Pricing pressure in U.S., China raises fears about future profits

By Ben Klayman

DETROIT (Reuters) - The strength of the U.S. and China economies has helped companies like General Motors Co offset weakness in others parts of the world, but growing pricing pressure in those lucrative markets could be a warning sign for future profits.

GM Chief Financial Officer Chuck Stevens said on Thursday during the company's earnings conference call that the largest U.S. automaker sees flat retail pricing in North America this year. The company also will see continued competitive pricing in China, especially for older-model vehicles that could see prices decline 3 percent or more, Stevens said.

The stronger dollar could allow overseas rivals to cut prices or offer more features in their products, and that has Wall Street concerned. If the U.S. and China markets see competition intensify further, that could lead to discounting, price cuts and other profit-harming strategies, analysts said.

That scenario is already playing out as motorcycle maker Harley-Davidson on Tuesday warned that discounting by foreign rivals would dent profits.

Other companies fear the same outcome.

"I don’t think we’ve lost business," Honeywell International Chief Financial Officer Tom Szlosek said in an interview last week. "But you can certainly feel the competitive impact of competitors that have that currency advantage."

Japanese automakers over the past two years have garnered a $4,000 per vehicle advantage due to the weaker yen, according to Morgan Stanley analyst Adam Jonas. German automakers have enjoyed similar favorable exchange rates.

"The competitive dark side of a strong U.S. dollar (which hasn't started yet) should keep U.S. auto CEOs up at night," Jonas said in a research note on Thursday.

Factor in the growing number of automakers announcing plans for new North American assembly plants and the picture gets even darker for the industry, Jonas said. "We see scope for significant blind-siding on FX-driven competition by year end."

GM executives assured analysts their profit outlooks, which they reaffirmed, include the tougher pricing forecasts, while new vehicles like the Chevrolet Malibu sedan being launched this fall should help them offset that pressure.

Stevens, the GM CFO, said of China's price pressures: "That's the same dynamic we saw last year and the year before. The market's slowing, there's a lot of competition, it's maturing."

Stevens said greater sales of high-margin SUVs and luxury Cadillac vehicles, as well as cost cuts, will allow GM to maintain profit margins in China.

In markets with weakening demand like Brazil and Russia, GM has resorted to job cuts, reducing production or closing plants.

Ford Motor Co has a similar strategy of relying on newer vehicles and high-margin trucks and SUVs to help it weather any North American price pressures. U.S. sales chief Mark LaNeve acknowledged earlier this month that the growth curves won't be the same as earlier this decade.

He said of the industry, "Everyone is ... doing what they can to hit their numbers and try to gain share."

(Additional reporting by Lewis Krauskopf in New York; Editing by Ted Botha)