GM’s Determination Has Costs

[nadepalma]

Source: http://wardsauto.com/ar/gm_determination_costs/

GM’s Determination Has Costs
By Alisa Priddle
WardsAuto.com, Mar 28, 2006 11:06 AM



DETROIT – General Motors Corp. appears determined to stick to its sales and marketing plan in North America, whatever the cost.
The No.1 auto maker says it is prepared to accept months in which total sales decline as it reduces its daily rental sales.

GM also will resist the urge to buy short-term market share with incentives, even as the competition increases discounts in some segments, marketing executives say.

The auto maker is pledging not to make products with razor-thin profit margins. It will support its eight distinct brands, now distributed by a sales organization winnowed to four channels, with a newfound discipline to not badge-engineer identical models across all brands.

It means bracing for hits of bad publicity in the months ahead, starting with next week’s March sales report. U.S. totals will suffer by comparison with year-ago, in part because there will be fewer fleet sales in the tally, says Paul Ballew, executive director-global marketing and analysis.

And market share in the U.S. will fall to about 24%, Ballew says. That compares with 26.7% in like-2005.

It is calculated short-term pain.

The figures reflect the continued cutback in daily rental sales to 700,000 units this year, from 834,255 in 2004. This reduces GM’s share of the rental industry to 30% from 41.8% in 2004. Retail selling rates have stabilized, Ballew says.

The numbers also reflect the fact GM will have reduced total output in North America by 1 million units by the end of 2008 with the closing of 10 assembly, stamping and powertrain plants.

The potential long-term payoff: vehicles with a reputation for good value for the price; higher average transaction prices and a richer mix; greater profitability; brand equity; and less reliance on incentives and the volatility they create in the market.

There are early signs the plan is working, GM executives say.

First-quarter residual values are up three points on large pickups from year-ago, while midsize cars have seen resale value improve a full six points, says Mark LaNeve, GM North America vice president-vehicle sales, service and marketing.

In lowering sales to rental fleets, GM is making more money per vehicle. Ballew says GM’s average transaction price in the first quarter should be 3%-4% higher than the industry-wide increase of 1%-2%. Ballew says GM was lagging the industry in recent years and needed a richer mix.

A large contributor is the launch of profitable fullsize SUVs from the GMT900 platform that will roll out the next generation of large pickups in the fourth quarter.

For the first two months of the year, the new vehicles GM has launched have seen 23.2% sales growth compared with a 6.8% drop in sales of non-launch vehicles.

Transaction prices also are being bolstered by more crew cab sales among small pickups, Ballew says.

And GM is addressing cars with unacceptable returns, such as the decision to cut a shift of Chevrolet Impala production in Oshawa, Ont., Canada, later this year, capping output at 250,000 cars. The goal: fewer sales but greater revenue per sale.

Ballew says the auto maker is casting a similar eye on production of the smaller Chevy Cobalt out of the Lordstown, OH, plant, to make sure there is not an unacceptably high push into daily rental fleets.

“We will not pursue marginally profitable or unprofitable business in the future,” Ballew says. “We need to be back in the mode where we’re making money once again in North America.”

Ballew admits the mix has not been favorable, especially last year with the shift from trucks to cars occurring faster than anticipated.
But he expects the industry as a whole to end 2006 with sales of more than 17 million units in the U.S.

On the truck side he says he is “cautiously optimistic” large SUVs will meet expectations, but he expects retail sales of midsize SUVs to be down 15% for the quarter.

But GM will not buy sales or share, executives insist.

“Chrysler (Group) has been outspending us on incentives for five or six months now and we’ve not changed our strategy,” Ballew says.

Chrysler is offering $6,021 on its midsize SUV vs GM’s $3,906 and Ford Motor Co.’s $4,196, according to Power Information Network. Chrysler also is the big spender on large pickups and in its overall incentive budget.

“We won’t gain share by dramatically increasing incentives,” LaNeve says. “It catches up with you. We learned that.”

