GM Still Believes in Incentives

DETROIT February 16, 2003;Michael Ellis writing for Reuters reported that General Motors Corp.'s use of high incentives to fuel stronger sales and profits may be losing their punch, analysts say, but the world's largest automaker shows no signs of easing off the throttle.

With healthcare and pension costs rising and sales of GM's highly profitable sport utility vehicles under threat from more competitors, the automaker's earnings will be squeezed this year between mounting costs and lower returns, analysts said.

Last year, while Ford Motor Co.'s automotive operations reported another loss and Chrysler struggled to break even, GM managed to post surprisingly stronger earnings despite its aggressive incentives.

GM mixed cost-cutting measures with growing sales of its SUVs to offset the added expense of higher incentives, which averaged about $2,500 per vehicle last year, according to analysts. Even GM's Saturn division, which historically shunned incentives and offered a "no-haggle" price to all customers, has stepped into the incentive game.

"People say it hasn't worked," GM Chief Executive Officer Rick Wagoner said last month, responding to critics of the incentives. "I say, 'Oh, I see, our profit is more than twice last year what we thought it would be at the beginning of the year, our market share is up, and the industry is strong. That doesn't sound like a bad outcome to me."'

GM has acknowledged that its profits will be under greater pressure this year. Last month, GM set an earnings target for its North American automotive operations of $1.7 billion to $1.9 billion, down from a $3 billion profit before charges last year. Diminishing industry sales and rising incentives, healthcare and pension expenses will more than offset continued cost-cutting and productivity gains, it said.

WALL STREET NOT CONVINCED

But clearly, GM has some more convincing to do on Wall Street. Since the beginning of the year, GM's shares have fallen about 10 percent. Recent sales results suggest the automaker's successful formula may be losing its bite, some analysts said.

GM's U.S. vehicle sales fell 2 percent last month, despite a year-over-year rise in consumer incentives by nearly 30 percent to an average of $2,900 per vehicle, according to Autodata.

The drop in sales, coming after an exceptional December, was less than Wall Street had predicted. Many analysts reckoned buyers who had planned to purchase new vehicles in January bought earlier instead because of the incentives.

However, January's results were propped up by a steep rise in fleet sales, such as to car rental agencies, which generally have lower profit returns, while GM's retail sales sagged, some analysts noted.

"We believe that GM's growing reliance on the fleet market could be a red flag, suggesting that the company is experiencing difficulty maintaining momentum in the more profitable retail market," Rod Lache, of Deutsche Banc Alex. Brown, said in a recent research note.

GM's Paul Ballew, head of market analysis, countered that fleet sales will drop in February and March, and said first-quarter levels will be the same as or below normal levels.

Banc of America analyst Ron Tadross, when he cut his rating on GM earlier this week to "sell" from "neutral," cited concerns that GM's market share gains may be unsustainable as Ford and Chrysler recover from their extensive restructuring efforts.

"The company had above average elasticity of demand," Tadross said. "We are already seeing signs of this elasticity waning as GM's trucks mature and Ford and DaimlerChrysler move through their restructurings."

BATTLE OF THE TRUCKS

Consumer jitters over a possible U.S.-led war with Iraq and the slow pace of the economic recovery have weighed on U.S. vehicle sales, pressing automakers to boost incentives to fight for every scrap of market share.

Last week, GM offered its dealers up to $1,000 cash on every SUV they sell above last year's sales levels. Ford quickly matched the offer.

Japanese automakers are also coming to market with more SUVs and pickup trucks. Toyota Motor Corp.'s (Tokyo:7203.T - News) Lexus GX 470, which went on sale late last year, has won strong sales, and Nissan is building a new plant in Mississippi that will begin churning out the Japanese automaker's first full-size pickup trucks and SUVs later this year.

But GM has its own array of new SUVs coming to market this year, including the Cadillac SRX, the GMC Envoy XUV, the Buick Rainier. It is also completing a full year of sales of its mammoth Hummer H2s.

"We really don't feel like we're losing any momentum in trucks," Ballew said. "In utilities, we're going beyond dominating."

That attitude was reflected in Wagoner's remarks to an automotive conference in late January, in which he offered no excuses for the company's aggressive incentives.

"There's been an inordinate amount of finger-pointing and hand-wringing over this matter," Wagoner said. "I say it's time to stop whining and play the game."