TTAC has a rule of thumb: if the Detroit Free Press is laying into GM, the trouble must be staggeringly unavoidable. And sure enough, the latest Freepian blast is the result of a predictably bad decision: cranking up production in the face of slack sales and a tough post-clunker market. GM’s decision to bump production by 45 percent next year has a host of analysts lined up to prognosticate profit-sapping incentives when The General finds that it’s building cars faster than people are buying them. “I don’t see what they’re thinking,” says a JD Power senior forecasting manager. “I’m seeing a little bit of shades of the old GM,” adds Edmunds’ Michelle Krebs. GM’s defense?
It’s clearly not the old GM because we don’t have overcapacity, which is what caused the problem before. If you look at the analysts’ own reports, we’re probably being conservative to middle of the road as to where the industry is going to be.
That retort by GM spokesfolks was echoed by outgoing Sales boss Mark LaNeve. “We think the industry will be up 15% and that we’ll hold our share,” says LaNeve, showing off the kind of willfully ignorant optimism that practically defined Old GM. And it begs the question: why would GM risk a drop in profits when it is supposedly tuned for profitability in a 10m unit US market?
The question doesn’t turn on the size of the overall market though. GM’s estimates about the 2010 car market are actually more conservative at 11.5-12m units, than CSM (13.6m) or JD Powers’ (13.9m). The issue rather seems to hinge on GM’s share of that market, which has been in steady decline this year. GM’s plan to build 2.8m cars would require the market to reach 14m units without losing any of its current 20 percent market share in order to sell all of its planned production. In short, by predicting a 12m market and 2.8m production, GM sees its market share growing by at least 3.5 percent next year. All this without incentives, or as LaNeve puts it “we want to do it profitably.”
Forecasters are putting GM’s production needs at 2.4 to 2.25m units, at least 400,000 fewer than GM now plans to build. LaNeve calls the decision to build up inventories “real simple math,” but he might want to run those numbers one more time. If the market hits 14m and GM doesn’t give an inch of market share, the RenCen will be flooded with champagne this time next year. Those are two huge “ifs” though, and even GM is predicting that at least one of those things won’t happen. In reality, the market isn’t likely to rise over 13m next year, and more importantly GM has shown no signs of stopping its market share erosion. Neither of which would be a problem if GM were actually tuned to make a profit in a 10m annual market. Which must not be true either, if The General is so quick to trade the possibility of a profit for such an unrealistic growth scenario. Old tricks, indeed.
GM has little changed, if at all. Ed whiteacre will fire more and more incompetent VPS and Division heads as they fail to perform, and most likely they will be replaced by even more inbred, incompetent (but sometimes politically correct) Non-talented GM lifers. Example, see LaNeve being replaced by the clueless Doherty.
Gnu GM suicide watch anyone?
Bunter
Oh NO!!! Jason Voorhees without his hockey mask!!!!
I’ll show you an example of how much overproduction GM has. When I took my Scion in for an oil change on Saturday, I took a walk past the other car dealers in the auto mall to kill time. Both the Saturn dealer and the Pontiac-Buick-GMC-Cadillac (sheesh) dealer had several brand new 2008 model vehicles still on their lots-in October 2009, after most 2010 models have already been released. No non-GM brand had any new 2008 models left. The Pontiac-Buick-GMC-Cadillac dealer even had a brand new 2007 Cadillac STS!
In order to buy new cars, people must have loans. In order to get loans, they must have jobs, and equity in their previous vehicles, or cash savings.
Since banks are not loosening credit (which is good),and since used car prices are not rising (despite C4C removing a chunk of them from the market)and since the savings rate, while up, is still constrained by people paying off credit card debt, etc. and since unemployment has YET to crest: Any one announcing a belief that 2010 calendar new car sales will be north of, say, 11.25 million units is taking a big risk with their credibility….
I do not believe that GM can make a profit at 10.0 million annual sales, even if they hold their 20% share. Their product offerings are too fragmented, other than their light trucks, their individual lines all lack the volume needed to amortize fixed costs such as tooling and depreciation….many of their plant and equipment assets will continue to depreciate, even as the plants are shut down….
Best they can HOPE for is to re-define “profit” down to “profit from continuing operations”…and play the decreased expectations game….
Farago is/has been right….C7 for GM is still more likely than not by 2011 (unless Uncle Sugar goes all-in to support them…..possible!)
