Is GM up to old habits?

October 12, 2009

Is GM up to old habits?

’10 production hike criticized

BY TIM HIGGINS
FREE PRESS BUSINESS WRITER

The new General Motors Co. is showing some old GM traits, according to industry analysts who question the Detroit automaker’s plans to increase North American production next year by about 45%.

GM has announced it plans to build about 2.8 million vehicles next year in North America.

That’s well below the number of vehicles GM built in 2008 but about 1 million more than the company expects to assemble this year.

When an automaker builds more cars and trucks than consumers want — as GM has done in the past — it is forced to discount the vehicles, which cuts into profits. Some experts wonder if GM is doing that again.

"I don’t see what they’re thinking," Dave Cutting, senior manager of North America forecasting at J.D. Power and Associates, said of GM’s new production schedule.

Michelle Krebs, a senior analyst at Edmunds.com, said GM’s production schedule seems overly optimistic and observed: "I’m seeing a little bit of shades of the old GM."

GM points out that the increase will come after an incredibly low year of production — the automaker expects to build about 1.9 million vehicles in North America in 2009.

"It’s clearly not the old GM because we don’t have overcapacity, which is what caused the problem before," John McDonald, a GM spokesman, said. "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."

Experts question GM’s math

Mark LaNeve, outgoing vice president of U.S. sales at General Motors Co., described the automaker’s decision to boost production plans next year by 45% as "real simple math."
 

As GM underwent sweeping restructuring this year, including a trip through bankruptcy, the company slashed its inventory by 500,000 vehicles.
 

"That’s the biggest factor," LaNeve said of the need to increase production dramatically next year. "The second biggest factor is we think the industry will be up 15% and that we’ll hold our share."
 

Combine those two things and, LaNeve said, GM will get "an increase without really being optimistic about gaining share or anything of that nature."
 

GM, which saw record inventory lows in September, says it believes it will need more vehicles next year to avoid losing out on sales because of lack of product.
 

During a conference call with industry analysts and reporters earlier this month, Chris Ceraso, an analyst with Credit Suisse, questioned recent comments by GM officials indicating the automaker is increasing its focus on growing market share, which is about 20% in the United States.
 

"Has GM, not having learned a lesson from the past 20 years, going to go after market share at the expense of profits and price?" he asked.
 

LaNeve, who stressed GM does not plan to buy market share through the use of sales incentives, responded: "We just know that continuing to lose isn’t a winning strategy. We want to do it profitably."

How much is too much?

GM’s latest production plans, announced in late September, are to build 2.8 million vehicles in North America in 2010. That’s about 10% less than GM’s forecast announced in February and it caught some industry experts by surprise.
 

"There’s no question that executives are looking to speak to what is possible, to speak to market potential," said Mike Jackson, director of North American vehicle forecasts at CSM Worldwide in Northville.
 

"Realistically," he added, "GM is positioning for recovery next year."
 

Analysts interviewed by the Free Press agreed GM should see sales increases next year over 2009’s dismal levels — GM’s sales were down 36.3% through September.
 

Increased sales should, of course, lead to increased production requirements.

But the question for GM is: How much?

"I do think that GM … is getting a little ahead of itself with respect to the production increases," David Silver, an industry analyst with Wall Street Strategies in New York, said in an e-mail. "In the post-cash-for-clunkers auto world, sales are going to be weak."

Point of contention

GM’s forecasts have been a point of contention through 2009 as the government pumped about $50 billion into the company to keep it afloat and take it through bankruptcy reorganization.
 

The automaker has said its current turnaround plan should allow it to break even in a U.S. sales market as low as 10 million vehicles.
 

In the U.S. new vehicle market, GM expects the total sales to end 2009 at 10.5 million. The company expects a modest U.S. recovery next year with the market seeing 11.5 million to 12 million sales of new cars and trucks.
 

GM’s production plan for 2010 is higher than what industry experts have been predicting the company would need to build.
 

CSM, for example, has forecasted that GM’s North America production would hit 2.25 million next year. While J.D. Power doesn’t make public its production forecasts, Dave Cutting, senior manager of North America forecasting, said GM’s 2.8 million estimate is significantly higher than what J.D. Power predicted GM would need.
 

Erich Merkle, president of Autoconomy.com, predicts GM’s North America production needs will be around 2.4 million.
 

"There is no question that their production is going to be up next year and it’s going to be significant — it really is," he said. But, he added, 2.8 million "even under the best of circumstances … is going to be a difficult number to achieve."
 

CSM predicts the North America sales market will grow by 1.3 million to 13.6 million. J.D. Power expects the market to grow to 13.9 million from 12.5 million.
 

 

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