GM Proved Doubters Wrong in 2017 With a Strong Crossover Lineup

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When General Motors (NYSE: GM) announced positive guidance in January 2017, market watchers were surprised by the upbeat tone, but the company's revamped lineup of SUVs and crossovers was timed perfectly to take advantage of changing consumer preferences. Though the sale of the European business to Peugeot worried some investors, GM finished the year stronger than ever.

In this episode of Industry Focus: Energy, show host Sarah Priestley and Motley Fool contributor and senior auto specialist John Rosevear discuss the sale of Opel and how the company re-engineered the traditionally more expensive SUV and crossover models to be more profitable.

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A full transcript follows the video.

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This video was recorded on Jan. 11, 2018.

Sarah Priestley: General Motors, which most people recognize for car brands that such as Buick, Cadillac, Chevrolet and GMC, had a much better year. I think they got much better press. How we use summarize 2017 for GM, John?

John Rosevear: I would summarize it by starting out a year ago, again, in January when they gave their guidance. I was actually at this press conference in Detroit. They surprised the room. They came out and gave very upbeat guidance for 2017. And there was a lot of peak auto talk, at least for this cycle, going on at that moment. We knew that Ford was going to guide to a lower year. And GM came out and said, "We think things are going to be pretty good in 2017, more or less like 2016." And we said, "Wait a minute, how's that going to happen?" And they said, "We have these new crossovers." They had completely renewed their whole line of crossovers across all four of those brands. The new products are very up to date, very competitive, and were engineered to be more profitable, which is another way of saying a little less expensive to build. [laughs] And with more appealing options that maybe took the top-trend levels upscale, and that's where a lot of money is made on products like this.

And they said, "Car sales are going to get clobbered. We think we can hold our ground on pickups, even though Ford has a newer pickup. We can roughly hold our ground on pickups, and we think the crossovers are going to make up, at least in terms of profit, a lot of the difference." And everybody said, "Really? We don't buy this." And the story of 2017 is, that's basically what happened. [laughs]

So don't sleep on Mary Barra. She's on things. She's a step ahead of a lot of people out there. That was one of the big stories for GM in 2017. Another huge one is that they gave up on trying to make money in Europe and sold the whole thing, lock, stock, and barrel, to Peugeot.

Priestley: I think that's probably a smart move. Years of not being able to generate a decent operating profit probably convinced them. Didn't they take a writedown of, was it $5 billion for the sale?

Rosevear: Yeah, there was a $5.4 billion one-time charge for costs, and of course, GM takes a step down, a couple of steps down, in the ranks of the world's biggest selling automakers, because they gave up 1.2 million vehicle sales per year, give or take, by selling this operation. But they had been trying since the late 1990s to make their European operations sustainably profitable. And they had almost gotten there, and then Brexit happened. And the exchange rates went wonky on them, and it became very hard, and I think Barra and people like Dan Ammann, GM's president who was an investment banker before he joined GM, and thinks very much in returns on investment, I think they said, this isn't worth it anymore, we'll sell it. And Peugeot was willing to buy it. And they more or less gave it to Peugeot. When new balance all the numbers and so forth, GM almost paid Peugeot to take it. Almost, not quite but almost. But, I think GM was glad to say, "We'll take a big one-time charge for this and then we'll just look ahead."

Priestley: And this is also, they can concentrate much more on the North American market, and a lot of the growth initiatives that they're starting there, isn't that right?

Rosevear: North America and China. They actually sell more vehicles in China now than they do in North America. But nowadays, GM senior management doesn't think in terms of total sales, which was GM's thing for years -- we need market share, we need market share. Now, they think in terms of return on invested capital. As an investor -- I own stock in GM -- I love that. They want returns on invested capital ideally over 20%. They're making good margins in China and North America, and we'll get into more detail on that in a moment. Those are the places where they want to spend their money. They think that -- some of the countries in South America have had recessions, places like Brazil and so forth. As those countries recover, they think they'll make good margins in Latin America. So they're continuing to invest there as well.

And then, even looking within North America, they're ratcheting down investments in sedans. They recently renewed most of their sedans. They think those can go a couple of generations without completely being reengineered from the ground up. So they won't have to spend a ton of money to have good sedan offerings in the market. They'll just update them over time. They just spent a lot of money renewing their crossovers, and those are huge sellers. Up next are the trucks. GM has new pickup trucks coming, and we'll talk about that when we talk about the year ahead. But the idea here to take away is, at GM, it's all about investing the money where they think it'll make the biggest returns.

John Rosevear owns shares of General Motors. Sarah Priestley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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