By on May 17, 2010

Sadly, my internet came crashing around my ears just as GM’s Q1 results conference call was getting interesting. Typical Monday. I’ll rock myself to sleep tonight with a recording of the call and report back tomorrow, but at this point the big news is plainly visible on this single slide. Yes, GM finally got control of its incentives and wrestled them below the industry average… for a month. That month (March) also just happened to be the worst month this year for GM market-share wise. The next month (April), the incentives went back over the industry average, and market share increased once again. The lesson seems obvious: GM won’t gain market share on promises of high-quality cars and taxpayer payback alone.

Though GM’s executives seem to understand that “buying market share” isn’t worth the long-term downsides, they also don’t appear to have much choice. This, in a nutshell, is why GM is returning to captive lending: it has to buy the market share somehow, and risky loans are better than huge incentives. Problem is, this also proves why the bailout of GM was a foolhardy proposition. In order to sustainably grow their business, automakers need one commodity above all others: the trust and respect of consumers. Without that, you can screw bondholders, force worker concessions, cut dealerships, absolve debt and dump cash on the problem ’till the cows come home, but you’ll still end up with a chart like this.

When analysts say that GM’s new marketing wunderkind Joel Ewanick faces “the toughest job in marketing history,” this is exactly the problem they’re referring to. How he will be able to reverse GM’s spiff dependence, and get people to buy GM products because they want them more than anyone else’s vehicles isn’t the least bit clear at this point. And if he doesn’t make that change, GM will have no choice but to keep the incentives high and pile on the in-house financing giveaways. High stakes indeed, for a problem that Ewanick’s predecessor seemed to think could be solved with the tagline “Excellence For Everyone.”

[GM’s Q1 Slideshow is available in PDF format here, Supplemental information in PDF format here, and Q1 SEC 10-Q filing in PDF format here

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23 Comments on “What’s Wrong With This Picture: Follow The Incentives Edition...”


  • avatar
    psarhjinian

    Can’t VerticalScope let you expense a 3G stick or, at the very least, a copy of Tether or JoikuSpot, a decent phone and a data plan?

  • avatar
    gslippy

    I’d like to see a similar chart for other key automakers. Perhaps there is just as strong a correlation between market share and incentives for some others?

    While I enjoy dumping on GM as much as the next guy, that big ship will take some time to turn.

    Another way to look at it, they currently have the same market share as a year ago, but are offering only 2/3 the incentives.

    I’m very eager to see how this data looks after Q4-10 and Q1-11, once the Volt has hit, funded by government incentives and insufferable hype. And juxtaposed against the price of fuel.

    • 0 avatar
      segfault

      “…that big ship will take some time to BURN.”

      FTFY. I am still waiting for the second coming of GM Death Watch.

    • 0 avatar
      Stingray

      “I’d like to see a similar chart for other key automakers. Perhaps there is just as strong a correlation between market share and incentives for some others?”

      X2 in this. With names: Chrysler, Ford, Toyota, Honda amongst others.

  • avatar

    Return to Greatness

  • avatar
    John Horner

    You can’t talk about incentives, market share and captive lending in a vacuum. The actions of GM’s major competitors all have a significant impact on what GM is able to do. I’m no GM apologist, but I also don’t like to see every bit of information spun to fit a pre-conceived notion of what is going on. Toyota, for example, was in the market with the heaviest incentives it has ever used. Hyundai is gaining market share with very agressive out-the-door pricing. Every one of GM’s competitors has a captive finance unit piece of the puzzle.

    Spin it how you like, but GM is in much better shape financially today than it has been in a long time, and the new CEO certainly is shaking things up in a way we haven’t seen at GM since the Duponts kicked Durant out the door.

    Time will tell how it all works out, or not, but GM is certainly doing better today than many people expected. The IPO which was dismissed here on TTAC several months ago as a pie-in-the-sky idea is starting to look doable. Don’t get me wrong, I don’t plan to be a buyer of GM stock if and when it starts trading on the open market again, but you cannot dismiss the fact that GM is showing clear signs of improvement in most of the important metrics.

