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Is GM Trading Revenue for Profits?

Tim Brugger
July 13, 2012

Jump-starting slow or stagnant sales by offering new car buyers everything under the sun is a tried-and-true method of auto manufacturers the world over. But General Motors (NYSE: GM  ) has pulled out all the stops to get the revenue ball rolling, offering new car buyers between now and Sept. 4 a 60-day, no-questions-asked full refund guarantee. Though not unheard of (in fact, GM did it in 2009), giving customers the option to return their cars and get their money back is an aggressive marketing ploy if ever there was one.

The ups and downs of incentives
Generating revenue in a difficult economic environment is always a challenge. Selling cyclical, big-ticket items when times are tough puts even the best marketing departments to the test. But despite all that, car companies continue to provide shareholders with impressive sales results. And incentives are -- at least in part -- being used to maintain that top-line growth.

In addition to GM's money-back guarantee, customers can also take advantage of the same price cuts GM vendors are offered. And the company is bringing back its no-haggle pricing for a couple of its Chevy cars to get them off showroom floors before new models roll in.

It doesn't take an advanced degree in marketing to see all these incentives should boost sales. The question is the impact these will have on already-thin margins. Driving revenue growth is all well and good, but doing so at the expense of the bottom line is a risky proposition, to say the least.

GM will boost sales, but what about margins?
GM, like most auto manufacturers, has enjoyed a nice increase in sales recently. The 4.76 million cars and trucks sold around the world in 2011 broke long-standing company records. GM followed that up with a record-breaking Q1 with 1.8 million units sold -- that's heady stuff. But here's the rub: First-quarter revenue was only marginally better than Q1 of 2011, and the cost of that revenue jumped more than $1 billion compared to last year.

And all that sales growth? It doesn't stack up to other car companies. The U.S. auto industry as a whole has grown 15% this year, compared to GM's 6.3% for its Chevy line, and only 4.3% in total. Of course, GM's market share was hurt as the Japanese automakers returned to nearly full strength, but increasing sales for GM is still a must, no doubt about it.

When margins are as squeezed as GM's, clearly top-line growth isn't falling to the bottom line. And the margin pressure could become even more troubling when those incentives kick in. The operating margin of 2.59% that GM generated doesn't compare to competitors like Ford's (NYSE: F  ) 5.82% in the same period.