General Woes
Just selling more cars may not be enough for the troubled automaker
Sticker shift. GM desperately needs to wean consumers off incentives--without losing customers. The employee discount program was Step 1. By introducing set prices, and making them sound like a great deal, the company hoped car buyers would start getting used to lower list prices--and smaller rebates. Step 2 is a new scheme to lower sticker prices on about 30 of the 2006 models, to close the gap between the price on the sticker and the price buyers actually pay. An entry-level 2005 Malibu, for example, lists for about $20,000 but sells for just $17,700 on average, according to car-research firm Kelley Blue Book. That's a gap GM needs to close. So for '06, GM is dropping the list price by $1,835. "We're taking some of the guesswork out of the pricing equation," explains LaNeve. On other models, GM will add features without raising prices, hoping consumers will sense the bargain and buy without demanding deep discounts.
More realistic prices and hipper cars should, theoretically, improve GM's overall image--as it has for the company's Cadillac division, which has become a legitimate rival to BMW and Mercedes. GM hopes that stronger appeal among its higher-volume brands will eventually allow it to charge more for better-respected vehicles. But so far the opposite seems to be happening. Mark Oline of Fitch Ratings says his firm's analysis of the carmaker's cash flow suggests actual prices paid for the company's cars, after all discounts, are declining, not holding steady or rising.
That could bring back the big incentives--and lead to further cuts in GM's credit rating, forcing it to pay more to borrow. "GM's credit profile will continue to deteriorate," Oline predicts. "It's hard to see how they're going to restore profitability just through revenue and new products." And while the employee-discount deals have helped GM bump up its market share, they've also drawn shoppers into competitors' showrooms--boosting sales at Nissan, Toyota, Honda, and even Hyundai. If industry sales peter out this fall, as many analysts expect after the summer binge, GM will probably fall back more than others, since it has had to offer more come-ons to attract buyers.
Winter Solstice? Other reforms seem shrewd, yet far short of what's needed. The new Pontiac Solstice two-seat roadster has the hallmarks of a desperately needed buzz vehicle--quasi-Porsche styling and a zippy engine for about $20,000. But delays have GM introducing the convertible just in time for . . . winter. GM has also begun trying to carve out distinct personalities for struggling brands like Pontiac, Buick, and Saturn. Instead of issuing Pontiac and Saturn carbon copies of the Cobalt, Chevrolet's economy sedan--the old "rebadging" strategy--GM has used the Cobalt's chassis to build the Chevy HHR, a neo-retro wagon-ute that resembles Chrysler's PT Cruiser. Critics have lauded the strategy--but GM needs to sell hundreds of thousands of appealing new vehicles across all of its brands, not just a few thousand funky Chevys.
Worse, higher gas prices, exacerbated by Hurricane Katrina's damage to the energy industry, may already be neutralizing GM's secret weapon--full-size trucks and SUV s. Next year GM will introduce a new lineup of light trucks, which have been the automaker's most profitable segment. But higher gas prices and a shift in consumer preference toward smaller crossover vehicles have punctured hopes for a killer new SUV. "They're bringing new product into a shrinking segment," laments Oline. Even GM knows that. The company plans to build about 250,000 fewer light trucks than it did during the late '90s, the glory days of the big SUV.
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