General Motors Corp. lost $286 million in the second quarter despite strong vehicle sales, suggesting the automaker is still being dragged down by a host of operational issues as it tries to engineer a comeback.
GM has lost money for three quarters in a row, just as it prepares to introduce many revamped car and truck models for 2006. It now seems likely, some analysts say, that the giant automaker will end the year in the red for the first time in at least a decade.
"The huge loss in North America was a surprise to me," said auto industry analyst David Healy of Burnham Securities. "It was twice as big as I expected, and that does not bode well for the rest of the year."
In a conference call with analysts, GM vice chairman and finance chief John M. Devine repeatedly blamed production cuts for the company's troubles, along with rising costs for materials and skyrocketing payments for health care. The company is in discussions with its unions over the structure of its health insurance benefits, which are expected to cost the company about $5.6 billion this year.
"Health care costs are up about $1 billion from 2004 to 2005 -- it's a significant drag," Devine said. "It's put North America in a significant crunch."
But it is the production cuts that seem to be creating the real profit problems in the short term. GM had been hurt by excess inventory last year, which is especially costly as interest rates rise. So the company slashed output by 11 percent in the first half of this year to reduce inventory and make room for 2006 models. But that reduction hurts profit because GM books its revenue when it delivers cars to dealers, not when cars are sold to consumers. When fewer cars are shipped, it means less revenue and lower profit.
GM's quarterly loss was 51 cents a share on revenue of $48.5 billion. In the comparable period a year ago, GM had a profit of $1.4 billion on sales of $49.3 billion. Wall Street did not seem surprised by the numbers; the stock fell 25 cents to close at $36.58 yesterday.
On top of production cuts, the automaker has added aggressive sales incentives this summer, offering employee-level discounts to regular buyers. By shaving $6,000 to $10,000 off the typical price of a vehicle, the company hoped it would not only sell more cars and boost market share, but also reduce inventory levels even further.
But the company ended up with a different kind of problem: It is struggling to keep enough cars and trucks on its lots to satisfy demand for certain models. "In many cases, we're actually short some of the '05 trucks," Devine said.
At local dealerships, the shortages are not just for trucks, and the dwindling inventory has meant more swapping of cars with other dealerships to get customers the models and features they want.
"We are short on all our inventory right now, especially passenger cars," said Josh Dworken, business manager for Curtis Chevrolet in the District.
Cars such as the Malibu and the new Cobalt are particularly hard to find, he said.
Some industry analysts worry that GM's price-cutting tactics may lead consumers to regard the cars as inferior to foreign brands, which are discounted less often. They stress that when vehicles have the right styling and right price -- the updated Ford Mustang, for instance -- discounts are usually unnecessary.
"That is a debate that's very much a hot topic in the industry right now: Do incentives buy sales in the short term, in exchange for, maybe, brand erosion in the long term?" said Bernard Swiecki, project manager for the Center for Automotive Research, a nonprofit industry research firm. "GM and other automakers have been saying for a good long while that they must wean themselves off incentives and get buyers to buy the vehicle on its own merits."
GM is hoping to move in that direction with its '06 models, just rolling out of factories now. With a new "value price" strategy, GM will try to simplify its pricing structure by offering lower sticker prices and fewer discounts while adding more features to the vehicles to convey greater value. It is an approach that excites dealers.
"We expect the new '06 models to help us be much more competitive with the import market in Washington," said Neil Kopit, director of marketing and advertising for Criswell Chevrolet in Gaithersburg.
But it could also be risky to change pricing strategies when the company is saddled with massive costs in other areas. For one thing, GM will have to explain that it is no longer offering big incentives because the base price has been lowered, said Jesse Toprak, a senior analyst with Edmunds.com.
"Consumer psyche is indexed to getting a 'deal,' " Toprak said. "What if the value-pricing strategy does not stick? What if customers still keep demanding the rebates they're used to? They'll have to start giving rebates again, only against a lower sticker price. Then they're doing that, after spending more money on what's inside the car. It is a gamble."
Staff writer Anjali Athavaley contributed to this report.
General Motors added aggressive sales incentives this summer.
"We are short on all our inventory right now," said Josh Dworken, business manager at Curtis Chevrolet in the District.