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Breaking The Rebate Dependency
Jerry Flint, 07.26.05, 12:06 AM ET

General Motors turned in disappointing second-quarter results—a loss of $318 million—excluding special items. While GM's auto business was profitable outside the U.S., GM North America posted a $1.2 billion loss in the second quarter.

The good news: In June, General Motors (nyse: GM - news - people ) did a terrific job at slashing its inventories. In all, GM's July 1 inventories were down to 1,018,000 vehicles versus 1,367,000 at the same time last year. Of that 349,000-unit drop, 190,000 were trucks. That reduced the truck inventory to a much more manageable 707,000 units at the start of July.

GM reduced its passenger car inventory by 159,000 units, to 311,000 vehicles. July should be another good month for GM inventories. The "employee pricing" sale is continuing, and it is shutting factories for vacations and changeovers to 2006 models.

GM July 1 Truck Inventories Last Year/This Year:

-- Chevy Silverado pickup: 228,100/164,200

-- GMC Sierra pickup: 70,600/54,400

-- Chevy Trailblazer sport utility vehicle (SUV)::87,200/51,200

-- Chevy Tahoe SUV: 66,600/49,100

-- Chevy Suburban SUV: 43,300/33,000

-- Cadillac Escalade: 12,100/9,200

Source: Automotive News

The big sales promotion did clear out a glut of unsold vehicles. That's important, as having too many leftover cars late in the year may wreck a new-model launch because it forces dealers to use heavy incentives to unload the old models. This steals sales from the new vehicles and quickly renews the vicious cycle of production cuts and heavy incentives—on the new models.

That's exactly what happened to GM this year, and it resulted in a big first-quarter loss. At the start of 2005, GM had 1,238,100 vehicles in inventory; if GM is back to that number again by Jan. 1, 2006, it means that the June 2005 sales blowout was wasted.

While GM has succeeded in getting the stockpile down—at least for now—this is only half the job. It must not let inventories get out of hand again. In short, this means that GM must hold back production. Over the past few years, the company has talked a lot about getting out of the massive-incentive game but has not been willing to make big enough cuts in its production capacity for this to happen.

GM keeps hoping that if it builds better new cars and trucks that enough consumers will flock back, and that its market share will jump back up to 30%. I do not see this happening. GM has better new vehicles in the pipeline, but Americans are just too happy with their Hondas, Toyotas and BMWs. I doubt that GM can hold a 27% share unless it offers huge incentives, rebates or other giveaways. Even a 25% share may be a stretch—23% may be more realistic.

The company will have to close more factories. More importantly, it needs to rethink its entire product strategy, reorganize its lineup, eliminate some platforms and learn to build more varieties of different-looking cars off the same structural underpinnings. That is just what DaimlerChrysler (nyse: DCX - news - people ) is doing now with the Chrysler 300, Dodge Magnum and Dodge Charger. Chrysler builds all three on the common LX architecture, but they each have a distinct appearance. GM used to do just that a half-century ago but somehow lost its touch.

One step in the right direction is GM's new strategy of "value pricing," or taking the water out of the sticker price by keeping it closer to the price people actually pay for their cars and trucks. That is where the emphasis is to be on the 2006 models. It is a fine idea. Mark LaNeve, the new GM marketing boss, knows something about promoting and selling cars. He's the best I've seen at GM marketing—and I started covering this business in 1958.

For GM to make value pricing work, it needs to get religion with its inventories. The financial side wants to build and ship cars. The money comes into the company when the dealer pays for a car, not when the customer buys a car from the dealer. That makes for a quarterly profit, but the consequences come later in rebates and "employee pricing" sales.

Auto people usually talk about a 60-day supply as the normal or preferred level of inventory. The calculation for this metric: the inventory on a car model divided by the daily selling rate for that month. Frankly, it is rare for any Detroit company to have a 60-day supply; a 70- or 80-day figure for an entire produce line is more common. In May, the GM inventory supply was at 73 days. At the end of June, it dropped to 48 days, but that is a distortion because of the super-sales incentives.

Some brands maintain much leaner supplies. Toyota Motor (nyse: TM - news - people ) had 33 days at the end of June, Honda Motor (nyse: HMC - news - people ) had 48 days, BMW had 28 days and the Mini had only eight days. Most other foreign brands are much higher than the three mentioned, but the point is that it is possible to operate well with lower inventories. When inventories are lower, there is less pressure to offer big sales incentives.

Consumers may like giveaway prices, but such prices erode resale values and endanger the financial health of auto companies.
 

