General Motors is starting to pull ahead of itself. The car maker seems to have avoided the potholes that Ford hit recently in Russia and Latin America. Now, though, Chief Executive Mary Barra is promising bumper margins over the next few years. Those are possible but would require sales or pricing power that GM hasn't yet demonstrated -and a lack of geopolitical risk, which it cannot control.
Barra's goal is to crank out a 10 per cent pre-tax margin for the company as well as its North America unit. Ford has been doing the latter for some time. It gained a decent amount of pricing power by offering the right products - particularly small cars with good gas mileage - at the right time.
GM plans to beef up its US margins in two years by putting expensive bells and whistles on cars and entering new market segments. That sounds smart, but is hard to achieve in an industry where sales are peaking and competition is fierce. Even Ford reckons its profit will drop slightly for the next year or so.
Barra doesn't expect the overall company to generate 10 per cent margins for at least another six years. But GM President Daniel Ammann made a good case on her behalf at the car maker's global business update. He mentioned, for example, that 60 per cent of the global automobile industry's profit comes from just the 14 per cent of sales accounted for by trucks and luxury vehicles. GM is strong in the former and making a big push in the latter.
But he also pointed out that a lot of the growth will come from emerging markets, where making money is hard, and China, which is starting to mature. And, those regions are prone to geopolitical pressures that can whack earnings. Ford's problems in Russia and Latin America may lop at least $1 billion off pre-tax profit this year. Barra can at least be thankful her company dodged those issues, but there's still plenty of reason for caution.
