GM beats profit forecasts after cost-cutting drive

General Motors is starting to reap the benefits of a massive cost-cutting programme that is eliminating 34,000 jobs and shuttering factories, according to its latest quarterly figures.

The car maker, which lost its crown as the world's largest to Toyota in the first half of this year, blew through Wall Street forecasts to report a profit of $891m (£437m) in the three months to the end of June - a striking reversal of fortune from the same period last year, when it registered to a $3.4bn loss.

The bulk of the financial improvement was in its loss-making US division, but GM swung back into the black in Europe, where its net income of $217m, compared with a net loss of $39m in the same quarter last year. The fastest growth was prompted by a marketing push in emerging countries. Its Latin America, Africa and Middle East unit reported its best result in a decade: net income of $213m, up 53 per cent.

However, even as GM shares jumped 3 per cent on the news, Rick Wagoner, the company's chief executive, struck a downbeat note. "It's true that our North America team has made huge improvements, and we appreciate everyone's hard work," he said. "But our current earnings clearly demonstrate we've got more to do."

The comment was aimed at the United Auto Workers union, with which GM, Ford and Chrysler opened talks last month on a new employee contract. The big three car makers are demanding concessions on pay and conditions, in particular on healthcare benefits which cost GM $4.8bn a year. The spiralling cost of healthcare for hundreds of thousands of current and retired employees has been one factor in the declining profitability of the US car industry.

The existing contract with the UAW expires in September, although talks could last well into the autumn. Himanshu Patel, car industry analyst at JP Morgan, said there is the "potential for sizeable labour concessions, particularly a Goodyear-style healthcare deal". Last year, Goodyear Tire & Rubber agreed to set up a healthcare trust fund with a one-time $1bn payment in cash and stock that was meant to free the company entirely from future healthcare obligations.

Analysts at Deutsche Bank warned that strong second-quarter earnings by the US car makers could prove "counterproductive" if they relaxed the pressure on the UAW to agree concessions to save the domestic industry.

Last week, Ford surprised Wall Street with its first quarterly profit since 2005, making $750m between March and June, against a loss of $317m in the same period a year ago. But its chief executive Alan Mulally said he expected a difficult second half and negative cash flow as Ford pushes ahead with closing 16 plants and cutting up to 45,000 jobs in a sweeping restructuring.