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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.