This Bad Old Habit Could Wreck GM

Followers of Ford (NYSE: F  ) were excited last month when the Blue Oval stole the monthly U.S. sales crown away from General Motors (NYSE: GM  ) for only the second time since the 1990s. But payback time for the General came in April: A whopping 49% increase in car and crossover sales of its cars helped push GM to an overall 27% increase in sales versus year-ago numbers, enough to drop the Blue Oval (up a solid 16%) back down into second place for the month.

Meanwhile, to the surprise of absolutely nobody, earthquake-ravaged Toyota (NYSE: TM  ) posted on Tuesday what will probably be the first of several months' worth of declines, with sales down 2.4%, while Honda (NYSE: HMC  ) managed a subdued 5.7% increase.

Clearly, the General led the pack in impressive style this month. But the real story isn't GM's strong sales numbers. It's how the company got them.

Is GM back to buying sales?
GM's gaudy April sales results come with an eyebrow-raising asterisk: GM's incentives spending once again led the pack, and not by a small margin. Edmunds estimated GM's April incentives spending at $3,016 per vehicle, down a bit from previous levels but well ahead of Ford, Toyota, and ... well, everybody else, even longtime big-spender Chrysler (now in a distant second place at $2,455).

Nearly all of the automakers have reduced incentives spending in recent months, most much more than GM, for a simple reason: For once, supply doesn't greatly exceed demand. Producing extra vehicles and foisting them on dealers in order to pad total production numbers is an old, old Detroit trick, one that led to ruinous structural problems. With supply constantly exceeding demand, the Detroit automakers had to rely on incentives -- those "cash back" and "zero percent financing" offers -- to move cars. That killed margins, which meant the automakers had to reduce their per-car costs, which in turn meant cheap-feeling interiors and peeling paint, and that meant new customers for Toyota and Honda.

That's far from the whole story of Detroit's decline, but it's an important part of it. Anyone who has talked with or listened to Ford CEO Alan Mulally knows that one of his regular refrains is his insistence on "matching production to demand." By regularly adjusting production volumes to keep inventories on the low side, Ford (and most other automakers) can get a higher price per car.

Edmunds estimates that Ford's per-vehicle incentives spending was down by 25% from year-ago levels in April, and Ford CFO Lewis Booth repeatedly emphasized the importance of "higher net pricing" when Ford reported its blowout first-quarter earnings. Yes, the biggest part of Ford's success is due to its fresh-across-the-board product line, but managing the production-versus-incentives game well has been a significant factor -- just as it has been for Toyota and Honda over the years.

Did GM not get this memo? Or is there something else going on?

Old habits dying hard?
Many GM investors (and I'm one of them) worry that the company will get complacent and fall back on the bad old Detroit way of doing things. Not so much the crushing debt and costly labor giveaways, but the habits of settling for good-but-not-great products, of not worrying too much about the numbers, of prioritizing market share over profits.

I don't really think it's likely that GM's current management is going to go back to the worst of the company's old habits, but any hint of movement in that direction is -- has to be -- a cause for concern from investors.

In this case, I can see some legitimate reasons for a higher level of incentives spending. As I've said before, GM's product line is somewhat long in the tooth, and replacements for many key models are still a year or three away. GM's doing what it can to make incremental improvements to current models in the meantime (as I was writing this on Tuesday, GM announced that the seats in the Corvette -- a sore point, literally, for current Vette owners -- would be upgraded for 2012), and its most recent models are top-notch, but key parts of its lineup are still a step behind Ford and the best Japanese offerings.

GM's leaders may have determined that the bottom-line benefits of keeping sales high while waiting for new product justify the costs of incentives. I hope that's what they tell us when the company reports first-quarter earnings tomorrow. But as a GM investor, I still worry that not everyone at the General has learned the hard lessons of the company's near-death experience.

Worried about the General's next steps? Add GM to your free My Watchlist page and keep up with all of the Fool's coverage of GM's recovery.

Fool contributor John Rosevear owns shares of Ford and General Motors. General Motors is a Motley Fool Inside Value selection. Ford is a Motley Fool Stock Advisor pick. The Fool owns shares of Ford. You can try any (or all!) of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy has never spent a dime on incentives.


