Both General Motors (GM, Financial) and Ford (F, Financial) are extremely reliant on the U.S. market for their sales numbers and bottom-line profitability because, outside the U.S., they have neither the numbers nor the profitability to support their respective companies.
During the second quarter, General Motors' North America unit posted an operating income before taxes of $3.647 billion, and the group’s total operating income before taxes, which includes all regions, came in at $3.721 billion. It would be an understatement to say that General Motors is dependent on the U.S. market; it’s very much GM's bread and butter, not to mention the plate from which it's eating!
Since the fortunes of General Motors are directly related to how they are performing in the home market, let’s take a close look at how the company has performed during the first half of this year – and then see what the future holds for them.
GM's and Ford's current numbers
In the first six months of the year General Motors’ retail sales was up 1% with retail market share inching up by 0.4%, while Ford managed to move 1.353 million vehicles during the first half of the year, a 5% increase compared to the prior period. Ford’s exemplary performance was highly influenced by truck sales – more pointedly, its star performer, the F-series pickup trucks.
“Ford truck performance remains the standout for the first half of the year. The company sold 531,500 pickups and vans – a 13% gain versus a year ago. Truck sales were up 24% in June, driven by strong F-Series sales of 70,937 vehicles – a 29% increase versus a year ago and their best June sales performance in more than a decade.” – Ford
It would have been a disastrous first half for General Motors had it started losing market share. Fortunately, it seems to be holding its ground against an extremely aggressive Ford. Essentially, the war for market share between the two auto giants is turning to a truck war, with General Motors boosting discounts on big pickup trucks.
As you can see from the chart above, Ford nicely turned the tables on General Motors this year, easily surpassing General Motors' total sales of full-size pickups during the first half of this year. And General Motors is now dragging Ford into a price war to maintain parity with Ford’s sales numbers. In all likelihood, this will eat away at the margins for both companies during the second half of the year.
It must also be noted that General Motors' slowdown in overall sales numbers was due to the strategic decision taken by the company to reduce its sales to rental car companies, a segment that has significantly lower margins than retail customers. Ford has made no such decision and continues to push sales to rental companies. These are diametrically opposite strategies, and it all boils down to how much of a margin and savings you can get – and General Motors seems to prefer the higher-margin-lower-sales route, which is impacting its total sales numbers for this year.
As a result – and a validation of sorts of its strategy – of doing this, during the second quarter General Motors' operating margins for North America shot up to 12.1% from 10.5% a year before.
“Our retail-focused strategy is resulting in the highest share gains in the industry. Chevrolet is the fastest-growing full-line brand, and we expect that trend to continue as the availability of newly launched products improves in the second half of the year,” said Kurt McNeil, U.S. vice president of Sales Operations. “Our reduction in daily rental deliveries, disciplined incentive spending and well-managed inventories are showing real benefit in the residual values of our latest launched vehicles.” –GM
The final analysis
It would seem that General Motors and Ford are now divergent in their respective strategies to grow their highly penetrated home market. While the former is clearly after margin, the latter is focusing on sales – and is gaining ground on the back of truck sales.
Both companies are practically neck and neck when it comes to controlling the U.S. auto market. However, for now, Ford does seem to have the edge in terms of market share growth as well as revenue growth. I don’t expect General Motors to sit by and watch Ford closing that gap. It will be interesting to see what General Motors CEO Mary Barra has up her sleeves in the coming quarters.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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