Pickups' slow rollout strategy starting to pay off, GM says

DETROIT — The sales figures might not show it, but General Motors executives insist their strategy of slowly rolling out the next-generation Chevrolet Silverado and GMC Sierra pickups is working.

The latest evidence? GM's second-quarter earnings.

The automaker last week posted better-than-expected net income of $2.4 billion, up 1.6 percent from a year ago. In North America, GM earned $3 billion on a 10.7 percent profit margin, thanks largely to the sale of more lucrative crossovers and pickups.

"You're really starting to see the earnings potential of our truck franchise," CFO Dhivya Suryadevara told reporters.

That franchise has come under attack in recent months as the Silverado has slipped to third place behind Fiat Chrysler Automobiles' Ram 1500 in the hypercompetitive full-size pickup sales race. Through the first half of the year, Silverado sales fell 12 percent, while Sierra sales were down 3.4 percent.

"If you look at it from a sales standpoint, you'd think things are not particularly positive," Jessica Caldwell, executive director of industry analysis at Edmunds, told Automotive News. "But I think that from a profitability standpoint, it looks a lot different. It's the cornerstone of their business."

Although FCA and GM unveiled trucks at the same time at the 2018 Detroit auto show, GM has taken the atypical approach of methodically introducing the new model over an extended period.

It started by selling higher-margin crew-cab models, which retail for $45,000 to $50,000. Among similar models, GM says its share has increased 3 percent quarter over quarter.

And help is on the way.

GM started selling even higher-priced heavy-duty trucks in June and will soon add diesel-powered variants that will boast the highest EPA-certified fuel economy ratings ever given to a full-size truck. GM expects further share gains as it rolls out double-cab and regular-cab models.

The automaker is preparing to increase annual capacity of the pickups by 60,000 and has plans to roughly double production of the Silverado Trail Boss trim to more than 20 percent of its mix after dealers asked for more inventory.

"We had a deliberate strategy that our launch would be cadenced," Suryadevara said. "It was a strategy that was rolled out on purpose, and it's working."

Despite the boost to earnings, Caldwell said the blows GM has taken to its sales are troublesome.

"You could have a deliberate launch strategy, but if your direct competition is gaining share, that's a threat to your business," Caldwell said. "There has to be some concern somewhere. We can see what the numbers are, and Ram is certainly taking advantage of the slow rollout and has gained some new customers as a result."

Through the first half of the year, Ram sales surged 28 percent to 299,480, outselling the Silverado by nearly 50,000. Ram has beaten Silverado in 10 of the past 11 months, according to U.S. sales estimates from the Automotive News Data Center that have been validated by GM's quarterly reports.

Industry observers have lauded the Ram's lavish interior and technology, including its available 12-inch touch screen.

Part of FCA's strategy included continuing production of its previous-generation pickups and selling those Classic versions to value- minded shoppers.

FCA CEO Mike Manley said last week on the automaker's second-quarter earnings call that FCA has gained 7 points of share in the full-size pickup market from the same period a year ago.

Manley has focused on outselling Chevy and taking the No. 2 spot in the sales race since last year, although GM officials have argued FCA has been overly generous on incentives to do so.

GM is confident its pickup sales will improve in the second half of the year — and help fuel further profit gains.

The final six months of 2019 will be "meaningfully stronger" than the first half in terms of earnings and free cash flow, Suryadevara said, citing a lack of plant downtime for launches of new vehicles.

After earning $3.04 per share through six months, GM reiterated full-year guidance of $6.50 to $7 per share.

The largest U.S. automaker also stood by its 2019 forecast to generate $4.5 billion to $6 billion in adjusted automotive free cash flow. GM produced $2.5 billion on that basis in the second quarter, bringing its first-half total to negative $1.34 billion. The stronger second-half results will be evenly split between the third and fourth quarters, Suryadevara said.

The rest of this year and 2020 could be the company's "time to shine," Evercore ISI analyst Chris McNally said in a research note titled "Truck, truck and away ... ," according to Reuters.

Beyond pickups, GM's crossovers are also helping, with second-quarter sales up 16 percent year over year.

Caldwell said it's a trend that's unlikely to change anytime soon.

"In terms of profitability," she said. "The market is definitely swinging in their favor."