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Hampered by chips and other shortages, GM profits fall 40% in second quarter

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DETROIT — General Motors’ second-quarter net profit fell 40% from a year ago as shortages of computer chips and parts hampered plant production and slumped the company’s sales in the United States by more than 15%.

The Detroit automaker earned $1.67 billion from April to June, in part because it couldn’t deliver 95,000 vehicles because they were built without one part or another. A year ago, he earned $2.79 billion.

Although the company said it was bracing for an economic slowdown, it stuck to its earlier full-year earnings forecast.

Unlike Walmart, which on Monday lowered its full-year earnings outlook and said consumers were cutting discretionary spending, GM said demand remained strong for its vehicles.

“Right now, we can’t build enough full-size trucks and SUVs,” CEO Mary Barra told analysts on Tuesday. “A lot of these vehicles, we have customers waiting for them.”

And even when pent-up demand begins to decline, Barra said GM still needs to build inventory closer to normal levels. The company only has a 10-15 day supply on dealer lots, whereas automakers previously targeted 60 days. Barra said GM will restore inventory, but not to traditional levels, as it tries to move more toward a customer order model.

GM expects full-year dealer sales to increase 25% to 30% from last year as semiconductor supply improves throughout the year and up ‘in 2023.

But it is not certain that the year will go exactly as planned. Barra said there are economic concerns, so GM is taking steps to manage costs, including cutting discretionary spending and limiting hiring to critical positions needed to support growth. “We have also modeled numerous downside scenarios and stand ready to take deliberate action when and if needed,” Barra said in a statement.

Chief Financial Officer Paul Jacobson said the company had already started phasing out vehicles built without certain components and would sell them all by the end of the year.

He said the company restructured years ago and therefore did not expect any layoffs like Tesla, Rivian and other automakers. Crosstown rival Ford is reportedly considering cutting salaried staff to help fund the transition to electric vehicles.

Despite lower earnings, GM maintained its full-year net profit forecast of $9.6 billion to $11.2 billion. The company still expects pre-tax income of $13 billion to $15 billion.

GM shares fell 2.4% in early trading on Tuesday.

The company reported adjusted earnings of $1.14 per share, below Wall Street expectations for $1.27. Revenue for the quarter rose 5% to $35.76 billion on strong pricing, beating estimates of $33.9 billion, according to FactSet.

JD Power estimates that the average selling price of a new vehicle for the first six months of the year reached nearly $45,000, a record 17.5% higher than a year ago.

Like other automakers, GM has been forced to slow down its factories since late 2020 largely due to a global shortage of semiconductors, but GM was hit particularly hard in the second quarter.

GM earned $2.3 billion before taxes in North America, its most profitable market, a 21% drop from a year ago. The company said strong demand, coupled with production cuts, continues to limit dealer inventory.

The company posted a loss of $100 million in equity income in its China joint venture quarter, largely due to pandemic-related lockdowns. But GM said production began to recover in June.

The company’s liquidity, measured by cash and available lines of credit, fell more than 10% year-to-date to $33 billion.

Jacobson said the cash burn was temporary, largely caused by the timing of spending, including increased capital investment. The company started the quarter thinking it would produce more vehicles than it did, he said. “Essentially all of these vehicles will come back in the second half,” he said.

It will take more patience before GM shares, which have fallen more than 40% this year, turn their backs, wrote CFRA analyst Garrett Nelson.

“We now see full year results at the lower end of the forecast as it struggles with inflation, supply chain issues and lower volumes than a year ago” , wrote Nelson.

Also on Tuesday, GM announced it has commitments for all the raw materials needed to meet its goal of building 1 million electric vehicles a year by the end of 2025.

The company also said it has reached an agreement with LG Chem to supply nickel, cobalt, manganese and aluminum to make battery cathodes for electric vehicles. LG Chem will supply more than 950,000 tons of material over the next eight years. The two companies will explore a cathode material production plant in North America by the end of 2025, they said in a statement.

GM also announced a contract with Livent to supply battery-grade lithium hydroxide from a brine operation in South America over a six-year period beginning in 2025. The Philadelphia-based company’s lithium will be also used in cathodes.

Cathodes are the negative terminal of a battery.