General Motors' (NYSE:GM) 2014 Silverado is the company's most important redesign since it filed for bankruptcy. It relies on the Silverado for juicy margins in the massively profitable full-size pickup segment, and it usually delivers. GM has been a little vague about when exactly these trucks will hit the showroom, initially saying it planned a spring launch. Now without more news from GM other than "soon," it's looking like mid-summer is a better bet. I think GM's hit a speed bump in the launch of the Silverado and it could be a big deal. Here's why the inventory report we'll see released after this month ends will be very important to watch.
High stakes game
Analysts estimate each full-size truck sold by Detroit's Big Three automakers can bring in as much as $10,000 in profit. Analysts also estimate that the full-size pickups can rake in as much as 60% of Detroit auto's profits. Right now, that's great news because the average age of trucks on the road is 13 years, and sales in the full-size truck segment is surging. Trucks are important for Detroit autos, but more important is the balancing act between new and old model inventories, especially during a redesign.
On May 1, inventory levels for the Chevrolet Silverado sat at 99 days, a high number yet still an improvement for GM. That's 12 days less inventory than it had a mere month earlier, but is still above January's 78 days of inventory. The average days of inventory for all Chevrolet "trucks" -- Avalanche, Suburban, Tahoe, and others -- sits at 74 days, a whopping 25 days fewer than the Silverado. If you want to compare apples to apples, rival Ford's (NYSE:F) F-Series has 93 days of inventory as of May 1, up from 85 a month earlier, which is at least in the ball park of GM.
Problem or not?
This could easily turn into a massive problem because of an aggressive price strategy by GM. It opted not to raise the price on its new 2014 model to try to take market share back from the F-Series and Ram pickups. It has a one year head start on Ford's next generation F-150 and with potential pricing pressure from Japanese rivals on a weakening yen, it felt its 2014 Silverado would be most effective without a price increase.
That turns into a big problem if and when you can't dwindle down your 2013 model inventory in time. That would leave GM between a rock and a hard place with tough decisions to make. It could opt to delay the release of its most important redesign, missing prime selling time as the full-size pickup segment surges from increased construction and housing demand. Or GM can release the 2014 Silverado on time and create a pricing war between its 2013 model -- a situation that has to be avoided. A nasty price war would result in massive incentives to move the older product as the 2014 has no price increase. As a result of that, the 2013 at a discount would cannibalize the 2014 market sales. Not a situation GM and its investors want to find themselves in this summer.
Currently Ford is producing more profits than GM off lower revenue from its leaner operations and if GM doesn't handle this speed bump quickly, it will cause margins and profits to drop, which GM can't afford. There's still time for GM to smooth things out, and last month was a solid step in the right direction. In addition to that step, much of Detroit is slashing downtime to improve its inventories of popular vehicles while GM is opting to keep its typical downtime for most plants to reduce its higher inventories. When we see inventory reports released next week, we'll know If Memorial Day sales helped slash Silverado inventories lower than 99 days. If it hasn't, GM will have a major speed bump to deal with this summer -- something management and investors hope to avoid.
Fool contributor Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends General Motors. It recommends and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.