Despite help from SUVs, General Motors still isn't there yet

General Motors CEO Mary Barra
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General Motors CEO Mary Barra

General Motors isn't there yet. The $54 billion U.S. automaker made more money than expected in the second quarter thanks to a shift from cars toward trucks and crossovers. Now, though, it's making too many smaller vehicles. After exiting unprofitable overseas markets, Chief Executive Mary Barra has to slim down at home, too.

Discipline has been Barra's hallmark since becoming the first woman to run a U.S. car company three and a half years ago. An agreement to sell the Opel and Vauxhall business in Europe to France's PSA and a partial exit from the Indian and South African markets have stanched most of GM's international bleeding.

Losses and writedowns on those operations totaled more than $1.4 billion in the quarter, but excising them will boost free cash flow by $1 billion this year to an estimated $7 billion. What's left internationally is in stronger shape. GM made some money in China, where sales rose 1.6 percent, and broke even on an EBIT basis in South America on the back of a nearly 18 percent rise in vehicle sales.

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Barra's next challenge is domestic. North American vehicle sales declined 3.4 percent in the second quarter from a year earlier. Bigger products, in particular crossovers, are in high demand, and GM boosted sales of models like the Chevy Equinox by 15 percent. The flipside, though, was a 21 percent drop in U.S. passenger-car sales. While much of that reflected a sensible reduction in low-margin sales to rental companies, the company is saddled with far too many cars like the recently revamped compact Cruze and mid-sized Malibu.

Chief Financial Officer Chuck Stevens promised to reduce inventories to a more normal 70-day supply from the current 105 days, but with the overall U.S. market softening that's a moving target. The company said it would slash production by 150,000 vehicles in the second half of the year compared with the first half, a 50 percent larger reduction than Stevens announced just last month.

Washington provided some good news as the Department of Transportation said it may relax fuel-efficiency standards in 2021, a year earlier than planned. That should ease the risk of penalties for an automaker increasingly reliant on gas guzzlers, but it won't shift GM back into growth mode.

Commentary by Tom Buerkle, associate editor at Breakingviews. Follow him on Twitter @tombuerkle.

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