GM Cuts Truck/SUV Production Plans, Adds Incentives; Stock Continues to Slide

Truck Production Slashed

General Motors (GM) has announced that it will cut 170,000 units from its production target in the second half of 2008. The production cuts will affect its large pick-up and sport utility vehicle (SUV) models, but will be accompanied by a 47,000 increase in production of cars and crossover utility vehicles (CUVs). The assembly plants affected include those in Arlington, Texas; Fort Wayne, Indiana; Janesville, Wisconsin; Shreveport, Louisiana; Silao (Mexico); and Oshawa, Ontario (Canada). These will be closed for anything from one to 10 weeks from July through to the end of the year. These shutdowns will be in addition to the usual summer downtime schedule. GM will add shifts at car and CUV plants in Fairfax, Kansas and Lansing, Michigan to boost output of these models.

A Return to Incentives

GM also said it will introduce a ”72-hour sale” offering 0% financing over 72 months in an effort to give its June sales a last-minute boost. The sale will start today and last until Monday (30 June), GM's vice-president of vehicle sales, service, and marketing, Mark LaNeve, said in a conference call. The offer extends to all GM brands, encompassing around 80% of all models, but excludes in-demand models such as the Buick Enclave, GMC Acadia, and Saturn Outlook CUVs. LaNeve said that only models with tight inventories will be excluded. "We know how to do this, we throw considerable media weight behind it", LaNeve said. "It's a really simple offer that's very compelling. It's a good way to finance if someone's upside down on their vehicles", he added. GM will also offer US$500 cash to customers who buy, rather than lease, vehicles. GM also announced that it will raise prices on 2009 model-year (MY) vehicles by 3.5% on average to help cover increased commodity costs and product improvements. "It won't be 3.5 percent across the board", LaNeve said. "It'll be a little higher on some products and lower on others."

Hummer Up for Sale

GM also announced that it has hired Citibank to advise it on the options for its Hummer brand. "We want to work through this as quickly as possible, but we want to make a good decision for the brand", LaNeve said during a conference call.

Outlook and Implications

After a number of U.S. financial ratings agencies downgraded the Detroit automakers' credit ratings last week, GM's stock price hit a 33-year low yesterday, falling a further 6.4% to US$12.91 on the New York Stock Exchange (NYSE), as few observers can tell how deep the crisis affecting GM's sales will run. The decision to downgrade the ratings of the manufacturers’ credit and financing arms makes it difficult for the automakers to borrow money on favourable terms, with the additional headache that their financing arms will have to subsidise GM's 0% offer to a greater extent, making it even more costly, and thus further damaging GM's liquidity.

The sharp, short nature of the end-of-June sale indicates that there may be some truth in the rumour that GM is in danger of losing its top billing in the U.S. market to Toyota this month, an unprecedented event, but one that will likely be forestalled thanks to the fire sale. LaNeve said that GM is hoping that the sales lull will bottom out in the second quarter, citing the recent political activity as an additional reason for the extreme slide in sales, coupled to the soaring cost of fuel and the general economic malaise. "Up to the election you'll still have a lot of consumer confidence issues and cautiousness because we'll get a lot of economic news and both camps pointing fingers", he said. "We hope Q2 was the bottom", he added. Sales of GM trucks and SUVs fell 37% in May, yet the June numbers are expected to be even weaker, with large vehicles suffering the brunt of the decline.

LaNeve's outlook for the end of the year is more optimistic, as GM believes that there will be a minor recovery in the second half of 2008. Although this view concurs with Global Insight's own macro-economic forecasts, as it is difficult to envision the current near-meltdown situation continuing throughout the rest of the year, there are some extreme forces at work elsewhere in the U.S. economy. Although a halt to the precipitous decline in vehicle sales would appear likely, some respite from the pressures exerted from energy and food prices would be needed to restore any sort of consumer confidence.

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