‘This isn’t the same GM’
‘This isn’t the same GM’
Idling of the Cruze plant shows discipline and pursuit of higher prices and profits
Automotive News | December 12, 2011 – 12:01 am EST
DETROIT — The Chevrolet Cruze has been a home run for General Motors, cracking the list of Top 10 sellers and putting together a string of months as the No. 1 compact.
So it could have been seen as jarring news late last month when GM idled the Cruze plant in Lordstown, Ohio, for a week to tamp down mounting inventory.
But the swift decision to curb production of GM’s hottest car offers a window into the new General Motors. In sharp contrast to the overproduction and profit-sucking discounts that marked GM before its 2009 bankruptcy, GM’s top executives are managing for higher prices, better residual values and bigger margins.
“In the past, we’d blow through those production schedules and keep [the plants] on” and then use heavy incentives to move the metal, says GM North America President Mark Reuss.
The new approach signals a different kind of company for Dave Green, president of UAW Local 1714, which represents workers at GM’s stamping plant in Lordstown.
“I remember not long ago when we’d have a 150-day supply and they’d have us working Saturdays,” Green says. “Even our membership recognizes that this isn’t the same GM.”
In the new GM, the reduced legacy costs and lower operating costs have killed the incentive to overproduce just to generate revenue at any cost.
GM isn’t alone
GM isn’t alone in finding religion on production discipline after decades of stuffing dealer lots. When Alan Mulally arrived at Ford Motor Co. in 2006, he quickly declared that Ford would produce only as many vehicles as people would buy. Chrysler Group also is getting better at matching supply with demand under CEO Sergio Marchionne.
Reuss told Automotive News last week that GM’s refusal to sacrifice transaction price for market share has led to better resale values across GM’s lineup, especially in small-car segments that were once money-losing, rental-car black holes.
Research firm ALG projects that the buyer of a 2012 Cruze can expect the car to retain 51 percent of its sticker price after 36 months. ALG’s average residual for the Chevy Cobalt, the Cruze’s predecessor, was 42 percent.
The higher residual reduces the deficit Chevy’s small cars have had to overcome against competitors’ cars. ALG now projects a 55 percent residual for the 2012 Honda Civic and 50 percent for the Ford Focus. Higher residuals means GM no longer has to subsidize lease deals.
Production discipline leads to more pricing power on new cars, too. GM says higher prices, particularly in North America, added $1.2 billion to its bottom line in the first nine months of the year compared with the same period a year earlier.
And GM has reduced low-margin sales of cars to rental fleets.
Production discipline takes pressure off dealers to dangle fire-sale prices to clear their lots of the cars that GM pushed on them, says Duane Paddock, owner of Paddock Chevrolet in Kenmore, N.Y., the No. 2 Chevy dealer nationally in 2010.
“I cannot tell you the last time I received a call from General Motors saying, ‘Listen, I really need you to take more cars,'” Paddock says. “That used to be weekly.”
Even on new cars such as the Buick Verano, GM is earning lofty projected residuals.
Reuss says: “We would not have gotten these residual values even a year-and-a-half ago … because we’ve screwed it up so many different times on small cars.”
In the past, GM kept plants running just to generate revenue to cover its massive legacy costs such as retiree health benefits and a guarantee of near-full pay to laid-off workers. The removal of many of those fixed costs through bankruptcy, combined with UAW concessions, also removed the incentive to overproduce.
Lordstown had been running three shifts and often Saturdays all year. Sales boomed as customers gravitated toward the critically praised Cruze, and the Civic and Toyota Corolla struggled with short inventories. Through November, the Cruze was the No. 6 seller among U.S. cars and the No. 2 compact behind the Corolla.
But demand cooled this fall. By Nov. 1, Cruze inventory had spiked to a 73-day supply, from 33 days on on Sept. 1. GM blamed it on a normal seasonal slowdown for compacts.
GM took down Lordstown during the week of Nov. 28 “to make sure our days supply finishes the year accurately,” Reuss says. “But we’re not going to deteriorate” the nearly $2,000 price premium the Cruze has been commanding over some of its competitors.
In November, the average transaction price for a Cruze was $19,365, according to TrueCar. Among top-selling compacts, that trails only the Hyundai Elantra ($21,319) and is higher than the Ford Focus ($17,411), Civic ($17,644) and Corolla ($18,165).
Under a microscope
Twice a month, Reuss runs meetings with his 12 direct reports from sales, marketing and manufacturing to crunch production schedules and incentives. An economist walks through macro indicators such as consumer confidence and jobless claims.
It’s a simpler, more focused process than in the old days, Reuss says, when as many as 100 people attended production-scheduling meetings.
“We say: ‘This is what we think is happening; this is what we know the competition is running,’ and then we make the call,” Reuss says. His team sets 60-day incentive programs and sticks closely to them, although it will adjust if needed.
Financial analysts are monitoring GM’s discipline.
Last January and February, GM began offering lease pull-ahead deals that gained market share. Skeptical analysts questioned whether GM was reverting to old ways. Peter Nesvold, an analyst at New York investment bank Jefferies & Co., says GM has “shown much better production discipline” — except for the early-year splurge.
“The market wants to make sure they continue to act that way.”