General Motors (NYSE:GM) is planning extended shutdowns at two of its U.S. assembly plants, as it copes with swelling inventories of slow-selling sedan models.
GM's shutdown plans are the latest in a growing list of signs that the U.S. new-car market's long growth streak is losing steam.
What's happening: Extended summer closings at two GM sedan factories
As first reported by The Wall Street Journal, GM will extend the traditional two-week summer shutdown at two factories:
- GM Fairfax Assembly, in Fairfax, Kansas, will be shut down for a total of five weeks starting in late June. Fairfax employs about 3,200 hourly workers, and builds the midsize Chevrolet Malibu.
- GM Lordstown Complex, in Lordstown, Ohio, will shut down for longer than two weeks, but it isn't currently clear how long the factory will be idled. The Lordstown plant employs about 2,700 hourly workers and produces the compact Chevrolet Cruze sedan.
U.S. sales of the Malibu have fallen 30% this year through May, amid broad market weakness for sedan models and a decision by GM to reduce its sales to rental-car fleets. As of June 1, GM had 67 days' worth of Malibus in inventory in the U.S., according to Automotive News data; that's not an excessive number, but given softening demand, GM may want to ratchet that down further.
Sales of the Cruze are actually up 36% this year through May -- but that's largely due to a new hatchback version of the compact Chevy. The hatchback is made in a different factory, in Mexico; retail sales of the Cruze sedan, made at Lordstown, are down 3% this year.
As of June 1, GM had 87 days' worth of Cruzes (including both hatchbacks and sedans). That's a high number, one that GM would probably prefer to reduce to around 60 -- and it's possible that the current inventory includes more sedans than GM would like.
GM has been building inventories of several models in advance of some planned factory downtime (for plant upgrades) later this year. Its overall U.S. inventory stood at 101 days' worth as of the end of May. That's quite high: Automakers generally prefer to have 60 days' worth of most models, with a somewhat higher supply of full-size pickups.
What it means: A side effect of a stalling market
Auto sales are cyclical, and signs are mounting that the U.S. new-car market is past the peak of its current cycle. While the pace of auto sales is still quite strong by recent historical standards, a stalling market gives automakers a tough choice: boost discounts in search of incremental growth -- or hold prices steady, and lose some sales to discounting rivals.
Higher discounts (or "incentives") can generate sales growth, but they come at the expense of profit margins. GM, like Ford, has said that it will prioritize profitability over sales totals as the market weakens. It did well in the first quarter, delivering a very strong 11.7% EBIT-adjusted profit margin (EBIT is earnings before interest and taxes) in its North America region -- proof that it preserved profit margins while others discounted.
But GM's rising inventories may be the other side of that coin. We'll know more when GM reports its second-quarter results next month.