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GM’s Pickup Pileup Threatens 2013 Launches or Profits

December 05, 2012

GM’s Pickup Pileup Threatens 2013 Launches or Profits

U.S. sales of the Chevrolet Silverado decreased 10 percent to 30,674 last month compared with a year earlier. Photographer: Daniel Acker/Bloomberg

General Motors Co. (GM:US), with more than double a typical supply of trucks, is facing the prospect of cutting production or increasing discounts, threatening to squeeze 2013 profits.

Clearing away that inventory is critical. At stake is the rollout of new versions of the Chevrolet Silverado and GMC Sierras, scheduled for release next year, and which are key to the company’s success in 2013. GM’s big pickups, which made up 23 percent of the automaker’s U.S. sales last year, are among their most profitable models.

“If they continue to have these high inventories and then bring out the new product, that’s going to hurt the launch” of the new trucks, said Alan Baum, principal of auto-industry researcher Baum & Associates in West Bloomfield, Michigan. “It is more important to them that the new vehicles launch well.”

Most automakers try to have about 60 days’ worth of sales on dealers’ lots. Last month, supplies swelled to 139 days from 110 a month earlier as the Detroit-based automaker was caught off guard by competitors clearing out 2012 model-year pickups.

Adjusting production would be “first and foremost” in dealing with high inventory levels, Kurt McNeil, GM vice president of sales operations, told analysts and reporters on a conference call Dec. 3. U.S. sales of the Chevrolet Silverado decreased 10 percent to 30,674 last month compared with a year earlier while GMC Sierra deliveries slipped 2 percent to 11,726.

Production Estimates

Brian Johnson, an industry analyst with Barclays Plc, projected in October that GM would have to pare back first- quarter truck production by 35,000. He said in an interview yesterday that such a decision could cost almost $1 billion in revenue.

After November’s results, Baum sees deeper cuts. GM will probably reduce pickup production by almost half in the first quarter of next year, to 106,000 down from 210,000 a year earlier, before the new trucks start coming off assembly lines in the second quarter, said Baum.

IHS Automotive, which has estimated GM will build 210,000 pickups in the first quarter, will probably lower that forecast, said Tracy Handler, an analyst based in Northville, Michigan.

“I expect them to cut back a little bit,” she said. “They really want to protect themselves from having no trucks if anything were to go wrong with” the start of production of the redesigned pickups in the second quarter.

Long Build-Up

GM didn’t just wake up Nov. 30 with too many trucks. Some of the inventory build-up was, in fact, part of GM’s strategy to manage supply as it switched tooling in its factories to prepare for the new pickups. The automaker announced about a year ago that it had scheduled 21 weeks without production at three full- sized truck plants in 2012 to update the factories.

The company’s goal was to sell down its inventory to 200,000 to 220,000 by Dec. 31, giving it an 80 to 85 days’ supply on a selling-day adjusted basis.

“They’ve been talking about getting the pickup truck inventory down to like 85 days for six months but then we’re at the moment of truth and they’re blaming the competition,” Adam Jonas, an auto analyst for Morgan Stanley, said yesterday in a telephone interview.

At the end of November, GM’s pickup inventory rose 4.4 percent to 245,853 compared to a month earlier. That’s the highest month-end figure since Aug. 31 and more than 25,000 trucks in excess of the year-end goal.

Inventory ‘Jeopardy’

“We’re going to be in the high end of” the projected range and “might go a little above that, but not significantly above that” 220,000 level, McNeil said. GM’s total inventory goal of 660,000 to 670,000, which was increased from 650,000 vehicles a month ago, is in “jeopardy,” McNeil said.

Analysts, including Kevin Tynan at Bloomberg Industries, said GM will also probably turn to incentives to help sell more trucks.

“You’re basically giving back any operating profit on those vehicles until you get rid of them” and start selling the new model, he said.

GM decreased incentive spending on pickups in November compared with a year ago, researcher Autodata Corp. said. Average incentive spending on the Silverado decreased to $3,988 per unit last month compared to $4,459 a year earlier while Sierra incentive spending slipped to $4,226 from $4,801 a year ago, Autodata said.

That put GM’s incentive spending behind Chrysler’s $4,748 for the Ram pickup. GM’s spending was more than Ford Motor Co. (F:US)’s $3,294 per unit.

GM’s Dec. 3 call with analysts was dominated by questions about the decision not to compete with incentives.

Alan Batey, GM vice president for U.S. sales, said that while they were caught off guard by levels of incentive spending, especially by Chrysler, the priority was to maintain pricing.

‘Remain Disciplined’

“It really was a test about whether we really were going to remain disciplined,” Batey said. “We definitely gave up sales and we gave up some share in the month. But what really encourages us is the fact that we still have the best sales since 2007 and that we go into December now in a very, very strong position.”

Ram pickup sales rose 23 percent to 24,337 in November while Ford’s F-Series deliveries increased 18 percent to 56,229, the companies said in statements.

“If you were shopping based on price in November, GM trucks looked much more expensive than the competition,” Jesse Toprak, an industry analyst at TrueCar.com, a website that tracks car sales and discounts. “Part of it is seasonality, and part of it is the fact that the competition is certainly not being shy when it comes to spending money on trucks. That will force them to bring their incentive levels up to that of the competition.”

This month will be better, GM’s McNeil said.

“December should be an all-new ball game,” he said. “It’s traditionally one of the strongest sales months of the year for Silverado and Sierra. Consumers are feeling good, housing is rebounding, and we remain confident that there’ll be a resolution in Washington.”

-- With assistance from Craig Trudell and Keith Naughton in Southfield, Michigan. Editors: Jamie Butters, Rick Schine, Bill Koenig.

To contact the reporter on this story: Tim Higgins in Southfield, Michigan, at thiggins21@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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