On Jan. 11, GM announced a major price repositioning of 57 of 76 models, in keeping with an overall strategy of aggressive pricing with built-in incentives.
The challenge now is getting the word to consumers that the ’06 Cobalt, for example, starts at $12,990 vs. $14,490 for the outgoing ’05 model, and offers better value than competitive models. One thrust is ensuring third-party websites have the new pricing, as an increasing number of buyers use the Internet to comparison shop.

The auto maker’s overall advertising budget will be is slightly less this year than last, LaNeve says, but is more than enough, as there should be less need to promote national incentive plans such as 2005’s employee discount plan. And GM is pursuing more efficient and targeted campaigns with greater use of non-conventional media, he says.

GM’s marketing plan has been presented to the board in great detail and received support. LaNeve says he has not personally met the newest board member Jerry York.

LaNeve says the marketing team appreciates the dire situation the auto maker is in, having lost $10.6 billion in 2005 and facing a series of cutbacks in jobs, benefits for those who remain, production and continued uncertainty as the Delphi Corp. bankruptcy plays out.

“That sense of urgency has been around for awhile,” LaNeve says.
He takes some comfort in the unlikelihood of a repeat of some one-time occurrences in 2005 such as devastating hurricanes and a 250,000-unit inventory correction.

But the auto maker was rightly called out for dependency on marginal business and incentives and rental business, LaNeve says. And GM is taking the steps necessary to get out from under that, he insists.

apriddle@wardsauto.com

[nadepalma]

This all makes good sense to me -- Cut fleet sales to increase residuals. Make less cars, but more of a profit on each. All makes good sense and will hopefully translate into more money in GM's coffers.

Though the underlying thought on this is that GM may lose more market-share and ultimately lose the No. 1 spot in US through this reduction of output and the restriction on vehicle lines (like the 250K cap on the Impala). That is, at least until some of GM's new products make it to market to supplant those that aren't well recieved (or til some of these products are updated through refreshenings, etc.).

And while I would mourn the loss of the No. 1 seat, I have to say that by business standards, its a much better decision. Honestly, if GM needs to dwidnle the scope of their business to make money in the short term and shore up their loses, that's fine by me. I would rather have a bit smaller, but healthier GM with better margins and much better products than a lumbering giant that is decaying from the inside out. It will be hard on GM (and the rest of us GM enthusiasts), but the company will emerge better for it in the end.

Nevethless, the contracting of their business doesn't necessarily mean it will haunt them forever. IF GM were to do all they can to get back into financial shape, build more desirable products and get their message out that they've turned the corner -- then they can certainly grow out of this 'downsizing' in the market. There is nothing to say that the profits from SUVs and their new cars and crossovers might not fuel further expansion in the long term.

But short term, I think that it's a smarter move for them to focus on margins, profits and righting-the-ship than holding onto the biggest slice of market-share if it means losing money on each sale. Then they can get back to work in increasing sales through new conquests and improved market performance.

Just my opinion of course.

[Quickening]

I agree that this seems to be a good plan. Being number 1 doesn't matter when you are losing 12Billion dollars a year. If they need to lose that spot in order to get more profit on their vehicles and cut fleet sales, so people aren't getting screwed over when they try to trade in, then so be it. No one ever said this was going to be easy.

[1931Chevy]

On the part of GM losing the 1 title I think theres a hope it wont happen because gm is cutting its North America output but globally is building more cars so we can only tell when the year finish

[importedtuna]

When the quarterly results come in and GM states this again, I'll believe it.

[DuSpinnst]

GM still needs to eliminate the dividend on Common Stock.

[nadepalma]

Originally Posted by 1931Chevy

On the part of GM losing the 1 title I think theres a hope it wont happen because gm is cutting its North America output but globally is building more cars so we can only tell when the year finish

Thats a good point too. But since GM wants to cut 1 million units in North America, it would have to increase their world-wide sales by at LEAST that much since Toyota seems to be moving ahead at full steam.

