http://www.freep.com/money/autonews/webgm14e_20050114.htm
Health care is pothole in GM's '05 profit path
January 14, 2005
BY JEFFREY McCRACKEN
FREE PRESS BUSINESS WRITER
What a difference a year makes.
A year ago, confident General Motors Corp. executives told Wall Street investors and auto analysts the automaker was poised for higher market share and higher profits on its way toward hitting its long-running profit goal of $10 per share by 2005 or 2006.
Thursday afternoon, those same GM executives warned Wall Street the world's largest automaker will make much less in 2005 than it did in 2004 and also pushed back that profit goal to 2007, or later. That $10-per-share goal had often been considered somewhat pie-in-the-sky by Wall Street, but nonetheless GM had insisted it could be done by this year or next.
Now, GM expects to earn between $4 and $5 a share in 2005, which would be a drop of about 30 percent from the range GM has for 2004.
GM is especially skeptical about North America -- where it is projecting profits will tumble by half or more, to the point the automaker expects to make less here than it will in Asia. That hasn't happened since GM started breaking out Asia-Pacific profits in 1998.
The primary cause for GM's new assessment one year later: rising health care costs.
The automaker, which has been lamenting for years the cost of providing health care to its 1.1 million employees, retirees and other dependents, said its health care expense will jump about $1 billion in 2005.
GM Chief Financial Officer John Devine said the main problem for GM was the rising cost of prescription drugs.
"What's going on? In a word, or two words, drug costs. That's the most pressing issue for us," Devine said.
GM projects it will spend about $5.6 billion on health care in 2005, up from $5.2 billion in 2004 and $4.8 billion in 2003.
The real expense is the cost to GM for all the retiree health care spending yet to come.
The automaker, much like Ford Motor Co. or any other large company with a lot of retirees, must set aside money for all the future health care needed for current retirees and those yet to come. That expense will jump $1 billion, said Devine.
And it's that expense, almost by itself, that GM thinks will knock its profits in North America to the lowest they have been in several years.
GM said it would still make $6-$6.50 per share in 2004, which is about what Wall Street expects from it. But that amount is lower than what GM was predicting just six months ago, $7 a share. GM is to announce official 2004 results on Wednesday.
Wall Street reacted to the news by selling off GM shares. The sell-off was especially sharp after 3 p.m. when GM put out a news release spelling out some of the less-rosy numbers.
GM stock fell 2.8 percent on Thursday or $1.07 to close at $37.32. A year ago, GM shares traded at $53.33.
Automakers and suppliers often give their forecasts the week before the North American International Auto Show opens to the public.
GM's less-than-rosy view for 2005 was echoed earlier in the day by several suppliers, especially those like Troy-based Delphi Corp. and Detroit-based American Axle & Manufacturing Holdings, which get more than 50 percent of their sales from former owner GM.
These suppliers -- and plenty of others around metro Detroit -- are plagued by some of the same problems as GM, such as the aging of GM's full-size truck lineup. GM's full-size trucks, an industry powerhouse since 1999, are now getting old compared to competitors like the Ford F-series and won't be redesigned until 2006 and 2007.
This lineup, which is off a common structure known within auto circles as the GMT-800 platform, includes stalwarts such as the Chevy Silverado, Chevy Suburban or Cadillac Escalade.
History shows that when cars or trucks enter their last year sales either fall off rapidly, pricey incentives are needed to move them, or both.
GM's concerns in 2005 extend well beyond health care or aging trucks. There is Europe, for instance, where GM has been unable to turn a profit for several years. It has launched several restructuring efforts and large-scale job cuts, which have trimmed costs, but sales in Europe have never gotten to projected levels.
The automaker had hoped to break even there in 2004, but will instead lose millions. For this year, the goal is to keep losses in Europe to $500 million.
"Some of these things, like health care, are beyond our control, but some are within our control, like GM Europe," said GM Chairman and CEO Rick Wagoner.
Even an area of the world that GM has been pointing to with optimism -- China and the Asia-Pacific region -- is projected to post lower earnings in 2005 than in 2004. The automaker still expects profits from there -- in fact, higher profits from that region than North America -- but nonetheless down from last year.
The brightest spot for GM is its credit arm, GMAC, which continues to post record profits by handling things like auto loans and mortgages.
No longer does GMAC simply make a little more money than GM's automotive operations, it's now projected in 2005 to triple or quadruple the earnings GM gets from every car and truck it sells around the world.
GM expects GMAC to post profits of at least $2.5 billion in 2005, in line with what GM expects from the financial giant in 2004.
By comparison, GM expects to make only $500 million from selling cars and trucks in North America -- an amount that's expected to be wiped out by the $500-million loss in Europe.
GM then expects to make about $600 million in Asia-Pacific and $100 million in Latin America.