More GM Discounts Coming?

Southfield, Mich. December 16, 2002; Doron Levin writing for Bloomberg reported that "steep discounts by General Motors Corp. have helped push new vehicle prices into a tailspin, though U.S. consumers could find prices even lower if they wait until after the holidays.

Inventories of unsold vehicles nationwide have been swelling to a level that worries some analysts. General Motors -- the No. 1 U.S. producer -- nevertheless has signaled that discounts and robust production will continue.

The automaker announced in late November it intends to increase U.S. production in the first quarter.

The big question mark is the consumer. How many will be motivated to trade the relatively new models they're driving for ones that are brighter, shinier and probably even less expensive?

Absent a new flood of car buyers -- which seems unlikely given anecdotal evidence of slow traffic in showrooms -- the discounts will be essential for clearing dealers' lots of unsold vehicles.

Add another question mark: Are progressively bigger discounts setting up the auto industry for a deflationary price spiral that might be difficult to break?

Inflationary Spirals

Inflationary spirals spark buying because consumers expect prices to rise. Deflation is the opposite; buyers postpone because they believe prices are going lower.

The company wants badly to peel back its heavy discounts," said Darren Kimball, automotive analyst for Lehman Brothers Inc. But when push comes to shove, it sees maintaining volume and share as its overriding best interest."

Kimball said this strategy virtually guarantees that it will be another negative pricing year in 2003" for GM, Ford Motor Co. and DaimlerChrysler AG.

Credit Suisse First Boston calculated the unsold vehicle inventory for Detroit's Big Three at 2,552,649 at the end of November, up 167,519 from October. Detroit automakers hold about 60 percent of the U.S. new vehicle market.

Including unsold vehicles from foreign and domestic automakers, inventories stood at 3,588,379 at month's end, according to Autodata Corp. At the current sales rate, that number represented a 77-day supply, compared with a 68-day supply in October and a 55-day supply a year ago.

With pension and health-care obligations looming, General Motors wants to concentrate on maintaining strong cash flow. Moreover, Ford Motor has been weak for the past 18 months because it has been caught with few new models and has been suffering quality glitches, so General Motors' price-cutting has been effective in winning customers from its biggest domestic rival.

Cash Flow, Market Share

Maximizing cash flow and market share with aggressive discounts has, however, hurt profit margins. General Motors' worldwide gross margins -- net sales minus cost of goods sold -- fell to 11.5 percent in the third quarter, the lowest level since the summer of 2001.

Because some U.S. car buyers shop among domestic producers only, Ford and DaimlerChrysler AG try to match General Motors' discounts, rather than risk losing sales.

Models built by Japanese producers, whose customers often compare one Japanese brand against another, are also offering discounts, though less steep than those of domestic models. Honda Motor Co., for example, is offering loans of 1.9 percent to 3.9 percent on 2002 and 2003 Civics.

A $6,000 Discount on Yukon

Last week GM extended five-year, no-interest loans to 13 sport utility models that previously were offering three-year, no- interest loans. Moreover, the automaker added a $1,000 cash rebate on car and cross-over models like the Buick LeSabre and Buick Rendezvous, which already had several thousand dollars in cash rebates and no-interest financing.

For a GMC Yukon full-size sport utility, which normally sells for $50,000 at retail, a five-year, no-interest loan is worth about $6,000 off the retail price, taking into account the automaker's current cost of borrowing, according to Lehman Brothers.

Pricing has been difficult for manufacturers in part because of the worldwide glut of factory capacity. Analysts believe about 80 million vehicles could be built annually in existing factories, though demand stands at only about 60 million.

Looking at 2003

For General Motors executives, 2002 has been an opportunity to prove they can stop the steady erosion of market share, which dates to the early 1980s -- mostly at the hands of Asian and European producers. Since the mid-1970s the automaker hasn't operated for two straight years without losing market share.

General Motors' captured 28.3 percent of the U.S. market in 2001, only a 10th of a point more than its share in 2000. This year GM's share was headed toward another increase; executives have been wearing lapel pins with the number 29," symbolic of the market-share goal they were targeting. In November, however, sales weakened despite heavy discounts.

Most forecasters believe the 2003 U.S. vehicle market will decline from this year's expected sales of about 16.8 million units. A consensus of 10 economists polled by Automotive News pegged next year's total at about 16.1 million units.

Given the possibility of war with Iraq and rising unemployment, General Motors forecasters say any total above 16 million will be regarded as decent in 2003. They hope to give fewer, smaller discounts but aren't counting on it.