Flagging GM pickup sales may spur incentive war

August 28, 2012
Flagging GM pickup sales may spur incentive war
Company expects demand to pick up in second half of year
By MELISSA BURDEN / The Detroit News
General Motors Co., which ended July with a hefty 41/2-month supply of full-size trucks, may be forced to cut production or boost incentives. That, in turn, could lead to an incentive war among truck competitors.

The Detroit-based automaker has said for a year that it planned to build up truck inventory in 2012 to ensure it had enough pickups while it retools plants for all-new pickups coming next year. GM even warned that pickup inventory would exceed a 100-day supply at times.

But some analysts are concerned about the inventory level, which at 136 days at the end of July was nearly double the 73-day supply that GM had at the end of December. Analysts consider less than a 100-day supply ideal for full-size pickups.

“My concern would be thatif inventory levels don’t improve, GM will need toraise the incentive level tomove the vehicles,” said Joseph Spak, an auto analyst with RBC Capital Markets LLC.

July incentives on GM’s Chevy Silverado and GMC Sierra at $4,200 and $4,800, respectively, were down substantially from the same month a year before, according to TrueCar.com. But they were higher than incentives Ford Motor Co. offered for the F-150 and what Chrysler Group LLC offered for Ram 1500, TrueCar.com says. Pickups are highly profitable for automakers, generally bringing in about $10,000 per unit.

“You could start seeing some pricing pressure as we move through the year if inventories remain high,” Spak said.

Pickup sales down
GM will release August full-size truck inventory Sept. 4. GM executives said this month the company wants to end the year with full-size truck inventory between 200,000 and 220,000 vehicles. At the end of July, its inventory was at 238,165 trucks.

Sales of full-size Chevrolet and GMC trucks were down 11.5 percent in July compared with a year ago, following five consecutive months of year-over-year gains.

Company executives have said they expect to sell down the stockpile of trucks throughout the second half of the year — traditionally a stronger period for truck sales — and have no plans to change production strategy.

GM expects that more housing starts, stronger home prices and an aging fleet of full-size pickups will release pent-up demand and boost truck sales.

“The pickup market from this point on will start to steadily increase,” Alan Batey, GM’s vice president of U.S. sales and service, said in a sales call this month.

The automaker has said it plans 29 weeks of downtime at four plants this year as it readies the launch of all-new 2014 trucks. Executives at Detroit-based supplier American Axle & Manufacturing Holdings Inc. said last month that they expect GM to take 11 weeks of truck-related downtime in the third quarter, and that GM truck production would be between 75,000 and 100,000 units lower in the second half of the year compared with the first six months.

Feeling the sting
American Axle Chief Financial Officer Michael Simonte last month said the supplier had no concerns with GM’s growing truck inventory.

“General Motors and the extended supply chain this year is playing out exactly as expected,” he said. “If anything, it’s going better than expected.”

GM will feel a financial sting from the transition to new trucks.

Credit Suisse analyst Chris Ceraso, in a research note earlier this month, said the profit contribution from GM’s new pickup launch might be seen later into 2013 than he previously expected.

Citi Research autos analyst Itay Michaeli said many had feared an entire year of “financial lumpiness” or negative financial impact in 2012 connected to the upcoming truck launch, though that hasn’t happened yet.

“It’s possible that the more disruptive downtime, which would presumably hit their financial results a bit more, could be more of a 2013 event,” he said.

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