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GM's Strong Quarter Points To Operational Discipline And Growth Potential

At this point in the global economic and automotive cycle, most auto companies find it difficult to deliver favorable year-over-year sales comparisons. GM is in that position - reporting third-quarter sales down 14.7% or 341,300 units compared to 2017. Underneath this headline number is a loss of 82,300 units expected from GM's exit from Europe, but 146,000 units from China, which tends to be the market of last resort for automotive unit growth and 91,000 units from the North American haven of truck margin.

It is with this backdrop that GM's quarterly delivery of $35.8 billion of revenue (an increase of $2.2 billion over 2017) and $1.6 billion of operating income (essentially flat with 2017) was received so well by Wall Street analysts. As Bank of America Merrill Lynch's John Murphy so poetically described it, "A Silver(ad0) lining in a cloudy auto landscape."

GM's North American operations delivered $27.7 billion revenue versus $24.8 billion in 2017. As noted above, unit sales are down, so how can revenue be up? It's product, as always, is key. It's product that demands price, as average transaction prices rose to a record $36,069 - approximately $800 over 2017.  This is impressive as incentives declined approximately $500 per vehicle. So, technically, mix or content pushed transaction prices up $300 per unit. For GM, that $500 per unit of incentive savings is not driven straight to the bottom line but gives it a cushion against the rising costs from commodity materials and tariffs. And it's product that demands fast showroom turnover. GM's wholesale unit deliveries to dealers increased to 843,000 (81,000 units over 2017) while U.S. dealer inventories - granted not a clean comparison since it does not include Mexican and Canadian inventories - fell 22,000 units. Only with vehicles spending less time on the dealer lots do deliveries go up while inventories come down. None of this is on cruise control. It is clear that with all the automakers chasing truck margins, competition is heating up, particularly in the small and compact utility markets.  Obviously, the electricity is still on in the house.

On the rewiring side, GM's earnings discussion, and analyst's questions spend an inordinate amount of time on Cruise given its zero attributed revenue and $400 million of cash used in operating activities through the third quarter. But its importance to the company's future warrants such time. And there had been recent news stories questioning GM's ability to deliver an autonomously operating vehicle fleet in 2019. GM reiterated its commitment to that goal, while chairman and CEO Mary Barra noted the engineering challenges they face and the likely roll-out towards volumes being over a period of decades.  She emphasized that "safety will be the gating factor for moving ahead" and that given the street complexity that the Cruise pilots face in San Fransisco that not all development miles are the same. That was a clear response to the question if GM was behind other competitors in autonomous development miles.

Garry McGuire