GM’s Determination Has Costs

DETROIT – General Motors Corp. appears determined to stick to its sales and marketing plan in North America, whatever the cost.

The No.1 auto maker says it is prepared to accept months in which total sales decline as it reduces its daily rental sales.

GM also will resist the urge to buy short-term market share with incentives, even as the competition increases discounts in some segments, marketing executives say.

The auto maker is pledging not to make products with razor-thin profit margins. It will support its eight distinct brands, now distributed by a sales organization winnowed to four channels, with a newfound discipline to not badge-engineer identical models across all brands.

It means bracing for hits of bad publicity in the months ahead, starting with next week’s March sales report. U.S. totals will suffer by comparison with year-ago, in part because there will be fewer fleet sales in the tally, says Paul Ballew, executive director-global marketing and analysis.

And market share in the U.S. will fall to about 24%, Ballew says. That compares with 26.7% in like-2005.

It is calculated short-term pain.

The figures reflect the continued cutback in daily rental sales to 700,000 units this year, from 834,255 in 2004. This reduces GM’s share of the rental industry to 30% from 41.8% in 2004. Retail selling rates have stabilized, Ballew says.

The numbers also reflect the fact GM will have reduced total output in North America by 1 million units by the end of 2008 with the closing of 10 assembly, stamping and powertrain plants.

The potential long-term payoff: vehicles with a reputation for good value for the price; higher average transaction prices and a richer mix; greater profitability; brand equity; and less reliance on incentives and the volatility they create in the market.

There are early signs the plan is working, GM executives say.

First-quarter residual values are up three points on large pickups from year-ago, while midsize cars have seen resale value improve a full six points, says Mark LaNeve, GM North America vice president-vehicle sales, service and marketing.

In lowering sales to rental fleets, GM is making more money per vehicle. Ballew says GM’s average transaction price in the first quarter should be 3%-4% higher than the industry-wide increase of 1%-2%. Ballew says GM was lagging the industry in recent years and needed a richer mix.

A large contributor is the launch of profitable fullsize SUVs from the GMT900 platform that will roll out the next generation of large pickups in the fourth quarter.

For the first two months of the year, the new vehicles GM has launched have seen 23.2% sales growth compared with a 6.8% drop in sales of non-launch vehicles.

Transaction prices also are being bolstered by more crew cab sales among small pickups, Ballew says.

Chevy Cobalt

And GM is addressing cars with unacceptable returns, such as the decision to cut a shift of Chevrolet Impala production in Oshawa, Ont., Canada, later this year, capping output at 250,000 cars. The goal: fewer sales but greater revenue per sale.

Ballew says the auto maker is casting a similar eye on production of the smaller Chevy Cobalt out of the Lordstown, OH, plant, to make sure there is not an unacceptably high push into daily rental fleets.

“We will not pursue marginally profitable or unprofitable business in the future,” Ballew says. “We need to be back in the mode where we’re making money once again in North America.”

Ballew admits the mix has not been favorable, especially last year with the shift from trucks to cars occurring faster than anticipated.

But he expects the industry as a whole to end 2006 with sales of more than 17 million units in the U.S.

On the truck side he says he is “cautiously optimistic” large SUVs will meet expectations, but he expects retail sales of midsize SUVs to be down 15% for the quarter.

But GM will not buy sales or share, executives insist.

“Chrysler (Group) has been outspending us on incentives for five or six months now and we’ve not changed our strategy,” Ballew says.

Chrysler is offering $6,021 on its midsize SUV vs GM’s $3,906 and Ford Motor Co.’s $4,196, according to Power Information Network. Chrysler also is the big spender on large pickups and in its overall incentive budget.

“We won’t gain share by dramatically increasing incentives,” LaNeve says. “It catches up with you. We learned that.”

On Jan. 11, GM announced a major price repositioning of 57 of 76 models, in keeping with an overall strategy of aggressive pricing with built-in incentives.

The challenge now is getting the word to consumers that the ’06 Cobalt, for example, starts at $12,990 vs. $14,490 for the outgoing ’05 model, and offers better value than competitive models. One thrust is ensuring third-party websites have the new pricing, as an increasing number of buyers use the Internet to comparison shop.

The auto maker’s overall advertising budget will be is slightly less this year than last, LaNeve says, but is more than enough, as there should be less need to promote national incentive plans such as 2005’s employee discount plan. And GM is pursuing more efficient and targeted campaigns with greater use of non-conventional media, he says.

GM’s marketing plan has been presented to the board in great detail and received support. LaNeve says he has not personally met the newest board member Jerry York.

LaNeve says the marketing team appreciates the dire situation the auto maker is in, having lost $10.6 billion in 2005 and facing a series of cutbacks in jobs, benefits for those who remain, production and continued uncertainty as the Delphi Corp. bankruptcy plays out.

“That sense of urgency has been around for awhile,” LaNeve says.

He takes some comfort in the unlikelihood of a repeat of some one-time occurrences in 2005 such as devastating hurricanes and a 250,000-unit inventory correction.

But the auto maker was rightly called out for dependency on marginal business and incentives and rental business, LaNeve says. And GM is taking the steps necessary to get out from under that, he insists.

[email protected]