutilized factories include car plants in Bowling Green, Ky., Lordstown, Ohio; Detroit-Hamtramck and Orion Township, Mich.

While the future of the Bowling Green and Orion Township plants appears stable thanks to recently announced or implemented investments, Detroit-Hamtramck and Lordstown produce among the slowest-selling, domestically produced cars in GM's lineup.

GM argues the U.S. car market remains viable -- down 13 percent to 4.1 million through the first three quarters of the year in the U.S. But operating four plants that produce lower-margin vehicles on one shift is unsustainable for the long term.

GM could fill some of that capacity with new or redesigned crossovers, but only one of the company's current domestic crossover plants is operating with three shifts.

Low factory utilization is something GM will likely have to address during negotiations next year with the UAW.

The capacity issues are exacerbated by slowing sales in both North America and China -- the world's and GM's largest vehicle market.

Industry experts expect sales in North America to plateau following record levels, while China is slowing on weak underlying demand, pressure on automotive financing and unexpectedly slow economic growth.

"GM, like all autos, are facing strong headwinds -- rising interest rates, higher costs due to tariffs, higher commodity pricing, and an economic slowdown in China," said David Kudla, chief investment strategist for Mainstay Capital Management, in a note Tuesday.

China and North America represent the vast bulk of the company's sales and profits, while emerging segments such as EVs and autonomous vehicles cost the automaker billions.

That's not to say GM can't handle the traditional challenges and costs.

Despite lowering guidance earlier this year, the automaker has a sound balance sheet and expects to end 2018 with 9 percent to 10 percent North American profit margins; free cash flow of $4 billion; and earnings of about $6 a share. It also had a roughly $17.8 billion cash reserve to end the second quarter.

GM also has said it can remain profitable in the U.S. if the seasonally adjusted annual rate were to plummet again to between 10 million and 12 million units.

For that, credit GM's sales mix, as its crossover sales have surged and it's continuing to launch its next-generation pickup trucks.

Bank of America Merrill Lynch research analyst John Murphy, in a recent note to investors, said the "truck launch/ramp should provide upside" to GM in 2019, which may otherwise be "somewhat disappointing given ongoing industry pressures."

The next-gen pickups are expected to be followed by redesigns of GM's heavy-duty pickups and full-size SUVs over the next two years or so.

Overall, for the third quarter, analysts expect GM will report an earnings decline but an increase in revenue from a year earlier.

"GM management will need to convince investors the monetization of its Auto 2.0 will come to fruition in time to cover the post 'peak auto' slowdown of its core legacy business," Kudla said.

According to the analyst consensus on Yahoo Finance, GM is expected to report revenue of about $35 billion and earnings of about $1.25 per share for the third quarter.