What Caused GM's Dramatic 35% Drop in Net Income?

Key Points

• Tariffs cost GM about $1.1 billion during the second quarter.

• Tariff impacts are expected to be even worse during the third quarter.

• GM's restructuring in China is paying off.

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The market might be slow to realize it, but General Motors (NYSE: GM) has been doing a lot of things right over the past few years. GM has invested in its core portfolio of vehicles, returned value to shareholders through massive buyback programs, and gained market share over its competitors, all while keeping margin-eroding incentives in check. So let's dig into why GM shares were trending lower this week after the company reported a 35% plunge in net income.

Tariffs pack a punch

General Motors posted solid second-quarter earnings on July 22 despite operating in a challenging and uncertain environment. What many might not know is that GM imports quite a few vehicles, which makes the current tariff impact noticeable. In fact, GM imported roughly 45% of the vehicles sold in the U.S. market in 2024, mostly from Mexico and South Korea.

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GM said that tariff impacts in the second quarter cost the company $1.1 billion, and it's holding its guidance for the full-year impact to be between $4 billion and $5 billion. The Detroit automaker isn't waiting around for tariffs to be reduced, and believes it can offset at least 30% of tariff impacts through cost initiatives, pricing, and manufacturing adjustments.

A Chevrolet Silverado EV. Image source: General Motors.

The tariffs weighed on GM's bottom line in its most important market, North America. North American pre-tax profit dropped 46% to $2.4 billion. Overall, GM's adjusted earnings before interest and taxes (EBIT) dropped 32% to $3.04 billion.

"Tariffs are obviously a big story for us," CFO Paul Jacobson said on CNBC. "We're in a bit of an adjustment phase right now, but I think the team is really firing on all cylinders."

Unfortunately, it's a story that's going to get worse before it gets better. GM expects a higher tariff impact during the third quarter despite working to offset the bump in costs. GM plans to invest roughly $4 billion to build more gasoline-powered vehicles, including building the Chevrolet Equinox in Kansas and moving production of the Chevrolet Blazer from Mexico to Tennessee.

In other news

Moving tariffs and their impact aside, there were certainly bright spots in GM's second quarter. One such bright spot is its average transaction price (ATP), which topped $51,000 during the second quarter, while incentives as a percentage of ATP checked in two points lower than the industry average.

ATP = average transaction price. Image source: General Motors' Q2 earnings deck.

Another bright spot was the automaker's results in the world's largest automotive market, China, where the company had been struggling. GM has worked to restructure its operations in the country and reported China equity income of $71 million, very favorable compared to the $104 million loss in the prior year's second quarter. It was the second consecutive quarter of year-over-year sales gains in China, driven by its new energy vehicle (NEV) lineup. GM gained more market share than any foreign competitor.

What it all means

It's a challenging time in the automotive industry as GM navigates tricky waters that include not only tariff impacts, but also an uncertain electric vehicle (EV) market that has taken off more slowly than anticipated. But the future is almost certainly EVs, and GM will continue to invest in its lineup of EVs that recently took over the No. 2 brand spot for sales volume in the U.S. market.

GM posted a solid quarter, but investors will have to remain patient as the company works through mitigating tariff impacts in the near term as they will weigh on margins and the company's bottom line. But that's just business in the auto industry currently.

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Daniel Miller has positions in General Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.