GM Needs Volume to Make Small Cars Profitable

Joliet, Il — General Motors Corp. Vice Chairman Bob Lutz says the industry will not sell small cars profitably until consumer demand swings further towards the segment.

“Part of it is getting the supply and demand dictated,” Lutz tells journalists at GM's recent '09 product preview here. “The profitability of fullsize SUVs was only there because that was what the public demanded. The profit always goes where the public wants it to go.”

With demand high and pricing robust, auto makers spent nearly two decades booking thousands of dollars of profit on every SUV they sold.

But with this year's spike in gasoline prices, consumers began fleeing the segment to more fuel-efficient passenger cars and cross/utility vehicles.

Sales of SUVs through August slid 29.4% to 318,635 units from 451,188 in like-2007, according to Ward's data, while deliveries of small cars pulled ahead 8.9% to 1.93 million from year-ago's 1.77 million.

“With the decline in the popularity of fullsize sport/utilities, we're seeing profitability of those (vehicles) decline,” Lutz says. “On the other end, look at the new (redesigned Chevrolet) Malibu.”

It commands an average transaction price of $22,000, whereas its predecessor brought only $16,500. “What's the difference? The desirability of the new car,” he says.

Lutz reports the market's shift to fuel efficiency has led to better pricing on other GM cars, such as the economical Chevy Cobalt and HHR cross/utility vehicle. Both sell with “zero to minimal” incentives, which pushes up their sticker prices as much as $4,000.

However, outside of these cars, the profit picture remains dim.

“The market isn't accepting any pricing,” Lutz says. “It's accepting discounting. Employee-pricing-for-all is working very nicely, but it is also very expensive, and right now the market is not resilient.”

GM started its employee-pricing incentive scheme last month and announced this week plans to continue the program through the end of September, with the addition of some '09 models it previously excluded.

GM says its average transaction price increased $1,000 on all vehicles in August to $26,600, compared with July, to lead the industry by $2,000.

Its cars also led the industry at $24,600, up $2,000 from July, GM says.

Mark LaNeve, vice president-sales, service and marketing, calls the rise in GM's average transaction price an indication of the auto maker's growing product strength. “The more (good products) we get in the market, the better off we'll all be,” he says.

But GM also sold more of its bread-and-butter light trucks in August than any other month this year on the strength of incentives, which were up $700 compared with year-ago.

The average truck transaction price fell slightly from July to $28,200. Compared with like-2007, the overall average transaction price on GM vehicles slipped $300.

Lutz declines to quantify how high the auto maker must price its future small cars to recapture the bounty it earned on fullsize truck and SUV sales. Indeed, he admits small cars aren't likely to ever reach the profit levels of SUVs.

However, a small, mechanically sophisticated Cadillac with a well-crafted interior could command a sticker price upwards of $40,000. Lutz points to the Mini from BMW AG, “which is a small car but is cool, and there seems to be no limit to how high they can price it.”

But he says GM must first solve its structural-cost puzzle, which contributed to a $15.47 billion loss in the most recent quarter and makes talk of which vehicles might become profitable pointless.

GM says benefits from a new labor agreement struck with the United Auto Workers union last year, plus an economic recovery in the next two years, are necessary for its turnaround. This places a greater emphasis on car sales vs. trucks to begin showing results.

He says former Ford Motor Co. Chairman and CEO Red Poling used to tell him when he worked at Ford: ‘Bob we're very satisfied with your performance in Europe, because unlike Ford North America, you have figured out how to make money on small cars.’

“I said, ‘Thank-you, Red.’ And he said, ‘But now the problem is you're not making enough money on big cars.’”