GM priority is profit, not all-out production

[NINETY EIGHT REGENCY]

GM priority is profit, not all-out production

Chrissie Thompson

Automotive News -- February 22, 2010 - 12:01 am ET

DETROIT -- General Motors Co. and its dealers are adjusting to a new reality: It's OK to miss some sales in the name of profits.

GM is squeezing all the vehicles it can out of its existing plants instead of hurrying to restart idle plants, even though an improving economy this year could push demand past GM's forecast.

Meanwhile, dealers are learning to operate without lots bloated with ready-to-sell vehicles.

It's a sea change for a company that before its 2009 bankruptcy tended to keep factories running at all costs. But the advantages of lean inventories are immense: low incentives; better brand values; and, eventually, annual profits, which have eluded the company since 2004.

"By doing everything right -- in the short term, tighter alignment of production and demand -- maybe it will cost us a few sales," says Mike DiGiovanni, GM's top sales analyst. "But that will build the brands. And by doing so, the residual values will go up, people will pay more for our vehicles, and more importantly, the image will be greatly enhanced. And that will gain us market share."

To keep costs down -- and keep up with demand -- the automaker by spring will have five of its 16 operational North American plants working at more than what is typically known as 100 percent capacity: two standard shifts, five days per week.

Walking a tightrope

Take production of full-sized SUVs. GM is walking a tightrope.

The Arlington, Texas, plant that builds the GMC Yukon, Cadillac Escalade and Chevrolet Tahoe currently is running two 10-hour shifts five days a week, with some Saturday overtime planned in March and April.

That's because in December a combination of lower gasoline prices and financing and cash incentives sent inventory of those vehicles tumbling below a 34-day supply by Jan. 1, according to the Automotive News Data Center, compared with the industry's typical 60-day level.

GM dropped the financing incentives on 2009s -- but not the $2,000 to $4,000 cash rebates -- at the end of December and added the fifth day of production at the end of January. Inventory of those SUVs had increased to between a 38- and 61-day supply by Feb. 1.

If GM keeps limiting those vehicles' incentives, the Arlington plant may be able to keep up with demand without adding a third shift, DiGiovanni says.

But that doesn't change the pleas of dealers nervous about low inventories. GM is working on getting them hot products, but dealers who want more than a 60- or 70-day supply should take comfort in higher transaction prices, DiGiovanni says. In January, sales chief Susan Docherty says, GM transaction prices saw an average year-over-year increase of $3,000, compared with an industry increase of $1,800.

Flight from incentives

Executives are hoping to wean dealers and customers off incentives. In January, GM offered incentives of about $3,200 per vehicle, down from $4,400 a year earlier, Docherty says. Competing automakers' incentives fell from $3,300 to $2,700 in the same period.

Jim Hawkins, a Chevrolet dealer from Danville, Pa., says dealers know they need to adjust to life without several months' worth of product on their lots.

"There's some product issues, but they've already got a 60- to 70-day supply companywide. We're just going to have to learn to work this way."

But will GM miss sales if U.S. demand skyrockets late this year? It could happen, DiGiovanni says.

"My message here to the senior leadership is it could turn quicker than we think, and we have to be prepared for that," DiGiovanni says. "Let's not miss the upside."

Last month DiGiovanni raised the low end of GM's 2010 U.S. light-vehicle forecast, saying sales would total 11.2 million to 11.7 million. The old forecast was 10.7 million to 11.7 million, up from 10.4 million sold in 2009.

But DiGiovanni has to keep weighing the chances that consumers will buy even more vehicles this year.

"There is some probability that the industry could be above" 11.7 million light vehicles, DiGiovanni says. "In our planning we do look at that, just to be prepared. It's not a 50 percent probability. It's less than that."

Skimpy supplies of the Chevrolet Equinox and GMC Terrain underscore the hazards of underestimating demand. Both those vehicles, selling without rebates, started the month with less than a 20-day supply. The Ingersoll, Ontario, plant that makes the hot crossovers already is running on three shifts, plus about three Saturdays a month.

Mark Frost, general manager of Jim Ellis Buick-GMC and Jim Ellis Chevrolet outside Atlanta, sold 130 vehicles in January. But he says his stores could have sold at least 30 more if they had had enough hot products. For instance, he got two Terrains last week for the first time since January. But he expects they will sell as fast as the two Equinoxes he got earlier in the week and delivered the same day.

"The second they're here, they're gone within 24 hours," Frost says. "It is frustrating that we know we could be selling a lot more vehicles, but it's a good indication for the future."

The success of those products surprised GM's forecasters, DiGiovanni says. Executives have said repeatedly that they're looking for ways to boost production in response, although the solution will be nontraditional, North American President Mark Reuss has said.

Vice Chairman Bob Lutz suggests one way to add output cheaply and quickly is to put less-automated tooling -- meaning less robotics, more workers -- in an unused plant, and Reuss once mentioned GM's shuttered plant in Spring Hill, Tenn., in a discussion about reopening factories. Chrysler used that strategy in the 1990s to capitalize on fast-growing demand, Lutz says.

Not worried

But in general, GM's strategy of lowering rebates and maxing out existing plants still will work if 2010 U.S. sales surpass GM's current forecast -- reaching, say, 12.2 million, DiGiovanni says. In that situation, GM risks losing half a point of share at the most, he says. The automaker had a 20.9 percent share in January, which exceeded its share targets.

A stronger economy could mean more demand for pickups, currently running about 11 percent of total vehicle sales.

"That segment has a potential to pop to 12 percent overnight easy if the housing market comes back," DiGiovanni says. "That still drives our volume. We're 40 percent" of that segment. More truck sales would mean GM would pick up share to offset capacity constraints elsewhere. GM still has room to add enough production to keep up with higher demand for pickups, he says.

Still, if GM's share were to drop because consumers demanded more vehicles than it could produce, the ultimate goal still would be in reach, DiGiovanni says.

"By definition, that would mean, I'm sure, we were very profitable," he says. "We would, I would think, significantly exceed our financial targets in that scenario. And we would be very happy."

Maxed out

Since October, these GM plants have run, or will run, more than 2 shifts.

Plant Products start of extra shift

Ingersoll, Ontario Chevrolet Equinox, GMC Terrain October '09

Kansas City, Kan. Chevrolet Malibu, Buick LaCrosse January

Arlington, Texas Cadillac Escalade, Chevrolet Tahoe, GMC Yukon January

Delta Twp., Mich. Buick Enclave, GMC Acadia, (Chevrolet Traverse coming in spring) Spring

Fort Wayne, Ind. Chevrolet Silverado, GMC Sierra Spring

Read more: http://www.autonews.com/article/20100222/OEM01/302229949/1178#ixzz0gGn80XHt

[RJB]

How about long-term quality? Where does that fall in the overall scheme of things? Just recently (consumer joke) stated that the CTS is a remarkable car in every aspect against the foreign automakers, but the quality is suspect over time. That's where GM's biggest hit is. You may have a fantastic car when it's new, but after year or so down the road the car doesn't seem like such a jewel anymore, which squeaks, rattles, and other problems. Trust me I know, I have an 08 Aura with 18,000+ miles on it and it's been to the dealer more times than I'd like to think about