What goes up must come down, and all good things come to an end. Those are two phrases that could easily describe the automotive industry over the past eight years, which has been lucrative for automotive sales as well as prices and profits but now faces a new reality of slowing sales, stalling prices and potentially volatile profits.
What would make the new reality much worse, however, would be if automakers haven't learned from past cycle horrors involving massive incentives and bloated inventories. Fortunately, General Motors (NYSE:GM) just dropped some valuable information that should ease concerns about its recent increase in inventories.
Time to idle
General Motors ended the month of March with roughly 98 days' supply of vehicles, which was a notch higher than the 91 days' it had one month earlier and much higher than the 71 days' at the end of 2016. That was much higher than Ford Motor Company's 80 days' supply at the end of March and Fiat Chrysler Automobiles' 82 days' -- and all of those levels are higher than the industry's preferred 60-65 days' supply.
In fact, GM's supply at the end of March was its highest level in nine years, according to Automotive News, but little did many of us know that there was a reason behind the bloated inventory other than slowing sales.
GM is going to need the extra inventory soon: The automaker announced this week at the New York International Auto Show plans to idle numerous North American plants for a total of 10 weeks later this year in preparation for new model launches. The scheduled downtime for retooling was a large driving force of GM's ballooning inventory over the past few months.
Alan Batey, General Motors' president of North America, added an interesting hint: "Our inventory is high because we're going to take 10 weeks out in the back end of the year as we're modifying our plants, particularly with pickup trucks."
The note about pickup trucks is intriguing, as the Silverado and Sierra were launched as model year 2014, and the models were refreshed in 2016. While the two sister trucks have sold well, they haven't managed to gain ground on America's best-selling pickup truck, the Ford F-Series. It'll be of huge interest to investors when GM releases more information on that upcoming development and possible redesign.
Ultimately, however, hearing from GM's management about a direct reason for GM's bloated inventory is huge. Most auto investors remember the bottom-line pain that comes with an automaker having far too much inventory and needing to entice consumers with massive incentives -- it can be devastating. Speaking to reporters, Batey noted that the inventory levels are precisely where GM wants them, and that if they need to balance supply and demand, the company is prepared. In addition to announcing potential new vehicles at the auto show, GM squashing this looming concern was more than investors could have hoped for.