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NINETY EIGHT REGENCY

How GM Handles a Hit: Build Fewer

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How GM Handles a Hit: Build Fewer

Wary of Repeating Mistakes,

Car Maker Cuts Production

To Keep the Enclave Hot

By JOHN D. STOLL

October 31, 2007; Page B1

This summer Mary Mooney and her husband were soaking up the sun in Florida when they saw a Buick Enclave, a big, seven-passenger vehicle, and decided they just had to have one. But when the couple called two dealers back in Michigan, where they live most of the year, the model they wanted was sold out at both.

[Heavy Load]

So instead of flying home, the Mooneys bought an Enclave in Florida and drove it 1,300 miles back to Michigan. Sitting in her opal-colored Enclave on Saturday, Mrs. Mooney said, "We fell in love with it."

The tight supply of Enclaves -- a so-called crossover utility vehicle that has become General Motors Corp.'s breakout hit this model year -- is no accident. Buoyed by a new labor contract that reduces its costs, GM is keeping a tight rein on production of the Enclave in an effort to avoid past mistakes that forced it to offer discounts and cheapened the image of the company's brands.

"We want to keep [the Enclave] hot," says GM Vice Chairman Robert Lutz. "Nothing destroys the value of a new product faster than over producing."

In the past, when GM had hot models, it usually built as many as it could, and almost always ended up with lots filled with unsold vehicles. For example, the Chevy HHR, a retro-styled wagon launched in 2005, sold briskly at first, often at full sticker price. But after cranking up production and offering discounts to boost sales, GM had a glut. Fifteen months after the HHR was introduced, Chevy dealers had enough in stock to last almost five months without ordering more. Since then, GM has had to continue discounting and dump thousands of HHRs into rental fleets, which eroded the margin on the car, and badly watered down its cachet.

Ford Motor Co. and Chrysler LLC often do the same with their fast-selling models and are also trying to break away from the practice. But GM's handling of the boldly styled Enclave and two other crossovers made from many of the same parts -- the GMC Acadia and the Saturn Outlook -- is one of the first signs any of the Big Three is truly changing its ways.

Both the Enclave and Acadia are selling almost as fast as dealers get them. At the end of September, GM had a 21-day supply of Enclaves, and a 49-day supply of Acadias. The Outlook hasn't sold as well and its stock is higher -- 73 days' supply. A supply of 65 days or less is considered healthy.

But overall auto sales have slowed this year, hurt by the housing slump and high gas prices. So GM is acting now to hold down its inventory of the three crossovers, which look like SUVs but are lighter, drive more like cars and get better gas mileage. In December, the Lansing, Mich., plant that makes the three models will cut back to two shifts of production from three.

It's a risky move. The crossovers, which sell for $35,000 and up, make a lot of money for GM at a time when sales of its highly profitable trucks and SUVs are falling. GM is also struggling to produce steady profits in North American and needs every dollar it can bring in.

The need to maintain revenue means GM can't apply the tight-supply approach to all of its models, their best-selling cars and trucks, and still has to use incentives to prop up sales. For instance, although GM has cut truck production recently, it is still offering 0% financing for 60 months on its Chevrolet Silverado pickup.

Meticulously controlling supply takes a page out of the playbook used by many of GM's more profitable foreign rivals, said Earl Hesterberg, chief executive of Group 1 Automotive Inc. a dealership chain based in Houston. Both Toyota Motor Corp. and Honda Motor Co. ratchet production levels up or down to stay in line with demand and minimize the need for discounting.

"This is the way [Toyota's] Lexus business operates and the way the BMW business operates," Mr. Hesterberg said.

Michael Jackson, chief executive of AutoNation Inc., another large dealership chain, has been badgering GM executives, including Chairman and Chief Executive Rick Wagoner, to cut production and tighten inventory for a couple of years. He insists it's the only way to get away from hefty rebates.

"If your product is hard to get, it becomes more desirable to the consumer and people will pay full price for it," he said.

