General Motors (NYSE:GM) said last week that it's planning to cut third shifts at two U.S. factories that make cars. The car models in question, the Cadillac ATS and CTS, and Chevrolet Cruze and Camaro, haven't been selling as quickly as GM would like, and inventories have risen sharply.
That wasn't really a surprise. GM is far from the only automaker to see car sales slump as more and more buyers gravitate toward SUVs. But inventories of some of those models were already way out of hand by the time GM announced the shift cuts (which won't take effect until January, by the way.)
And until recently, GM executives -- unlike some competitors -- were upbeat about the prospects for the U.S. market.
What happened here?
Did GM go full speed ahead into a slowing market?
During that third-quarter earnings call, CFO Chuck Stevens was still upbeat about the prospects for the U.S. new-vehicle market. In fact, he said that GM's production in the fourth quarter would probably be up "marginally" from its third-quarter output. That surprised analysts and many investors, who have been noting the increasing signs of a slowing U.S. new-car market -- and who were well aware of rival Ford Motor Company's (NYSE:F) much more conservative outlook.
If the production cuts are any indication, Stevens' outlook might have changed recently.
Inventories are measured in terms of days' supply. For most models, at most times of year, 60 days' supply is considered ideal. 90 days' worth or more is cause for concern, and over 100 is usually too much. (The exception: Full-size pickups often have higher inventories.)
Here's what the inventories looked like as of Nov. 1 for the cars in question:
|Model||Total Vehicles As of Nov. 1||Days' Supply As of Nov. 1||Total Vehicles As of Oct. 1||Days' Supply As of Oct. 1|
Note that the total number of cars is also significant. 105 days' worth of the Cruze is a much bigger issue (in terms of total volumes) than 135 days' worth of the Cadillac CTS. Note also that the "days' supply" number will increase as the pace of sales slows.
But no matter how we count them, that's a lot of cars sitting on a lot of dealers' lots. GM will probably boost incentives to clear them out. The production cuts will keep the problem from getting worse, but still: Those incentives will cut into its profits on those sales.
It's not quite what we could expect from GM's stated approach to managing a slowing market.
GM's "disciplined" strategy looks a little ragged here
GM executives often say that they are committed to a "disciplined" pricing strategy in the U.S.
"We remain absolutely committed to our disciplined retail-focused go-to-market strategy, and we have demonstrated that by managing supply and demand and through disciplined pricing," Stevens said during the company's third-quarter earnings call.
What does that mean? GM is saying that when sales soften, it will choose to reduce production of new vehicles rather than resorting to discounting to boost sales. The upshot is fewer vehicles sold, but the vehicles that are sold have higher prices and fatter profit margins.
That approach is good for a lot of different reasons, not least because it maximizes GM's profit margins. It should reward shareholders over time. But recent events have this GM shareholder wondering if that's really what the General has been doing.
That leads me to two questions. First, did GM wait too long before cutting production? Second, if GM did wait too long, are there other models piling up?
Inventories and incentives are climbing on this popular model
The answer to the first question is a judgment call. But we can look at inventory figures as reported by Automotive News to find an answer to the second -- and while there are several that are over 90 days, there's one that sticks out simply because, like the Cruze, the total number of cars involved is high: The Chevrolet Malibu.
As of Nov. 1, GM had 59,600 Malibus in inventory, a 96-day supply. That's up from 50,000, a 58-day supply, on Oct. 1 -- and suggests that the pace of sales slowed sharply last month.
The Malibu is a well-regarded product that was all-new for the 2016 model year. It should be selling well. But midsize sedans in general have been a tough sell this year. GM already has fat incentives on the Malibu, totaling almost $5,000 per car, according to J.D. Power figures obtained by The Motley Fool.
The high incentives are probably partly about clearing out leftover 2016 models. But it's still a lot of money, and a lot of inventory. Will the Malibu's factory -- GM's Fairfax Assembly Plant, near Kansas City -- be the next to announce a shift cut?
Maybe Ford's pessimism was warranted
I can't help contrasting GM's experience with that of Ford here.
Ford has been warning for a while that the U.S. market looked to be slowing, and that higher incentives and production cuts were likely in the second half of 2016. Here's what CFO Bob Shanks said during Ford's second-quarter earnings call in July, with emphasis added:
[Overall incentives across the industry] are up. We're up in line with that. The weakness or the softness in US retail industry – we see the second half actually being softer than the first half on an absolute basis. Again, that is retail.
These are absolutely strong levels [of overall sales]. They're just not as strong as what we had expected.
The contrast between Ford's pessimism and GM's upbeat output was cause for considerable comment among investors. Ford took some heat for it, with a few analysts wondering if the problem was that Ford couldn't keep up with its old Detroit rival.
But at least it was no surprise when the Blue Oval followed through on its guidance and cut production at five North American factories in October.
The takeaway: GM might have been caught off guard
Like many of its rivals, including Ford, GM's inventories and incentives are up. Neither is a surprise at this stage of the sales cycle. But it's a little bit of a surprise that GM might have let some of its inventories get out of hand before announcing moves to cut production -- not long after reiterating its upbeat outlook.
I think, in the end, CEO Mary Barra and her team are committed to following the approach they have emphasized -- to "walking their talk," as the saying goes. But it's possible that GM executives were caught off guard here -- or that some sales folks didn't get the memo.
It may turn out that Ford's cautious guidance wasn't pessimism, but an accurate take.