Q1 Results Reveal Profitability Strategies for Bulls and Bears

The first quarter results show the trends the companies will take in the succeeding quarters. Companies will continually lower costs through divestitures and workforce reduction and pay cut. Revenue generation strategies will be consolidation through mergers and acquisition and outsourcing.

General Motors Corporation (NYSE:GM) reported net loss amounting to $6 billion while Ford Motor Company (NYSE:F) with only $1.4 billion which was better than analyst projection. Similar with the automotive industry, the technology industry was also dominated by major losses. Hewlett-Packard Company (NYSE:HPQ) reported a 3 perecent decline in revenue of $27.4 billion, so did Lenovo Group Limited (ADR) (LNVGY.PK) with a quarter loss of $264 million. Outsourcing providers were no exceptions as well; Convergys Corporation (NYSE:CVG) with $21 million loss and TeleTech Holdings, Inc. (NASDAQ:TTEC) with 8 to 10 percent decline in revenue.

However, there are still companies which remain bullish in tough times. International Business Machines Corp. (NYSE:IBM) has growth markets revenue up to 4 percent. Sykes Enterprises, Incorporated (NASDAQ:SYKE) enjoyed an 8 percent increase in its operation margin and cash flows from operation. Accenture Ltd. (NYSE:ACN) this quarter grew its operating income by 6 percent. TELUS International Philippines, Inc. reported with approximately $3.59 million net income increase.

Cost Cutting by Workforce Reduction and Pay cut

Companies are cutting costs dramatically. Ford’s goal is to decrease operating cost to $4 billion by year end. GM successfully implemented cost reduction amounting to $3.1 billion for this quarter. Ford closed 17 factories in US and Canada and laid off tens of thousands of employees. GM plans to lay off 23,000 workers and close additional factories and bring down their dealerships to 3,600 by 2010.

On Monday, General Motors reached an agreement with Canadian Auto Workers (CAW) union for the implementation of a 15- to 16-dollar an hour wage cut. Chrysler LLC announced it was dropping 789 of its roughly 3,200 dealerships by around June 9. TeleTech is letting go of its 470 employees by end of July. HP is eliminating 25,000 jobs. This trend will continue but will not be sufficient to bring in positive earnings.

Consolidation through Divestiture

Another way to lower costs and attain liquidity is through divestiture. Automaker giants also plan to consolidate their business through divestiture. GM plans to cut its Saturn, Hummer, Saab and Pontiac brands and sell the Opel brand in Europe. Fiat S.p.A. (ADR) (FIATY.PK), Magna International (MGa.TO) and RHJ International (RHJI.BR) are currently bidding for Opel. Ford also takes a similar approach and is now currently in talks with parties interested to buy its Swedish Volvo unit.

Consolidation through Mergers and Acquisition

Lowering operation costs is only one side of the coin; to produce net profits, revenue generation is also necessary. Consolidation through mergers and acquisition if done properly can lead to revenue generation.

HP’s acquisition of EDS proved to be a positive move for the HP as EDS is the only HP division that generated positive income. With its computer revenue suffering a 19 percent decline, it will not be a surprise if HP beefs up on this segment. After all, IBM’s strong earnings results showed that there is money in the software and services business. As for Lenovo which posted a $264 million loss on its computer business, it appears that it has no intention of changing its product line. Instead it sees great opportunities in merging with Acer. With this consolidation, Lenovo will then have a bigger chunk of the consumer market.

Revenue Generation Through Outsourcing

Both ailing US auto companies also believe that increasing their production brings them back on track. In their earnings report, GM said that the drop in revenue was primarily due to GM’s production volume decline of 903,000 units. GM’s revenue generating game plan is to outsource its production.

GM is now ramping up its auto production in Mexico, China, and South Korea.

GM is planning to sell around 17,000 China-made vehicles in the U.S. starting in 2011. It hopes to triple that number to 51,000 by 2014. General Motors is planning to sharply increase sales of cars it manufactures in Mexico and South Korea. Mexico-manufactured vehicle sales would go from 317,763 units in 2010 to 501,316 in 2014, and South Korean-made cars would more than quadruple from 36,967 in 2010 to 157,126 in 2014.

This move might actually generate better revenues for GM but whether it is sufficient to bring in profits continues to remain bleak given that even with lower priced products consumer demand might remain on slump.

Ford also plans to increase its production to 435,000 cars and trucks during the second quarter and at the same time lower operation costs to $4 billion by year end. It would be logical to expect that to do this profitably, Ford will also need to outsource, especially as it wants to maintain its liquidity.

Disclosure: No positions.

Comments

[Alchemist118:]

Good insight into the current trends. There are companies that still remain bullish in this flailing economy. This just goes to show that businesses must adapt. What evolutions they take to survive shows how they are willing to accept change or not. Today's modern market constantly has changing business models. Only the strong and flexible will outlast the others.

May 29 12:10 AM

[hankat:]

True, companies continue to cut down expenses with no certainty when this will end. And at the same time they seek to grab every opportunity to earn even for little profit (at the expense of skilled cheap labor esp. in Asia). Outsourcing is the most efficient revenue-generation at the moment. It cuts labor costs and generates products in greater number if not better.

Jun 01 01:58 AM

[Outsourcing...:]

@Freya. I agree with you. It’s not just about cheap labor but quality cost efficient labor. Clients naturally want value for their money. Richard Mills, president of Canadian Chamber of Commerce, reiterated that “the Philippines is a good place to do business for companies that are reducing cost and IMPROVING QUALITY. There are talented people with good English skills and lifestyle opportunities here are huge.” Another sign that they value and recognize quality at a good price is their continuous expansion here in the country. Convergys is planning to hire 1,000 more workers in Cebu this year for instance. If the quality of this cheap labor is below expectation then firms would naturally not push for expansion.

Jun 09 01:08 PM

[Outsourcing...:]

@Alchemist118. I agree. The companies need to understand how they can change to survive or better yet to be profitable. If the current fiscal policies in their country is making their business less competitive then they have options of relocating them. If they think that demand for their products are not sufficient to sustain the business they can find another product offering or lower its cost to increase demand. There are so many options; it’s just a matter of courageously trying these alternatives.

Jun 09 01:09 PM

[Outsourcing...:]

@Hankat. Make sense. No wonder smaller companies who are willing to take on small profits seem to be doing better than huge ones. You are right in saying that outsourcing “cuts labor costs and generates products in greater number if not better”.

Jun 09 01:12 PM