GM's Unrealistic Profit Target

At about the same time that General Motors (NYSE: GM) ran five ads during the Super Bowl, its management said the world’s largest car company has targeted profits of $10 billion a year for the next several years. The comments were made by Daniel Ammann, its chief financial officer, in a Wall Street Journal interview. It is usually a bad idea for large companies to make long-term forecasts, at least to investors and the press. Better to underpromise and overdeliver a business school tenet says.

The strengths that Ammann cites could easily be turned against it. The first is that its market share and pricing are strong in the U.S. That has made it the primary target of the largest manufacturers — Ford (NYSE: F) and Toyota (NYSE: TM). Ford already has proved it can do well in the U.S., and has since GM and Chrysler went into Chapter 11. After two rough years, Toyota’s plants are back online at full production. The Japanese quake of last March had idled some of them. America’s number three U.S. car company, Chrysler, is now its fastest growing. That is another challenge to GM’s plans. Perhaps just as great a danger to GM is the success of several niche firms. These include BMW and Mercedes at the high end of the market and Hyundai and Kia in the mid- and low-priced segments.

GM also says it can rely on China, the world’s largest car market. That plan has two barriers. The first is that the growth of the market for cars and light vehicles in the People’s Republic has slowed. The other is the GM no longer just competes with other foreign car companies in China. Local firms want to take market share from GM and have begun to bring on the manufacturing capacity to do so.

GM’s Achilles’ heel is its EU operation, Opel. Opel has not made it through a restructuring the way GM has in the U.S. There is still a battle between GM’s money-losing unit and local unions. And some EU nations are anxious to make sure GM keeps jobs within their borders. GM has a union problem in Europe, and it also has a political one.

GM’s CFO would have been better off saying that GM is a world-class car company with a bright future and left it at that.

Douglas A. McIntyre