GM (GM) has decided to do two things to stimulate sales. One is to offer aggressive incentives on its new cars. The other is to offer substantial warranties on its used cars. Between the initiatives, GM is likely to move inventory, but the cost may be high enough so the the remedy poisons the patient.
GM’s US sales are running about 20% behind the pace of last year. The company cannot survive that much longer, so priming the customer pump may be its only alternative.
GM tried to swear off incentives, but, like a old drunk, it returned to the bottle. If GM has been losing $2,000 per vehicle sold in the US, that number may move up to $4,000. Suicidal Math 101.
Offering warranties on used cars works if almost all of the vehicles continue to run OK. Some actuary in the basement of the GM headquarters made the calculation that losses from the program will be manageable. That person probably rides a bicycle to work. There are few substitutes for experience.
GM has decided to see if it can survive a great deal of bleeding now while it gambles that its near-term future can be made better by an improving economy and a product line-up of more fuel-efficient cars.The other factor that the firm will need to weigh is its cost base, which is still too high. For each new car sold with $3,000 cash back, some poor GM soul will probably have to be let go.
The sales message from this year is that fewer and fewer people want to own a GM product. Turning that river may be impossible.
Douglas A. McIntyre
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