Friday, August 26, 2005

GM extends employee discount

Critics worry carmaker can't tear itself away from the costly incentive to post earlier sales.

By Christine Tierney / The Detroit News

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General Motors Corp. extended its employee-discounts-for-all plan for a second time Thursday and added some 2006 light trucks to the mix, stoking concerns about the automaker's ability to wean customers off huge incentives.

GM first launched the discount plan in June to clear out inventories of 2005 vehicles ahead of the new model year, and it succeeded beyond all expectations, racking up big sales gains in June and July.

GM executives said the plan's simplicity -- everyone gets the same low price that company employees receive -- would help the automaker shift to a new pricing strategy aimed at switching consumers' focus to vehicle values instead of the size of discounts.

A GM spokeswoman said the extension of the employee discount plan did not undermine the new strategy.

"Everyone pays the same price. That's the message," said Deborah Silverman. "We're not stressing the deal."

But some analysts said GM's decision to prolong the employee discount plan beyond Labor Day weekend signaled that the company was having trouble getting off the incentive treadmill.

Early indications also suggest that GM's August sales are down from year-earlier levels.

GM hiked incentives after the September 11 attacks and they have since risen to $4,102 per vehicle, on average -- compared with $2,976 for the overall industry and $1,542 for leading Japanese automakers, according to Autodata Corp.

Other industry experts said GM's move made sense, given that its aging truck lineup will not be rolled out until early 2006. GM's large sport utility vehicles and pickups, such as the Chevrolet Tahoe and GMC Sierra, are nearing the end of their life cycles and struggling in a competitive market.

"GM is wisely making sure that they don't have inventory before they start production" of the new light trucks, said Michael Robinet, vice president at auto forecasting firm CSM Worldwide in Farmington Hills.

"When the new vehicles arrive, you don't want too many of the old ones on the lot," Robinet said. "I see this as a specific case, not a wide-ranging trend."

GM's move once again put pressure on domestic rivals. Ford Motor Co., which matched GM's employee discount plan in July, said it may extend the offers beyond Sept. 6, when they were set to expire. Ford already had included some 2006 light trucks, such as Super-Duty F-Series pickups and the Escape SUV.

SUV sales have declined this year in response to a surge in gas prices to around $3 per gallon in some parts of the country and because many domestic SUVs are nearing the end of their product cycle.

This week, Ford CEO Bill Ford Jr. said sales of large SUVs were strong in July and "went pretty well" in August. But he said he was pleased that the automaker was rolling out some fuel-efficient models, such as the Fusion sedan.

DaimlerChrysler AG's Chrysler Group has reluctantly matched GM's employee discounts but has not decided when the deals will end.

The employee-discount offers have helped Detroit's automakers stem a decline in sales and clear out inventories of 2005 models.

"We're just about out of '05 merchandise," said Larry Linscomb, sales manager at Chuck Nash Chevrolet Buick Jeep in San Marcos, Texas. "So it's a pretty good deal," he said about the extension.

But Wall Street analysts worry that chronic discounting will further erode the U.S. automakers' profitability.

From Wall Street's viewpoint, GM's and Ford's operating costs in North America are too high relative to their diminishing market share -- now around 60 percent of the U.S. auto market. They have too many underutilized factories and employees to remain profitable as sales and market share fall.

On Wednesday, Moody's Investors Service lowered Ford's and GM's credit ratings to "junk" status. Standard & Poor's had previously downgraded the two companies.

Both automakers are losing money on their North American operations: GM lost $2.5 billion in the first six months of the year, and Ford reported a $907 million pretax loss on its North American operations for the second quarter.

The second half of the year also looks challenging, with auto executives predicting that the sales boom fueled by the employee discounts will be followed by a slowdown.

GM sales are already losing steam, according to auto research site Edmunds.com. It estimates that GM's August vehicle sales were down 5 percent from year-earlier levels -- in a market expected to show a 15 percent overall gain.

GM's decision to extend its discounts "is a clever way for GM to draw consumers' attention back to its brand, and particularly to its less fuel-efficient vehicles," said Jesse Toprak, senior analyst at Edmunds.com.

Just as GM was first to offer employee discounts, "payback seems to be hitting GM first," said analyst David Healy at Burnharm Investment Research.

Healy expects GM's sales to fall 18 percent from year-earlier levels but forecasts gains for Ford, Chrysler and foreign brands.

Faced with increasing competition from foreign-based automakers, GM and Ford are drafting plans to downsize their North American operations, including plant closures that will have to be negotiated with the United Auto Workers union. The two automakers also are seeking incentives from union workers to stem their soaring health care costs.

GM's recovery effort includes the new pricing strategy aimed at narrowing the gap between sticker and actual selling prices in 2006.

For instance, the manufacturer-suggested retail price of the 2006 Saturn Ion sedan is $12,825 -- or $2,455 less than the comparably equipped 2005 model.

But overall, GM's 2006 sticker prices are down only slightly, and many industry experts believe they will have to cut the prices more to reduce their reliance on discounting.

You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.