The caption for the picture should be: “It was this big.”
I predict that after some years of unnecessary expense and hardship, FORD will be the ONLY one left of the so-called “Domestic” Automakers, just as Boeing is the only (and hugely successful world-wide) domestic Planemaker. And it is no coincidence that, before he saved Ford’s A$$, Alan Mullaly saved BOEING’s, as its CEO. And his generous pay ($40 millions every year), with hindshight, seems fully deserved.
In reality, the market isn’t likely to rise over 13m next year, and more importantly GM has shown no signs of stopping its market share erosion.
Every tangible indication since the bailout indicates that GM is toxic to the car-buying public. I don’t think anyone at GM appreciates the depth of the antipathy that lurks in the real world as the result of the company’s massive squandering of taxpayer money. That, combined with the looming question of GM’s long term survival will virtually ensure that its market share will continue its horizontal journey down the face of a cliff.
Even if GM didn’t have their numerous product gaps and decreasing market share to name but two of their problems a 11.5mm market isn’t enough to maintain profitability across the board. GM’s numerous maladies put them at the head of the line of manufacturers poised to continue losing money until the market returns to more normal historic volume levels. If GM thinks they’re going to gain market share at 11.5mm annual volume my question would be with what? GM is in a crowd of one if they’re predicting increased market share this year and in more trouble if they’re basing their production on that premise. But what else is new, GM is wrong again or is that still?
Is LaNeve wearing kohl in that picture?
Why do we keep referring to the “New GM”? Except for a sham 6 week bankruptcy, not a signle thing has changed at that company.
All their big “changes” are plans and intentions, like they have always been. They haven’t yet actually sold Hummer or Saab, nor have they actually closed most of the dealerships.
The entire GM “turnaround” exists only in some dim future where all these promises of savings, efficiency, and glorious new product exist.
Today, right here, right now, there is nothing new about the new GM.
So, we’re skewering GM today for setting some aggressive sales goals for itself?
Back around 1975, car sales were in the post-Energy Crisis/Recession dumper. Back then, Car & Driver was in its prime, Pat Bedard wrote a fantasy piece about the following year’s auto show, where the car makers had to stop making cars because no one could or would buy them anymore.
It seemed fantastic and unbelievable then, especially as sales did turn around in ’76. Now it’s for real, and very eerie.
Geotpf :
October 12th, 2009 at 12:20 pm
I’ll show you an example of how much overproduction GM has. When I took my Scion in for an oil change on Saturday, I took a walk past the other car dealers in the auto mall to kill time. Both the Saturn dealer and the Pontiac-Buick-GMC-Cadillac (sheesh) dealer had several brand new 2008 model vehicles still on their lots-in October 2009, after most 2010 models have already been released. No non-GM brand had any new 2008 models left. The Pontiac-Buick-GMC-Cadillac dealer even had a brand new 2007 Cadillac STS!
Of course Mike. This is TTAC, remember?
FreedMike :
October 12th, 2009 at 2:37 pm
So, we’re skewering GM today for setting some aggressive sales goals for itself?
we’re skewering GM today for setting some aggressive sales goals for itself?
It makes sense to do so.
Aggressive projections lead to increases in production capacity, which increases the cost base.
When the sales targets are missed, revenue falls below forecast.
While the revenues fall short, the higher costs largely remain locked in. Combine those higher costs with the revenue shortfall, and you end up with losses.
Now you know why GM was losing money before the recession started — they do this stuff routinely. Overpromising and underdelivering is not a cost-free exercise.
I like how all of those bailout plans, even Chrysler’s, rely on an increase in market share. Not realistic in this day and age.
Oh, and they aren’t setting aggressive sales goals: they are setting aggressive PRODUCTION goals. The difference is they can’t ship their overstock back to the manufacturer.
GM would do well to try to SELL OUT of every vehicle next year! At the very least, make it their goal to have less than 30 days supply of anything.
