GM loss widens in 2Q as U.S. sales fall

$286 million in red ink

company loses $1.1 billion in North American market

GM loses $286 million as U.S. sales fall


DETROIT - General Motors Corp. blamed everything from rising health care costs and steel prices to falling vehicle production for its third straight quarterly loss yesterday, as the automaker missed Wall Street expectations by a wide margin.

The dismal second quarter - on top of a first quarter in which the company posted its worst loss in 13 years - caps a bad first half for GM, one that couldn't be saved even by the enormous success of the automaker's "employee-discount" sales incentive program.

GM lost more than $1.1 billion in North America in the second quarter, overwhelming its solid profits at its financing unit, General Motors Acceptance Corp., and at GM's operations in China, Europe and Latin America.

Overall, GM lost $286 million in the second quarter, or about 51 cents per share. For second quarter a year ago, GM made $1.4 billion, or $2.42 per share.

The company said yesterday that it has a plan for restoring profits in North America. It declined to provide the timing or specific goals of its plan, but said it would include reducing its manufacturing capacity by about 500,000 vehicles a year.

A drop that big is roughly equivalent to closing two plants. Plants can't be closed during a UAW contract, but can suspend production for months at a time.

"We have not put targets and we've not put dates on North American recovery plan, but believe us, we have those targets internally," said GM Chief Financial Officer John M. Devine.

GM was hurt at home by falling sales of full-size SUVs, including crucial profit drivers like the Chevy Suburban and the Cadillac Escalade.

Whether the reason is higher gas prices or that GM's full-size trucks and SUVs are perceived to have unattractive designs are slowing or requiring vastly higher incentives to lure in consumers.

The automaker's sales were boosted in June by the employee-discount plan, but Devine acknowledged that the now widely duplicated deal cost the automaker by raising its spending on profit-eating incentives.

"North America has a serious profitability problem," Devine said in a conference call with Wall Street analysts and reporters. "Health care costs are still a significant drag. It has obviously put North America in a serious crunch."

Then again, a year ago GM was building a lot more cars and trucks in North America and making several hundreds of millions of dollars doing it. Then, GM exceeded Wall Street expectations for the quarter. This time, Wall Street was projecting GM to break even, and the automaker substantially missed that mark.

Looking ahead, the next quarter looks equally bleak for GM. Health care costs will continue to rise, and GM's vehicle production is scheduled to be down again. The hope is that the company can finally make a profit in the fourth quarter.

The highest-profile portion of GM's recovery plan is its continuing negotiations with the United Auto Workers to reduce GM's health care spending on employees and retirees.

The UAW has said it will try to find a way to save GM money on health care, but any savings must be done within the four-year agreement that expires in late 2007.

Devine was pressed several times on the state of negotiations or when a deal might be reached, but he refused to give details. GM expects to spend about $5.6 billion in cash on health care this year.

"We are actively engaged in discussions with the UAW. The discussions with the UAW are continuing. As soon as we have something to report, we will," he said.

While GM has pointed to these talks as the source of potential savings, Wall Street experts are becoming increasingly skeptical. They say GM needs to cut in other areas, such as reducing its stock dividend.

"GM continues to highlight the need for UAW concessions to alleviate its health care burden. We continue to believe no concessions are likely in the near term," wrote UBS auto analyst Rob Hinchliffe.

"The UAW remains hesitant to `throw money down a hole' without sacrifice and commitment from other constituents. As we've said in the past, the closer GM gets to the launch of its GMT-900 trucks without concessions, the lower the likelihood in our view."

The GMT-900 is an internal name for GM's next generation of its full-size pickup trucks and SUVs. GM is hoping to get its new SUVs into dealerships by early next year.

The launch of all the trucks and SUVs - which includes the all-important Chevy Silverado pickup truck - will force GM to spend considerably more in the second half on new machinery and tooling necessary to build an all-new product.

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