Until now, GM has been under great pressure to build as many vehicles as possible -- mainly because the company needed to generate huge sums each year to cover the cost of health care for more than a million people, mostly union retirees and their dependents. Any production cuts risked leaving the company with less revenue to finance its debts and the obligations to its workers.

But in the past few years, GM has fundamentally changed its cost structure. A deal with the United Auto Workers in 2005 lowered the company's health-care costs. Last year it shed about 30,000 workers -- roughly a quarter of its unionized workforce -- through buyouts and early retirements.

More far-reaching changes came in the new labor contract workers approved last month. It allows GM to hire new workers at lower wages and give them 401(k) accounts for retirement, which are much less costly than pensions. It also lets GM to set up a union-controlled fund that will cover the cost of retiree health care, which will remove about $50 billion in liabilities from GM's balance sheet.

With its labor costs now set to fall steadily over the next several years, GM can start to bring production more in line with consumer demand without worrying as much about a revenue shortfall.

The new contract also gives GM more flexibility to lay off workers when demand slackens. Twelve days after the contract was ratified, GM announced it would phase out the Lansing plant's third shift and lay off 1,000 workers building the Enclave, Acadia and Outlook.

It is also reducing production at a truck plant and a large-sedan plant, both in Michigan, which together will result in an estimated 1,900 job cuts.

GM will face a test of its ability to maintain discipline in the months ahead after it introduces new versions of two critical sedans -- the Cadillac CTS and Chevrolet Malibu -- while auto sales are trending downward. Currently, the U.S. market for light vehicles, which include passenger cars, pickups and SUVs, is 1.5 million vehicles lower on an annual basis than GM had thought it was going to be when it crafted its restructuring plan in 2005, said GM sales analyst Paul Ballew. Lower industry sales will mean GM has to stretch to hit its revenue target, and could be forced to pump up sales with incentives.

And while the Enclave and the Acadia are hits for now, that could change in 2008 when GM begins building a Chevrolet version of the same vehicle, called the Traverse, at a plant in Tennessee. Because Chevrolet sells far more vehicles than Buick or GMC, the Traverse could very well pull buyers away from the Enclave.

"Of course we don't want to have too little supply on dealer lots," Mr. Ballew said, "but the situation we're looking at now is definitely a good problem to have."

[GM]

source:

http://online.wsj.com/public/article/SB119...4909776934.html

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uh.... what? :blink:

+1, the traverse has the danger of cannibalizing sales from the Saturn & GMC models, but the Buick is differentiated enough that it's not likely to have a noticeable effect, IMO.

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They'll be surprised to find out very few Buick owners or targeted buyers will consider Chevrolet, let alone cross shop the brands side-by-side. It's not a natural impulse. Never was, and as the newer products come out distancing the brands further... never will.

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In other news, the Highlander steals sales from the RX330 and the Pilot steals sales from the MDX.

What sales?

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Currently, the U.S. market for light vehicles, which include passenger cars, pickups and SUVs, is 1.5 million vehicles lower on an annual basis than GM had thought it was going to be when it crafted its restructuring plan in 2005, said GM sales analyst Paul Ballew. Lower industry sales will mean GM has to stretch to hit its revenue target, and could be forced to pump up sales with incentives.

Did you get in GM executives' heads Mr Ballyhoo, when you made that comment?

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GM shouldn't even have given a thought about producing the Traverse. How many of these crossovers do they need and in every brand?! It's the same problem Chrysler is going through right now, too many overlapping products. Of course Chrysler is getting ready for some much needed chopping of products.

GM will have a problem down the road. Big deal if they are keeping the Enclave production low. They need a smaller crossover in the market - stat instead of flooding the market with 500,000 Acadias, Enclaves, and Outlooks.

Edited by RJB
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uh... Saturn Vue, Chevy Equinox, Pontiac Torrent?