Last I read, GM sales were up significantly world-wide (especially in China), but some of their other markets (moving forward at least) might be constrained by manufacturing. I've read that GM is looking for production in other countries for it's GMDAT vehicles since they don't really have production capacity in South Korea to meet demand for Euroep, the US, and elsewhere. This is a good point and an indication that their global plans for Chevrolet might be working -- but manufacturing will increasingly become a factor moving forward.

That being said, who's to say if GM can increase global sales by 1 million to match reduction here at home?

I wish them luck -- but they have to stay on their game to see it happen.

[steverino]

nadepalma, you hit the nail right on the head.

[ChevroletRevived]

Nadepalma, you're so right. I really hope that GM can pull it off, and still retain the title, but you know, if it means we'll have a healthy GM that's not on the brink, then so be it.

[AmericanRevolution]

Ya, I'd rather loose #1, and even 2 and 3 if needed but be able to become profitable and stay about, rebuild, and get larger then try to stay #1 and then loose everything.

[Finch]

Originally Posted by nadepalma

Thats a good point too. But since GM wants to cut 1 million units in North America, it would have to increase their world-wide sales by at LEAST that much since Toyota seems to be moving ahead at full steam.

Last I read, GM sales were up significantly world-wide (especially in China), but some of their other markets (moving forward at least) might be constrained by manufacturing. I've read that GM is looking for production in other countries for it's GMDAT vehicles since they don't really have production capacity in South Korea to meet demand for Euroep, the US, and elsewhere. This is a good point and an indication that their global plans for Chevrolet might be working -- but manufacturing will increasingly become a factor moving forward.

That being said, who's to say if GM can increase global sales by 1 million to match reduction here at home?

I wish them luck -- but they have to stay on their game to see it happen.

Isn't GM decreasing their capacity by 1 million in this country? That's different than saying they're reducing the number of cars they sell by a million.

[CobaltSScrazy]

The sad part is many people won't even CONSIDER a GM car.

My uncle is in the aviation business and was talking with a NW pilot who was in the market for a new car. My uncle asked him what he was gonna buy, he said "a Honda Accord", my uncle said, have you checked out any GM products, he said no, he said he heard hondas have better quality and realiability, my uncle told him to consider how many GM, DCX, and Ford employees fly Northwest and give him his job (almost all), and how many japanese fly (almost none) and who he should support, my uncle told him how his G6 has been a blast for him and no problems at all and has maybe 25k miles? My uncle told him about how the profits go back to japan and all the arguments that we all typically use to tell people to buy american, in the end, in my uncles words, he was a "traitor" and ended up buying the accord without even checking out a fusion, g6, malibu, or waiting for the aura.

I know all of you have stories like this, but I just heard this one, and not testing GM cars is a disservice to our free market 'buy w/e you want' economy, if you wont even consider some products, then shame on you. But to each his own i guess (eye roll).

LaNeve needs to address this, maybe go into import dominated areas (coasts and cities outside the midwest) and have open test drives in "hot spot" areas, whatever that means and get people to try these great cars that are coming out. What do you guys (of the Domestic type) think?

[Ming]

GM can get people to drive its cars. It just needs styling hits like (but not copies of) the 300C. I've seen plenty of 300C's around Chinatown in Houston, where Domestics are generally an endangered species. Styling can help break the barrier, and the Cobalt, LaCrosse, Uplander and other efforts fall far short of the break-through styling GM needs to deliver to get conquest sales like DCX is getting from people who normally wouldn't consider a Domestic. The HHR, Solstice, and Sky are a start, but lets see that kind of eye popping styling on a mainstream sedan. Maybe the Aura will deliver, but not if the Aura concept is as different in production form as the G6 was from concept to production.

[ChevroletRevived]

Hopefully it won't be. If it's similar, it could mean a hit for GM.

[ChevroletRevived]

The new retro themed Impala is going to be a real seller.