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General-2007, Outlook

How GM Handles a Hit: Build Fewer

Date: Oct 31, 2007


Author: Ninety Eight Regency

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Original Article:

How GM Handles a Hit: Build Fewer

Date: Oct 31, 2007

Source: The Wall Street Journal

Author: John D. Stoll

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How GM Handles a Hit: Build Fewer
Wary of Repeating Mistakes,
Car Maker Cuts Production
To Keep the Enclave Hot
October 31, 2007; Page B1

This summer Mary Mooney and her husband were soaking up the sun in Florida when they saw a Buick Enclave, a big, seven-passenger vehicle, and decided they just had to have one. But when the couple called two dealers back in Michigan, where they live most of the year, the model they wanted was sold out at both.
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So instead of flying home, the Mooneys bought an Enclave in Florida and drove it 1,300 miles back to Michigan. Sitting in her opal-colored Enclave on Saturday, Mrs. Mooney said, "We fell in love with it."

The tight supply of Enclaves -- a so-called crossover utility vehicle that has become General Motors Corp.'s breakout hit this model year -- is no accident. Buoyed by a new labor contract that reduces its costs, GM is keeping a tight rein on production of the Enclave in an effort to avoid past mistakes that forced it to offer discounts and cheapened the image of the company's brands.

"We want to keep [the Enclave] hot," says GM Vice Chairman Robert Lutz. "Nothing destroys the value of a new product faster than over producing."

In the past, when GM had hot models, it usually built as many as it could, and almost always ended up with lots filled with unsold vehicles. For example, the Chevy HHR, a retro-styled wagon launched in 2005, sold briskly at first, often at full sticker price. But after cranking up production and offering discounts to boost sales, GM had a glut. Fifteen months after the HHR was introduced, Chevy dealers had enough in stock to last almost five months without ordering more. Since then, GM has had to continue discounting and dump thousands of HHRs into rental fleets, which eroded the margin on the car, and badly watered down its cachet.

Ford Motor Co. and Chrysler LLC often do the same with their fast-selling models and are also trying to break away from the practice. But GM's handling of the boldly styled Enclave and two other crossovers made from many of the same parts -- the GMC Acadia and the Saturn Outlook -- is one of the first signs any of the Big Three is truly changing its ways.

Both the Enclave and Acadia are selling almost as fast as dealers get them. At the end of September, GM had a 21-day supply of Enclaves, and a 49-day supply of Acadias. The Outlook hasn't sold as well and its stock is higher -- 73 days' supply. A supply of 65 days or less is considered healthy.

But overall auto sales have slowed this year, hurt by the housing slump and high gas prices. So GM is acting now to hold down its inventory of the three crossovers, which look like SUVs but are lighter, drive more like cars and get better gas mileage. In December, the Lansing, Mich., plant that makes the three models will cut back to two shifts of production from three.

It's a risky move. The crossovers, which sell for $35,000 and up, make a lot of money for GM at a time when sales of its highly profitable trucks and SUVs are falling. GM is also struggling to produce steady profits in North American and needs every dollar it can bring in.

The need to maintain revenue means GM can't apply the tight-supply approach to all of its models, their best-selling cars and trucks, and still has to use incentives to prop up sales. For instance, although GM has cut truck production recently, it is still offering 0% financing for 60 months on its Chevrolet Silverado pickup.

Meticulously controlling supply takes a page out of the playbook used by many of GM's more profitable foreign rivals, said Earl Hesterberg, chief executive of Group 1 Automotive Inc. a dealership chain based in Houston. Both Toyota Motor Corp. and Honda Motor Co. ratchet production levels up or down to stay in line with demand and minimize the need for discounting.

"This is the way [Toyota's] Lexus business operates and the way the BMW business operates," Mr. Hesterberg said.

Michael Jackson, chief executive of AutoNation Inc., another large dealership chain, has been badgering GM executives, including Chairman and Chief Executive Rick Wagoner, to cut production and tighten inventory for a couple of years. He insists it's the only way to get away from hefty rebates.

"If your product is hard to get, it becomes more desirable to the consumer and people will pay full price for it," he said.

Until now, GM has been under great pressure to build as many vehicles as possible -- mainly because the company needed to generate huge sums each year to cover the cost of health care for more than a million people, mostly union retirees and their dependents. Any production cuts risked leaving the company with less revenue to finance its debts and the obligations to its workers.

But in the past few years, GM has fundamentally changed its cost structure. A deal with the United Auto Workers in 2005 lowered the company's health-care costs. Last year it shed about 30,000 workers -- roughly a quarter of its unionized workforce -- through buyouts and early retirements.

More far-reaching changes came in the new labor contract workers approved last month. It allows GM to hire new workers at lower wages and give them 401(k) accounts for retirement, which are much less costly than pensions. It also lets GM to set up a union-controlled fund that will cover the cost of retiree health care, which will remove about $50 billion in liabilities from GM's balance sheet.

With its labor costs now set to fall steadily over the next several years, GM can start to bring production more in line with consumer demand without worrying as much about a revenue shortfall.

The new contract also gives GM more flexibility to lay off workers when demand slackens. Twelve days after the contract was ratified, GM announced it would phase out the Lansing plant's third shift and lay off 1,000 workers building the Enclave, Acadia and Outlook.

It is also reducing production at a truck plant and a large-sedan plant, both in Michigan, which together will result in an estimated 1,900 job cuts.

GM will face a test of its ability to maintain discipline in the months ahead after it introduces new versions of two critical sedans -- the Cadillac CTS and Chevrolet Malibu -- while auto sales are trending downward. Currently, the U.S. market for light vehicles, which include passenger cars, pickups and SUVs, is 1.5 million vehicles lower on an annual basis than GM had thought it was going to be when it crafted its restructuring plan in 2005, said GM sales analyst Paul Ballew. Lower industry sales will mean GM has to stretch to hit its revenue target, and could be forced to pump up sales with incentives.

And while the Enclave and the Acadia are hits for now, that could change in 2008 when GM begins building a Chevrolet version of the same vehicle, called the Traverse, at a plant in Tennessee. Because Chevrolet sells far more vehicles than Buick or GMC, the Traverse could very well pull buyers away from the Enclave.

"Of course we don't want to have too little supply on dealer lots," Mr. Ballew said, "but the situation we're looking at now is definitely a good problem to have."



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