They need a proper midsizer. The Thetas are narrow and inexpensive compared to the Edge or Highlander.

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They need a proper midsizer. The Thetas are narrow and inexpensive compared to the Edge or Highlander.

The new Thetas are coming pretty soon. Let's see how they compare after some changes.

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What, does GM come up with a new way to strangle Buick, now that it's got a hit? Restricting sales might be a more feasible option if GM would HURRY UP and get Buick something else with the same effort and care as Enclave. The '09 LaCrosse better be no excuses, Mr. Lutz and it can't get here too soon. (And HURRY UP with the NAIAS, so Buick can publicly reveal that it's going to produce a new Riviera 8))

Edited by wildcat
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They'll be surprised to find out very few Buick owners or targeted buyers will consider Chevrolet, let alone cross shop the brands side-by-side. It's not a natural impulse. Never was, and as the newer products come out distancing the brands further... never will.

I'm one of those buyers.

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I agree it will hurt GMC and Saturn the most. This is all good news for the most part tho! Wahoo alot of positive things have been said tonight!

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GM shouldn't even have given a thought about producing the Traverse. How many of these crossovers do they need and in every brand?!

Ummm...huh? I'm no fan of brand engineering, but Chevy needs a large crossover. It's too big of a market to not have one in your core brand. If there's a brand that doesn't need one, it's Saturn. If Saturn is supposed to be the American Opel, it just doesn't seem to fit the theme. Plus, part of GM's multi-brand philosophy is to have multiple vehicles where it makes sense. Hopefully though, they'll have the foresight to know when it's time to reign the Lambdas back in rather than allowing too many similar models to survive while the market is shrinking, like what happened with their midsize SUVs.

The new Thetas are coming pretty soon. Let's see how they compare after some changes.

Can't wait to see those. The Camaro and Volt are cool and will do a lot as halo vehicles adding to GM's image (and yes, will do more volume than most typical halos), but it's vehicles like the new Malibu that make the difference to the bottom line and affect the greatest number of potential buyers. With the midsize CUV market exploding, I consider the next Equinox to be one of those vehicles too...very important.

What, does GM come up with a new way to strangle Buick, now that it's got a hit?

OK, Buick needs attention, fine. But, cranking out a ton of Enclave's because they're hot now and driving days' supply into the 80s is only going to lead to fire sales and incentives later and we all know where that leads. By keeping supply short, you can make it's hit status last a little longer and make it seem more exclusive. Also, you'll improve resale value by not dumping the aforementioned incentives on the hood. And all that will lead to an improved brand image from which Buick can truly thrive on. Otherwise you just kill your product efforts with poor marketing.
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I think this is a good strategy for the Enclave. It makes them more desirable. I just hope that the dealers don't take advantage of this and make customers pay ridiculous amounts exceding the MSRP. GM and Buick definitely don't need any public relation disasters right now. I hope they remember that if you screw the customer, you screw yourself in the long run. Chrysler did this with the PT Cruiser and look at the position it is in (of course, the lack of a redesign hasn't helped matters either).

I don't see Chevy's version competing with the Enclave. I think it will interfere with the Outlook the most and the Acadia to a lesser degree. I think Chevy should be the last brand to get a version. Cadillac could use a better representative in the segment than the SRX, but I think a large Cadillac crossover should be based on a rear wheel drive platform (with available all wheel drive) to make it more exclusive.

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GM will reduce line speed to keep supplies low and the demand high. It's what they are doing and have been doing to the Kappa cars.

Actually, Kappas CANNOT be built quickly...so this was not necessarily by design---and the last time I checked, there were between 80-90 days of Solstii available...but that's the 2 seat roadster market in a nutshell--there's just not enough demand in general for these products....

The idea of limiting production is a good one, however, with Outlook sales settling into the 30k/year range, they may not have to effect Enclave production volumes at all--my guess is that planned Outlook volume will be supplanted by Enclaves, thus no need for the extra shift.

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