GM’s losses in Europe hurt strong sales report

DETROIT — Strong sales in North America and China are generating big profits for General Motors. Now the company needs the rest of the world to play along.

GM's net income totaled $1 billion in the first quarter as it sold more vehicles at higher prices in the U.S. But the earnings fell 69 percent from a year earlier. The reasons: big one-time charges and high operating costs in Europe, and lackluster earnings in South America.

For GM to continue its rebound from bankruptcy three years ago, it needs Europe and South America to improve, especially if North American sales slow.

So far, the story of GM's comeback from near collapse has been North America, where the company earns most of its money, and China, where it sells its greatest number of cars. In North America, GM has slashed costs, introduced hot-selling cars and improved its reputation for quality. That success continued in the first quarter, when the automaker posted a $1.7 billion pretax profit in North America. It also did well in Asia, where it made $529 million in the first three months of the year.

But it's a different story in Europe, where GM lost $256 million, and South America, where earnings fell 8 percent to $83 million.

In Europe, GM's biggest cash drain, costs are too high and new products are needed. Prospects are poor as the economy slips into recession, scaring the middle class away from buying cars. GM has pledged to fix the troubled unit, but anything it does will be overshadowed by high unemployment and austerity measures to cut government debt in many countries.

GM hasn't released specifics about restructuring, and Chief Financial Officer Dan Ammann says there won't be one magic answer.

"I'm not sure there's going to be a big bang," Mr. Ammann said Thursday. "It's a series of actions that we're taking."

GM's costs in Europe are high because of contracts with powerful labor unions and laws that make closing a factory difficult. The future was so bleak just three years ago that GM tried to sell the unit, but the deal was scuttled by the GM board.

Tim Urquhart, a European auto industry analyst with IHS Global Insight, said GM has at least 20 to 30 percent more factory capacity than it needs in Europe.

The company has seven assembly plants there and an 8.2 percent share of sales. By contrast, rival Ford Motor Co. has five plants, including one in Turkey, and an 8.5 percent share.

Mr. Urquhart said that, ideally, GM would close one or two plants. But that won't happen right away. GM agreed to keep all European plants open until 2014 in a restructuring deal reached with unions two years ago.

"There's a lot of negotiation that needs to be done, a lot of brinksmanship that needs to go on with the unions," Mr. Urquhart said.

Meanwhile, GM can try to squeeze out profits by making factories more efficient and lowering production costs in other ways. But until it cuts factories, the company is "rearranging the deck chairs on the Titanic," Mr. Urquhart said.

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