In THE BEST POSSIBLE WORLD, they’d lose a few sales for not having a car to sell. A much better position to be in than what they are planning now…
In case anybody is interested in GM’s official response:
But let’s just run with the number the Free Press used; was it out of line? GM has taken a conservative view of 11.5 – 12 million US market for next year. This is lower than most other estimates that analysts and our competitors are using. So let’s assume carry-over share, and see where things net out. If GM maintains its current share in a 11.5 million market, that’s 2.3 million units right there. Carry-over share for Canada, Mexico and exports from the U.S. is worth about half a million more. With carry-over share based on the lower end estimates for the industry next year, the numbers would indicate a GMNA production run of about 2.7 or 2.8 million for CY 2010 – a more than reasonable estimate, remembering we’re at record-low inventory as well.
So what would production look like in a scenario that was below 20 percent market share next year? Even at the 18.5-percent share outlined in the viability plan for the U.S., we’re still talking around a 2.6 million run for next year.
General Motors will probably end the year with 14-16% of a 9.350M market. Although more deeply in the red than before, Corporate pork will continue unabated as management undoubtedly feels entitled to it.
2010 will be 12-14% share of a 10.625M vehicle market.
GM’s “conservative” estimate is often wildly liberal in the face of market reality.
Is GM trying to eliminate Chrysler from the bargain-basement sector of the market? Is the Pope a Catholic?
So let’s assume carry-over share, and see where things net out.
If that’s your starting point, then you are assuming losses.
Let’s note that GM is incapable of selling that number of cars at a profit. The only way that GM can sell that many vehicles is to give many of them away at a loss. The massive incentives are a reflection of the inability to make money based upon that market share.
GM has it backwards. It needs to start by specifically targeting lower market share. GM should purposely reduce its market share to a level that it is selling a minimum of vehicles with deep discounts on the hood. Find the audience that would buy the car without giveaways to move them, and sell into them exclusively, while ignoring the unprofitable segments of the market.
I don’t know what that share number is, but I would guess that it is under 15%. Whatever it is, it is definitely below what it is now.
chinar,
All well and good, unless they generally don’t sell any of those 2.6 million vehicles for MORE than cost.
Where is GM’s cash flow going to be?
One of the things that may make a difference to cash flow is that we’re now cruising into year 3 of the 5/100 warranty. Unless GM has really nailed reliability and durability, warranty expense is very likely to be climbing. Did they increase a cash reserve to cover this contingency?
Unit volume is only part of the revenue and cash flow equations, there’s unit price and vehicle margin to consider. The other day, in a FastLane webchat, GM CEO Fritz Henderson talked about increasing the transaction prices on their small car lines. This is no small task.
The Cruze, GM’s next entrant in the small car Gran Prix, isn’t even on the road yet and it’s not at all certain that it will sell for prices above the Cobalt.
What are Malibu margins?
What happens when GM drives towards higher prices? What happens when consumers arrive at a Chevy dealer in response to an ad for a $14K Cruzes and $19K Malibus, only to find the dealer loaded to the gunwales with $19K Cruze LTZs and $26K Malibu LTZ’s? Will they sign on the dotted line for same or trot down the street and get something more in line with their budget plan?
A base Corolla ($16,150 with automatic) may be a bland car but it is not a bad car and consumers know it. For $12,655, a Yaris 5-door is a surprisingly good car with surprisingly good interior room. In fact, I’d argue that the Yaris is the natural Toyota competition to the Cruze.
Hyundai’s competing vehicle is likely to be priced lower than a Cruze for a similar trim level.
I’m having a hard time picturing GM making money in that end of the market.
And at the top end? I notice that there’s $6K offers, right now, as part of “Truck Month.” Uh-oh.
Maybe they think there’s a bunch of pissed off Prius owners who are chomping at the bit to dump their Prii if only GM could offer an alternative that can get 230 mpg.
Just curious…
Just because GM says they plan to boost production, does that mean they will? Are they now flexible enough to adjust their production within a tighter timeline than 1 year?
If they can make quarterly, or monthly adjustments then they can reduce production of demand drops.
I get the impression that GM has to decide a year out how many cars to make, and then it is damn-the-torpedoes, make that many. That is crazy.
Srynerson :
Is LaNeve wearing kohl in that picture?
First impression was you were asking if he bought his clothes at a lowish-end department store. Then realized he could be responding to a little known fatwa for terminated auto execs. Hmmmm.
The caption for the picture should be: “It was this big.”
I don’t know the guy, and I think the pic has been used before?
The first time I thought; “I got no idea… I got nothin\'” (Hands land on the legs, head slumps forward)
Or, “Help me Jesus”.