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More importantly, it needs to rethink its entire product strategy, reorganize its lineup, eliminate some platforms and learn to build more varieties of different-looking cars off the same structural underpinnings. That is just what DaimlerChrysler (nyse: DCX - news - people ) is doing now with the Chrysler 300, Dodge Magnum and Dodge Charger. Chrysler builds all three on the common LX architecture, but they each have a distinct appearance. GM used to do just that a half-century ago but somehow lost its touch.
I don't think those are very good examples of what he's trying to say. I think they look very much alike, especially the 300 and the Charger. And I'm also not sure that you would want to be taking cues from the #3 US auto manufacturer :)
 

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I agree editguy. Those cars have been a success, but they are closer to the typical "Detroit Badge Engineering" school of production rather than the newer, "build unique vehicles off the same platform" school. Now, they are overall unique, but the Magnum and Charger interiors are the same, they share wheelbases, engines, transmissions, etc. The 300 is unique from the Charger/Magnum, but the Charger and Magnum are not so different other than body style.

The real irony is that GM is doing a good job at differentiating cars on the same platform. Take the Epsilon platform, and the three cars currently produced off of it. The G6, Malibu, and Saab 9-3. All are uniqulely styled, and the only obvious interior sharing is the center stacks in the G6 and Malibu. The rest of the dash is unique. There is also a lot of variations in these, the Saab as a SWB 4 door, and 2 door softtop, the Malibu as a SWB sedan or LWB wagon, the G6 as a LWB Sedan , LWB Coupe, and hardtop convertable. Among them are at least 6 different engine variations (2 Saab turbos 4's, one turbo V6, and for the US one base 4, two V6's with a third DOHC V6 on the way, atleast in the Aura if not the G6). This also doesn't take into account the upcoming Cadillac BLS in Europe, or the Saturn Aura. Yet, this platform is looking as versatile as any in the industry to me.

GM keeps hoping that if it builds better new cars and trucks that enough consumers will flock back, and that its market share will jump back up to 30%. I do not see this happening. GM has better new vehicles in the pipeline, but Americans are just too happy with their Hondas, Toyotas and BMWs. I doubt that GM can hold a 27% share unless it offers huge incentives, rebates or other giveaways. Even a 25% share may be a stretch—23% may be more realistic.
I disagree here too. I think there are a lot of people who really like their Honda and Toyota, but would be glad to go back to an American company of they believed that American company was building a car that was just as good as their Toyota or Honda. So I really think if GM can consistantly match Toyota/Honda on the quality and reliability fronts, they will start to win back some customers.
 

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I disagree here too. I think there are a lot of people who really like their Honda and Toyota, but would be glad to go back to an American company of they believed that American company was building a car that was just as good as their Toyota or Honda. So I really think if GM can consistantly match Toyota/Honda on the quality and reliability fronts, they will start to win back some customers.

You're right. And I think that's where the employee discount sale may pay long term dividends for GM. If those people are happy with their cars, they will talk. Having more on the road helps sell too. I think some of these writers are guilty of what they have accused GM of (and rightfully so for a long time):
not reacting to the changes. GM is changing and for the better. And if the Solstice is as succcessful as it appears to be, that will be one element to help fuel the fire.
I remember when auto analysts were writing off Cadillac as being old and stodgy and basically declaring it dead and ready for burial. GM has done a great job of not only bring it back, but reaching new demographics while holding on to their traditional customers. Obviously GM has to keep making good moves, but I believe they are poised to do that.
 

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Editguy, I apologize, I hit the edit button on your thread instead of the quote button. That is why it says I edited your post. However, I did not remove or change any of your post. Sorry for the goof!! Now, for the response I was trying to make!...



GM has done a great job of not only bring it back, but reaching new demographics while holding on to their traditional customers. Obviously GM has to keep making good moves, but I believe they are poised to do that.
The popular article earlier this year was about whether Bob Lutz has been a failure at GM. Given another couple years time, people may just be calling him GM's great savior, instead of making him a scapegoat.

PS, I just dropped into the Chevy dealer around the corner, because they had the redesigned 2006 Impala SS on the lot. It looked pretty good. They ditched the round taillights, and gave it a more traditional rear end look. It has a slimming affect on the car, making it look less bulky. The SS is the 5.3L V8 version. The interior looked top notch to me. It had one of the new style GM radios like the Solstice will have, some aluminum accents, black leather seats. Overall, the car looked subdued enough to appeal to sedan buyers, but had enough visual differentiation to let people know it is no ordinary 4 door. Sticker on it was up there, $31K and change, but it had the options box full of stuff. Base price was $27K, which is an awfully good deal for a V8 sedan IMO, even if it is FWD.
 
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