Read/Post Comments (7) | Recommend This Article (3)

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  • Report this Comment On May 04, 2011, at 9:19 PM, doctorolds wrote:

    GM may have the highest incentives, but they also command the highest prices. GM incentives are about the same percentage of transaction prices as the industry average.

  • Report this Comment On May 05, 2011, at 5:52 AM, TMFMarlowe wrote:

    @doctorolds: The industry average for April was $2118, according to Edmunds. I'm having trouble beliving that GM's prices (or more to the point, its margins) are 30% higher than everyone else's, but if you've got some kind of info to the contrary, I'll take a look. Do you?

    John Rosevear

  • Report this Comment On May 05, 2011, at 8:00 AM, Jason87467 wrote:

    This is all highly speculative negativity. Give GM a chance instead of constantly pounding on them. If they do mess up, then you can truly write about it. As for now, GM is doing great job and should be given more credit.

  • Report this Comment On May 05, 2011, at 11:26 AM, TMFMarlowe wrote:

    @Jason87467: It's not speculative, and it's not negativity. Don't put me down as a GM basher. I own GM stock. My daily driver is a CTS-V. I've been watching this company for years and years and I'd love nothing more than to see them succeed in a big way.

    When I'm "pounding on them", as you put it, it's because I worry that parts of the organization are lapsing into old habits or settling for good enough when they should be pushing for excellence. GM has so much potential and I want to see them really unleash it, but there are real reasons to think it might misfire. I mean, you do know this company's history, right?

    @doctorolds: GM's numbers, released this morning, seem to support your case -- spending is trending down below the industry average as a percentage of transaction price, they say. I stand corrected -- or rather, maybe Edmunds should, because their estimates of incentives spending seem to be way off of the JDPower numbers GM was using in their presentation.

    I'll see if I can get more info.

    John Rosevear

  • Report this Comment On May 08, 2011, at 12:29 PM, MrChapel wrote:

    Whenever I read stories about GM vehicles, I see many rants regarding the quality by owners. As I recall, recently, I think it was J.D. Powers who noted that Ford was the only domestic carmaker who is in the top ten with regards to overall quality. The other two, GM and Chrysler were much lower. I don't know whether or not they had slipped on that list.

    Putting that and this story together, I'm assuming and I could be wrong here, that the majority of buyers have either been first-time buyers or people who have pushed the purchase of a new car off for a few years and went for the additional incentives instead of looking at quality and resale value. If it's first-timers, then quality is important and if indeed GM has quality control problems still, after all these decades, then you can bet that follow-on sales will not materialize. The same can be said for those who pushed off buying a car until now.

    Would you buy a vehicle from a company who earlier sold you a vehicle that has to go to the shop in a month or two? No. GM is not even going for good enough. I remember reading reviews of their vehicles from a decade ago and people like Brock Yates et al all complaining about the interior, the mushy underpinnings etc. Ford has been taking those complaints to heart lately as evidenced by vehicles like the Focus and others. Here in Europe, the Focus and later models have been praised for their fantastic suspensions, being equated favorably to those used on high-end sports cars. Interiors are not close to being equivalent to those of German vehicles but getting closer and closer.

    As for commanding highest prices, I've got to wonder why vehicles that are already long in the tooth are so expensive. Shouldn't they be priced more competitively? After all, the competition has newer models. That alone tells me that GM can't bring manufacturing costs down enough, even on the majority of their vehicles that have been in production for years already. Giving incentives to push them off the lot means they're cutting into their thin margins already.

  • Report this Comment On May 08, 2011, at 12:30 PM, MrChapel wrote:

    BTW, should've put this in the previous message, I own Ford stock.

  • Report this Comment On May 08, 2011, at 6:26 PM, zgriner wrote:

    After GM lied and announced it had paid back the US taxpayer - with more taxpayer funds - I decided I would never buy a GM car. Your article seems to confirm my belief that GM is more about gimmicks and numbers so that management can make their bonuses, rather than producing American cars that will compete with the top tier producers and last. "Planned obsolescence" still reigns supreme.

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