GM net profit doubles in Q3 but Brexit hampers its return to profitability in Europe

October 27, 2016

General Motors (GM) reported on Tuesday 25 October that net income more than doubled in Q3 to $2.77 billion (€2.54 billion). As stated by CEO Mary Barra, this was ‘led by strong performance in the US and China. However, with demand slowing in China and the US market at record levels and facing minimal growth, if not a correction, investors are increasingly looking to a return to profitability in Europe. 

The problem is that GM’s target of breaking even in Europe in 2016 is in jeopardy following the Brexit vote, GM’s chief financial officer warns. Chuck Stevens says that the business has taken a $100 million (€92 million) third-quarter hit from the sharp decline in the value of the pound since the UK voted to leave the European Union. Third quarter European losses totaled $142 million (€130 million), although this is a marked improvement on the $231 million (€212 million) loss in Q3 2015. Stevens said: ‘The pound sterling has deteriorated further, which creates another headwind for us. Breaking even this year is going to be very, very challenging. We're going to take a look across the business and take whatever action is necessary to get the business back on track.’ 

GM has not made a profit in Europe in more than 15 years and is more adversely affected than most OEMs by the loss in the value of the pound because a larger share of its cars in the region are sold in the UK. For example, between January and September 2016, 28% of its volume sales in western Europe were in the UK whereas total car sales in the UK in the first nine months of 2016 only accounted for 20% of car sales in the region. 

Stevens said GM raised vehicle prices in the UK by 2.5% on 1 October. Although this move seeks to bolster the company finances, the reality is that this increase will not be fully passed on to the consumer as the majority of cars in the UK are financed and monthly repayment rates are unlikely to increase to this extent. Although the UK car market has held up well since the Brexit vote in June, reports suggest that consumer attitudes to car-buying have not changed and orders should therefore remain healthy for the time being. The weakness of the pound looks likely to prevail for the foreseeable future and GM – and its investors – certainly need to look beyond the UK to bolster their finances, at least in the short term.

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