July 22, 2004

BY JEFFREY MCCRACKEN
DETROIT FREE PRESS BUSINESS WRITER

Writing loans, selling insurance and financing mortgages continued to be vastly more profitable for General Motors Corp. than making cars or trucks, as profits at the automaker jumped by almost 50 percent in the second quarter and its credit arm, GMAC, had its best earnings ever.

Profits for GM's automotive business did improve, especially in the United States, Canada and China -- as GM sales explode in that fast-growing Asian country.

GM was also able to hold the line somewhat on consumer rebates and incentives in North America, which cut into profits when automakers need thousands of dollars in incentives per vehicles to sell new cars or trucks.

But some storm clouds on the horizon darkened an otherwise upbeat report Wednesday.

Slowing the rate of profit-eating incentives contributed to much lower-than-predicted sales and left the automaker this month with a staggering inventory of 1.36 million unsold vehicles. GM admits this inventory glut will force it to increase incentives from the $4,215 per vehicle it averaged in the second quarter.

GM could opt not to increase incentives, but would then be forced to cut production at its assembly plants -- a move the company is loathe to do because that too would harm profits and leave it paying thousands of hourly UAW workers not to work.

The quandary leaves GM and the Wall Street financial community that covers it less optimistic about the second half of 2004 than they were at the start of the year. GM on Wednesday gave Wall Street guidance on the third quarter, guidance that was lower than Wall Street expected.

John Devine, GM's chief financial officer, admits the bloated inventories will force GM's hand when it comes to incentives.

"Our inventories are high so we expect pricing to be tough in the second half of the year," said Devine. "We've got a lot of '04 models sitting out there and we are starting to build our '05 models."

Devine said July auto sales are off to a good start after a weak June, which Devine called "a lousy month." GM and Ford Motor Co. both had double-digit drops in U.S. sales in June. Devine added that incentives, such as cash-back rebates and low-interest financing, are up for July.

GM's second-quarter earnings rose to $1.34 billion, or $2.36 per share, up from $901 million, or $1.58 per share, for the same period a year ago. GM came in at the top of end of Wall Street forecasts, which predicted the world's largest automaker would make between $2 and $2.45 per share.

Almost two-thirds of GM's overall profit came from GMAC, which continues to exceed even GM's rosiest forecasts. GMAC posted profits for the April-to-June period of $860 million, up from $834 million a year ago. Most of that came from new auto loans, financing commercial and residential mortgages or selling insurance on property or automobiles.

Wall Street finds GM's reliance -- or overreliance -- on GMAC disconcerting. GM stock fell 25 cents to close at $45.35 a share Wednesday. GM shares hovered around $54 at the start of the year, but have declined steadily since.

Wall Street analysts said they'd like to see GM -- as well as Ford -- make more money from selling cars and trucks. Ford is even more dependent than GM on its credit business, getting about 77 percent of its profits from there.

"I think at both GM and Ford the reliance is a general concern. If you buy the stock of these companies, it's like you are buying a finance company that comes with an auto piece attached," said Daman Blakeney, an equity analyst for Victory Capital Management, which manages about $50 billion for investors. "They are supposed to be selling cars and making money at that."

Worldwide, GM's profits on the sale of new cars and trucks rose to $529 million, up from $140 million a year ago. In North America, GM earned $328 million, up from $83 million a year ago.

GM sales for the quarter grew 7 percent to $49.1 billion, up from $48.3 billion a year ago, largely because it sold more vehicles in Latin America and the Asian Pacific.

GM continued to struggle in Europe, which has been a sore spot for years. GM had quarterly losses of $45 million, compared with a loss of $3 million a year ago. Devine said sales improved in Europe but GM's costs were too high, a signal GM may be preparing for more cuts on the continent.

"Europe continues to be very disappointing and unacceptable," said Devine, who had hoped his company would break even or make a little money in Europe for 2004.

"We're gonna have a loss, a significant loss there for the whole year," he said.

Overall, Devine struck a more cautious tone than he did at the beginning of the year, when he and other GM executives expected stronger auto sales, improved market share and slowing incentives. Overall sales have held strong, but GM's share of the industry is down and incentives are headed up again.

"I think on the margin, he's not as optimistic as he has been in the past," said Blakeney. "The whole environment is more challenging for GM. Their trucks are one year older. There is more competition. Interest rates aren't as favorable as they were."

Devine said GM still thinks it can make $7 per share, or about $3.95 billion for 2004, compared with $3.8 billion a year ago.

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