Courtesy: Bloomberg
General Motors seems to be doing pretty well for itself. After emerging from bankruptcy with fewer brands, fewer dealers and an attractive model line-up, the company went public, which went a long way in shedding its “Government Motors” reputation.
Sales have been improving as well. According to Ward’s Automotive Group, January and February 2011 sales for GM are up 34%. Even more impressive, sales growth in Feb. 2011 compared to Feb. 2010 is almost 50%. Considering the multitude of snow storms in Feb. 2011 (which translates into fewer days to sell automobiles) it sure seems like GM is back on the fast-track. That’s impressive for a company whose executives had to beg members of congress for a bailout.
One tactic that got GM into trouble in the first place was not innovating in the passenger vehicle market and relying on SUV sales instead. Another problem was the heavy use of incentives to spur sales. This is a common problem for car manufacturers, especially large players with undifferentiated products. Even Toyota, which has historically had much fewer incentives, has increased the use of this tactic to increase sales.
There are several problems with sales incentives. For one, they reduce profitability. With lower margins per unit, a manufacturer has to make up that gap with higher volume. That’s a problem because customers get used to and start expecting large rebates and low (or no) interest financing. Large up-front incentives tend to drive down the prices in the used-car market as well, which is problematic for leasing and financing operations.
Considering all these negative aspects associated with offering incentives, most car makers resist their use as much as possible. GM is not one of them.
Average 2011 model-year incentives (per vehicle) amount to $2,382 according to a recent analysis conducted by AutoObserver.com. GM’s average was over $3,600 per vehicle. That’s before GM announced the availability of zero percent financing on select models.
Everyone wants GM to succeed, but their growth must be based on organic customer demand. Otherwise the vicious cycle of high-incentives, low-profitability, reduced R&D funding and mediocre products will repeat itself.
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