Maybe Tesla could learn a few tricks from old General Motors (NYSE:GM): The manufacturing "ramp" for GM's all-new full-sized pickups appears to be a bit ahead of schedule.
Earlier this year, GM said that its all-new pickups would begin arriving at dealers this fall. But the first new trucks have already arrived, and while it's very early, dealers say they're selling quickly -- two very good signs for GM's bottom line.
GM is already shipping some higher-end pickups
GM said that its big pickup-truck assembly plant in Fort Wayne, Indiana began shipping the first of the all-new 2019 pickups at the end of July.
Not surprisingly, early production at Fort Wayne has focused on popular, high-profit versions of the trucks: crew-cab and V8-powered versions of the Chevy Silverado, and upscale SLT and Denali versions of the GMC Sierra. It's the same strategy that Ford Motor Company (NYSE:F) followed when it launched its all-new F-150 in 2015, and it makes sense: The early arrivals can be sold at especially strong prices.
Like Ford with that F-150, Chevy and GMC dealers will be selling a mix of old and new trucks for the next several months. GM built up ample inventories of the outgoing 2018 model-year trucks before revamping its factory to make the all-new models. The idea was to ensure that dealers have plenty of trucks to sell while GM works to fill its pipeline with the all-new models.
Why GM expects the new trucks to boost margins
Most GM investors probably already know that these full-size pickups are extremely important to GM's bottom line. They're very profitable products that sell in high volumes: The Silverado is GM's best-selling product in the U.S by far, and the Sierra is third (behind the Chevrolet Equinox crossover SUV).
The sales numbers are just huge: GM sold almost 400,000 Sierras and Silverados in the U.S. in the first half of 2018. If the two were counted as a single product, it would have trailed only Ford's rival F-Series in U.S. sales in the first half of the year.
But while GM's current trucks have been able to rival Ford's F-Series sales totals, the average transaction prices on the outgoing Silverado and Sierra have trailed those of Ford's trucks, suggesting that the GM twins are probably less profitable than their rival. The reason: Ford has staked out a big presence in the growing "luxury pickup" subsegment, with a range of appealing (and good-selling) trucks priced over $55,000.
GM's outgoing models didn't compete well in that end of the market. But GM president Dan Ammann said earlier this year that the all-new trucks will come with an expanded range of luxury trims and offerings in an effort to close the gap. In particular, the all-new version of the popular GMC Sierra Denali is taking a step further upscale. It's no accident that Sierra Denalis were among the first all-new 2019 trucks to emerge from Fort Wayne. The new Denali starts at $54,700.
As part of its factory overhaul to build the new trucks, GM is also expanding its ability to build popular (and higher-profit) crew-cab models. Ammann said that production constraints meant that only about 60% of the outgoing pickup's sales were crew-cab models, below the industry average of roughly 70%.
But of course, it will take several months before GM's dealers have lots full of the all-new trucks to sell.
How the new trucks will affect GM's profits
During GM's second-quarter earnings call, CFO Chuck Stevens said that GM's profits in North America fell about $800 million from the same period in 2017, primarily due to the discounts on its outgoing trucks. GM's profits and margin in the region were still strong, and the decline wasn't a surprise: GM's profits on the outgoing trucks will be relatively thin from here on out, while its profit margins on the early examples of the all-new trucks should be quite fat.
It will, however, take a while, likely until around the end of 2018, before the all-new trucks account for most of GM's full-size pickup sales. Assuming that the U.S. new-vehicle market stays strong, the new trucks should give GM a nice profit boost in 2019. In the meantime, the pressure on GM's profits from the discounting should gradually ease over the next two quarters as more of the new 2019-year trucks arrive at dealers.