GM Betting That Car Buyers Will Care What Goes Into Car - Enthusiasts Will, Mr. Lutz - Enthusiasts Are Here On TACH!

Detroit June 11, 2003; Joe Miller writing for Bloomberg reported that GM is putting components usually reserved for its Cadillac models into everyday cars to persuade buyers to pay higher prices.

The 2004 Chevrolet Malibu, among the first models to test the strategy, will have parts such as magnesium behind the dashboard instead of steel, which costs about a fifth less per ton. Magnesium is lighter and stronger, offering more protection and improving fuel mileage, vice chairman Robert Lutz said in an interview last week.

The new Malibu "is a very expensive car to produce, and we're betting people will notice," said Lutz, who is in charge of vehicle development. He declined to provide details on the production cost.

General Motors, which updated analysts on its business plan Tuesday, is shifting away from past efforts to limit production costs because those savings are being wiped out by rebates, Lutz said. The company's incentives averaged $3,916 per vehicle in May, reports CNW Marketing Research, compared with $2,259 at Toyota Motor Corp., whose models rank higher in quality surveys.

No-interest loans and cash-back offers helped General Motors increase sales 4.1 percent last month, narrowing the decline this year to 6.1 percent. The company, the world's biggest automaker by sales, is expected to stick with its 2003 forecast for earnings of $5 a share excluding its Hughes Electronics unit and certain items, according to six analysts.

"The company communicated from Day 1 that it's a tough environment out there," said Morgan Stanley analyst Steve Girsky, who rates the company "equal weight/in-line" and doesn't own shares.

Demand fell in May at Ford Motor Co. and DaimlerChrysler AG, whose Chrysler Group cut its profit outlook last week because of rising discounts. Chrysler, which is using a similar strategy of sharing parts with DaimlerChrysler's Mercedes brand, said it expects to lose about $1.17 billion this quarter.

Sales rose 18 percent at Honda Motor Co. last month and are up 14.4 percent his year. Toyota posted a 6.1-percent gain in May and its sales are 2.1-percent higher for the first five months of 2003 compared with the same period of 2002. General Motors shares have dropped 3 percent this year.

General Motors in April said its profit forecast for the year was at risk because of incentives. Using more expensive parts could mean General Motors will have to sacrifice profit initially until consumers are willing to pay higher prices, said Richard Hilgert, an analyst at Fahnestock & Co.

"If it's a move consumers see value in, you may eventually be able to do away with some of the incentives," Hilgert said.

General Motors is counting on new models, including this year's Saturn Ion small car and next year's midsize Pontiac Grand Am, to pull back on incentives.

New vehicles such as the Cadillac CTS sedan have helped increase sales at the luxury brand by 14 percent this year with fewer discounts than other General Motors brands. The company is spending about $4 billion to revamp the Cadillac lineup to compete with Toyota's Lexus unit as well as Bayerische Motoren Werke AG's BMW brand and DaimlerChrysler's Mercedes-Benz.

For the CTS, with a base price of $30,695, the company offers 3.9-percent financing for five years and no cash rebate. For the current Malibu model, with a base price of $18,700, buyers can get a $3,000 rebate or no-interest loans up to five years.

To sell more cars without the rebates, General Motors needs to stop skimping on materials and components to save money, Lutz said. "We realize you can no longer establish a cost target and then do the best car you can," he said.

The new Malibu, which will compete against Toyota's Camry, will help increase overall Chevrolet annual sales to 3 million by 2005 from about 2.6 million last year, said Chevrolet General Manager Brent Dewar. Chevrolet last sold 3 million in 1979. Its sales are down 7.9 percent this year through May. The company will announce pricing for the 2004 Malibu in July.

It could take General Motors several model years to convince consumers to spend as much for a Chevrolet as they would for a Toyota or Honda, said Charles Brady, an analyst at Credit Lyonnais Securities Inc.

"The mistake a lot of people make is they want to achieve equal pricing on Day 1," Brady said. "You don't get that in one model year."