General Motors is still making good profits, but these profits are not from the electric vehicles or potential autonomous vehicle that investors are most concerned about.
General Motors reported better than expected results for the third quarter on Tuesday. According to FactSet's data, the company's current net profit was approximately $3.1 billion, a 7% decrease compared to the very strong performance of the same period last year, but higher than the average analyst expectation of $2.5 billion.
Although the ongoing strike by the United AutoWorkers (UAW) has impacted the company's operating profit by approximately $200 million, its net profit is still higher than analysts' expectations. The company is expected to incur an additional $600 million in expenses in the fourth quarter. After General Motors announced its results, UAW demanded a strike from workers at a factory in Texas, USA. Throughout the strike movement, UAW clearly linked its demands to the strong financial performance of the Detroit automaker.
General Motors announced record profits after the epidemic lockdown in 2020, thanks to American consumers buying cars at high prices despite limited car supply. For a long time, Wall Street has believed that in this highly cyclical industry, as product supply improves and car loan interest rates rise, manufacturers will have to discount while labor costs rise, and business will tend to normalize or even deteriorate.
General Motors' data shows signs of normalization: compared to a year ago, the overall profit margin of vehicles sold by General Motors has decreased, while the decline in the value of used cars has hit its leasing department. However, strong pricing power and limited discounts, as well as increased production due to the easing of supply issues, have offset these impacts. General Motors' revenue in the third quarter actually increased by about 5% year-on-year, setting a record for the same period.
The reason for the decrease in profits is the increase in costs, not just due to strikes. One of the reasons given by General Motors is the increase in the production of electric vehicles. Considering the development prospects of this new technology and the huge cost gap between Tesla and traditional Detroit automakers, investors are particularly sensitive to this.
Unlike Ford Motor, General Motors has not split its electric vehicle business, so investors are not aware of how severe its losses are. But the company is sending worrying signals. On Tuesday, the company abandoned its electric vehicle production target and stated that it is slowing down its growth plan. The company hopes to have time to integrate engineering changes to improve the profitability of its production platform. General Motors also needs to limit the risk of overproduction, which may force it to follow Tesla's price reduction path.
At present, General Motors still adheres to the goal of achieving a low to medium single digit operating profit margin for electric vehicles by 2025. The company proposed this disappointing goal in November last year, and Tesla began to significantly lower prices thereafter. Since then, the decrease in lithium costs has become a major advantage, and General Motors has now begun to accept the lower cost lithium iron phosphate battery material that it has long rejected. How the electric vehicle profit margin competition will unfold in the coming years will have a greater impact on General Motors' profits than any agreement reached between it and UAW.
Another technology with significant losses for General Motors is the autonomous taxi launched through its controlled Cruise business. Cruise, headquartered in the San Francisco Bay Area, suffered an operating loss of $732 million in the quarter, an increase from $497 million in the same period last year, while its revenue was minimal. On Tuesday, Cruise also had a rough day, after the California Department of Motor Vehicles suspended Cruise's autonomous driving license. Like Tesla, General Motors is also engaging with regulatory agencies in an attempt to prove that its autonomous driving technology is safe on public roads.
After another 2% decline on Tuesday, General Motors' stock's P/E ratio was slightly higher than four times, almost lower than any period after its bankruptcy restructuring. Considering that the company continues to achieve good performance and investors hold a relatively positive attitude towards Tesla's autonomous driving efforts, this seems a bit unfair to General Motors.
If General Motors and UAW reach an agreement, investor sentiment may improve. However, in order for General Motors' stock to achieve sustained gains, the company still needs to convince investors of its advantages in new technologies. The slowdown in the launch of electric vehicles may increase General Motors' profits next year, but it will weaken the company's position as a leader in the automotive industry.