GM Cruzes to first-quarter profit of $3.2B
Thursday, May 5, 2011
DETROIT (AP) — GM is on Cruze control.
General Motors introduced the Chevrolet Cruze last October as its answer to the Toyota Corolla and other small car rivals. The timing couldn’t have been better. Gas prices have risen nearly 50 percent since the car hit the U.S. market. And sales of the Cruze worldwide are at 600,000, making it one of the most successful car launches in years.
It’s the biggest example of GM’s strategy to build better small cars, a market it ceded to the Japanese for years. While trucks and SUVs still provide much of its profit, GM is banking that higher fuel prices will drive customers toward smaller models. The company plans to launch its first compact Buick and the subcompact Chevrolet Sonic later in the year.
The strategy is showing signs of paying off. GM reported its best profit in more than a decade on Thursday. As gas prices marched toward $4 in the first quarter, the Cruze and crossovers like the Chevy Equinox helped GM earn $3.2 billion.
By contrast, it lost $4.4 billion in the summer of 2008, when gas prices last spiked over $4 and the company had a paltry selection of cars with good gas mileage.
Nearly half of GM’s latest profit came from selling its stake in an auto parts company. But it still made $1.7 billion by offering fuel-efficient cars that people wanted to buy.
The Cruze was a big contributor, with sales of more than 50,000 in the U.S. alone during the quarter. Its worldwide sales doubled. It gets better mileage than its predecessor at 36 mpg on the highway. It’s far quieter, handles better and has a plusher interior than previous GM compacts and even Japanese competitors.
In March, those qualities helped it break into the list of America’s 20 top-selling vehicles. And its April sales passed the Corolla, the best-selling compact for years.
Chief Executive Dan Akerson says GM’s revenue in North America rose 15 percent because of the Cruze and other fuel-efficient models. GM won’t say how much it makes on each car, but Akerson says customers are paying $3,000 more for the Cruze than its predecessor, the Chevy Cobalt.
“Traditionally, they didn’t make money on small cars, or any car. But it’s a whole new world,” says Rebecca Lindland, an industry analyst for the consulting firm IHS Automotive.
GM also made money on the Equinox and Terrain crossovers, SUV-like vehicles that are more efficient because they’re built on car platforms.
With front-wheel-drive and four-cylinder engines, they get 32 mpg on the freeway. Their prime competitors, the Toyota RAV4, Honda CR-V and Hyundai Santa Fe get 28, while the Kia Sorento gets 29.
Customers want the models so badly that GM doesn’t have to offer many discounts, something it had to do in past years to sell smaller vehicles.
Still, smaller models sell for much less than pickup trucks and SUVs. Those sales have started to slip as gas continues to rise.
Joe Phillippi, president of New Jersey-based AutoTrends Consulting LLC, says the profit for small cars and crossovers, even models with bells and whistles, are only in the thousands of dollars. But loaded-out pickups and SUVs make profits in the tens of thousands.
Investors worry that GM’s inventory of pickup trucks is too high and it may be forced to offer big discounts, Phillippi says. The company raised pickup production in the first quarter but said it would adjust in the second quarter if sales drop.
GM’s stock price fell $1.07, or 3.2 percent, to $31.97 on Thursday.
GM also said it will raise vehicle prices later in the year to help cover increases in raw material costs. Last month GM raised prices by an average of $123 per vehicle to make up for rising oil and metal costs.
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