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Finally, This Troubled Automaker Is Making Better Decisions

By Daniel Miller - Dec 18, 2014 at 3:51PM

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2014 has been a rough ride for General Motors, and rightfully so with its tragic recall saga. Recent decisions regarding fleet sales at least give investors hope that GM's management will continue to make better decisions.

General Motors headquarters in Detroit. Source: General Motors.

For decades, people trying to take a jab at poorly managed Detroit automakers would go for a low blow and call the automakers "fleet queens." Sure, some fleet sales, namely those to rental fleets, are detrimental to profit margins and actually lower residual values of an automaker's fleet, but investors should rest assured that General Motors (GM -1.04%) is finally making better decisions around its fleet sales.

If you're going to do something...
Let's take a quick look at a few things General Motors has done recently. Most important, if you're going to sell to fleet companies at all, you'd better do it right. One example of this is General Motors changes to its flagship sedan, the Chevrolet Impala. While it was once known only for its success as a fleet vehicle, GM decided to reverse the car's negative image and turn it into a popular design for retail buyers.

The 2014 Chevrolet Impala has impressed critics. Image source: General Motors.

The result was positive. GM's redesigned 2014 Impala became the first domestic car to win Consumer Reports' top ranking for large sedan in more than two decades -- that's a big deal. "The Impala's performance is one more indicator of an emerging domestic renaissance," said Jake Fisher, director of CR's automotive testing, in a statement.

GM's redesigned Impala found success on the business side of things, too. GM believes that 70% of future Impala sales will be from retail consumers, and those sales are much more profitable. For context, previous versions of the Impala that were successful fleet vehicles only sold to retail customers roughly 30% of the time.

That's just one example; here's another.

Recently, the 2015 Chevrolet Cruze was named 2014 fleet car of the year by Automotive Fleet and Business Fleet magazines, according to General Motors. The Cruze topped 48 other vehicles, and its fleet sales are up 41% this year through October. One thing GM is doing to improve the profitability of Cruze fleet sales is to improve its connectivity, which includes OnStar 4G LTE, and a standard built-in Wi-Fi hotspot.

Speaking of prices...
One last example comes from a different angle of the fleet-sale equation. Recently, prices that GM was fetching on its retired-from-rental fleet vehicles dropped significantly, likely due to an oversupply of its vehicles hitting the auction market. Former management would likely have ignored this event, but "new" GM decided to cut sales of these retired fleet vehicles temporarily. Automotive News reported that some GM auctions have had fewer than 70 vehicles recently, down from the 800 or so seen during October.

Why is this a good and important move, you ask? If GM had continued to sell these vehicles as prices dropped, it would have lost out on quite a bit of revenue per vehicle, as well as put more downward pressure on its vehicles' residual values. That would have made it even harder to sell new vehicles, because more consumers would be tempted to buy these cheaper vehicles from the dealerships that bought them cheaply at auction -- and that's a negative impact for new-vehicle demand that would be amplified as sales pick up during the holidays. As GM releases these vehicles at auction more slowly, prices should stabilize or rise, which bodes very well for the automaker squeezing out as much revenue as possible, while enabling new-car demand to remain strong.

These three examples -- the rebranding of the Impala, the domination and improvement in profitability of the Cruze, and the control of residual values -- are all pointing to a General Motors that better understands how to manage fleet sales. This is one of many reasons that GM has recorded 26 consecutive months of increased average transaction prices for its vehicles, which juices company revenues.

This is a big win for investors. And it's even more reassuring that GM management is taking a step forward despite a year filled with recalls.

Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. 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.

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