GM, Laden With Big Inventories, Revives Rebates : Move Comes Despite Vow to Shun Costly Incentives
Just six months after General Motors Chairman Roger B. Smith vowed that the world’s largest auto maker was kicking its addiction to costly sales incentive campaigns, GM announced one of the most sweeping sales incentive campaigns in its history Wednesday.
Plagued by huge inventories of unsold cars sitting on dealer lots, GM said it will offer cash rebates and discount financing as low as 1.9% on two-year loans on most of its 1987 model cars.
The program follows a similar massive campaign GM initiated last August, when its dealer lots were also filled to the brim, and comes despite Smith’s earlier pledge not to use wide-ranging promotions to reduce inventories.
Because such cut-rate financing programs are extremely expensive, Smith had promised the investment community that he would rather cut production than mount another sales offensive. In an interview last February, he described this change in strategy as GM’s new willingness to forgo market share in favor of profit.
Market Share Has Slumped
“The game in 1987 isn’t going to be market share for market share’s sake,” Smith said in February. “It’s going to be profit . . . so that’s what we are trying to do, maximize profits by controlling inventories, by not letting them get out of hand where you have to run into a big sales campaign.”
Unfortunately for Smith, GM’s sales--and its market share--have slumped so badly since then that, even with repeated rounds of production cuts, inventories have ballooned.
Industry analysts estimate that, at the end of July, GM had an 80-day supply of unsold cars on hand; 60 is considered normal in the auto industry. Many of its individual car lines have much higher figures, and some analysts have been predicting that GM’s inventories would have continued to increase.
As a result, industry analysts described GM’s move as inevitable. “GM has the unenviable situation of having a huge inventory buildup and a huge, huge excess in production over sales,” said William Pochiluk, an automotive analyst with Autofacts, a Paoli, Pa.-based research firm. Pochiluk estimates that, in the first eight months of the 1987 model year, which began last October, GM built 10% more cars than it sold.
Vulnerability to Strike
The program’s timing and duration did surprise some analysts, however. The incentives, effective today, are scheduled to last until Sept. 30, two weeks after the company’s labor contract with the United Auto Workers is to expire.
Michael Luckey, an automotive analyst with Shearson Lehman Bros., noted that if the incentives are successful, they could make GM more vulnerable to a strike by reducing its inventories just as the Sept. 14 contract expiration deadline looms.
“They seem to be placing a big bet here that they can settle with the union without a strike,” Luckey added.
Ford and Chrysler are expected to respond with their own incentives within the next few days. Some analysts also predict that the Japanese auto makers, many of whom are suffering through worrisome sales slumps, will also offer rebates or discount financing programs soon.
