GM and Ford face challenge to plot course to profitable growth

The distinctive roar of high-performance car engines filling the air in Milford, Michigan, is emblematic of one aspect of the US car industry.

The sound - from the latest Chevrolet Corvette and Cadillac ATS being tested this week on the high-speed track at General Motors' Milford proving ground - is testament to GM's ability to compete at the very top of the world's car markets.

But inside one of the buildings in the sprawling GM facility, investors and analysts were on Wednesday hearing a great deal about the less glamorous side of the business from Mary Barra, chief executive, and other senior managers.

GM's main markets in North America and Europe are expected to grow only 12 per cent between next year and 2030, as developing countries and small, inexpensive cars become increasingly important to western carmakers. Industry-wide figures project that demand in China is expected to grow 33 per cent over the next 15 years, and other emerging markets by 55 per cent.

The challenge for GM - and rivals led by Ford - is to explain how they will produce profitable growth. The western markets where GM is most profitable are barely growing, while the emerging markets are barely profitable.

Dan Ammann, GM's president, did little to avoid the scale of the challenge the company faces in emerging markets, particularly those outside China.

"The trouble is that these markets tend for us and for others to be very difficult to do business in right now," he said at the company's investor day on Wednesday. "The old strategy was 'Let's run a legacy set of products for as long as we can get away with it, so that we can have a very low price point'. That strategy doesn't work any more."

The answers looked no easier when Mr Ammann pointed out to his audience how much of the company's profit comes from a small number of sales.

Luxury vehicles and trucks, including pick-ups and large sport utility vehicles, account for 14 per cent of global car sales but 60 per cent of the auto industry profits. "We're earning strong margins in both of these segments today," Mr Ammann said about luxury cars and trucks.

GM is planning to cut through its Gordian knot of problems by similar means to those outlined by rival Ford on Monday, and by Italy's Fiat Chrysler Automobiles in May.

All three carmakers hope that simple volume growth in emerging markets - along with the economies of scale that come from using common vehicle designs in many different countries - will boost profitability. The trio also plan to introduce the sports utility vehicles that have been the basis of their US profitability to other markets worldwide, including China.

In the luxury market, meanwhile, GM unveiled plans to push its Cadillac luxury brand in China, just as Ford announced plans to do so with its Lincoln marque.

GM took solace from the success its once-moribund Buick brand has enjoyed in China. "We will become a major player in this group, given all the tools that we have," Mr Ammann said of the leading luxury carmakers. "We're starting with an absolutely iconic brand. We have vehicles that are winning car of the year awards left, right and centre."

The company also plans a series of technical and business improvements. Mark Reuss, GM's head of product development, outlined steps to improve relationships with suppliers, make its engines more fuel-efficient and deploy new aluminium-steel alloys to ensure some key vehicles are lighter, including a new Cadillac sedan.

Ms Barra outlined some ambitious financial targets for the company, led by plans for a near doubling of its profitability. By early in the next decade, the company is seeking to reach profit margins of between 9 and 10 per cent at the level of earnings before interest and tax - compared with 5.5 per cent last year.

Michelle Krebs, analyst at autotrader.com, contrasted Ford's record for delivering on plans with GM's past failure to meet expectations.

"Now the challenge will be for CEO Mary Barra and her lieutenants to stay the course and hold everyone accountable for meeting those goals," she observed.

Referring to Alan Mulally, the retired Ford chief executive, Ms Krebs said: "That was how Alan Mulally turned Ford around, with consistency, continuity, focus and accountability.

"In the past, GM has not held people accountable and has zigged and zagged on various courses. Let's see if this team will crack the whip."

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