    • 0 avatar
      holydonut

      I’m also curious regarding the mix assumptions for the average incentive. For example, Kia with its lower margin small cars cannot offer the same absolute $ of incentives since the automaker has less wiggle room to slap margin on the hood. And to your point, if Toyota went bonkers with incentives on their trucks and SUVs, GM would have to follow suit driving up their incentives against an industry average.

      A separate topic… I think the captive financing component is crucial to GM playing games with the incentives-shenanigans. The car-side/sales-org of the business can always artificially give vehicles great residuals so their lease terms are more attractive to buyers. In probably 99% of cases the automaker doesn’t accrue enough money to represent their estimation of “value” that they’re giving when they artificially bump up the residual.

      Of course, the actual residual value won’t come to be known until the vehicles hit the open market… at lease turn in. When all the bad news hits, the financing arm will send a bill to the car company to make up the fact that they’re getting bam-boozled on all the residuals.

      The automaker will get to pop a one time bad news item to catch up their accruals of lease-return vehicles sold at auction in 2013. The financing side stays healthy since the quality of their lease assets improves, and lots of old white dudes get rich. Of course, GM won’t be dumb… they’ll pile on lots of other “one time charge” bad news into the filing to make a big stink-fest. But that’s okay – since they’re going to be counting their bonus compensation dollars leading up to the surprising bad news.

      I can guarantee that no one is going to have to return any bonus $, option $, or IPO money… but at least they’re predictable. This also means you should sell your GM stock (if it ever becomes available) about 24 months after they return to a captive financing arm. You should make money while they’re making money. Just get out when you can.

    • 0 avatar

      Wiggle Room? I’ll show you Wiggle Room…

    • 0 avatar
      windswords

      Buickman,

      Do you do that dance number at your dealership? LOL!

  • avatar
    frank rizzo

    Without giving any indication of how manufacturers normally fluctuate around the mean, this post is meaningless. If I may also over-generalize, to me it seems like they have the house in order, at least for a while.

    Or maybe incentives don’t really matter on their own since they are only one part of the transaction price. I’d be more interested looking at incentives as a percentage of the MSRP price, not in average nominal amounts. If these are incentives on $50,000 trucks, who cares. $12,000 cars? Now that’s a bigger deal.

    Of course, this is all impossible to know while looking at one 16 month graph of one manufacturer. Maybe in the future have Karesh handle the data analysis using a panel of all manufactures, since he can probably talk about things where are meaningful statistically rather than random noise.

  • avatar
    George B

    Like others wrote, I’d like to see GM incentives compared to those of Ford and Toyota. All three are large full line manufacturers with both cars and light trucks. My hypothesis would be Toyota offered incentives and GM was forced to follow. At least GM did get an increase in market share.

  • avatar
    IGB

    This graph can easily be viewed in a glass is half full sort of way as alluded to above.

    The market share moving average appears to be rising.

    Incentives are nearly half of what they once were and appear to be in steady decline.

  • avatar
    mythicalprogrammer

    Err… Can’t really tell from this Q1, need to wait for Q2 and maybe Q3. But they did have less incentives then last year Q1 and kept a relative $/unit for this Q1 versus last year Q1. Also the markets is due to recover slowly throughout 2010 and they believe we will see the result by the end of 2010. Perhaps, GM will improve as the economy improve. Unless Europe tanked, then we’re all screwed.

    Yeah, someone stated that they need to see other automakers’ incentives? That makes sense, I remember Nissan had a crap ton for their trucks.

  • avatar

    GM’s incentive problem is a two-edged sword. Part of the solution is for GM to bite the bullet and permanently scale back their incentives. Over the last three years or so they have resolved to do this on several occasions, but they never been able to follow through.

    The real challenge here is that GM (and Ford and Chrysler) have relied on very generous incentives for so long that the public is conditioned to expect this. No-one, not even GM’s most loyal supporters, will buy without some combination of discount pricing, big rebates, and cut-rate financing. If GM isn’t piling enough cash on the hood today, you only need to wait a few months for the next Red Tag, Employee Pricing event.

    It’s easy for GM to state the obvious and say it needs to reign in incentives. The hard part is weaning buyers from these incentives.

  • avatar
    John Horner

    I just looked at that graph more closely, and now I have an alternative headline for it:

    “GM Grows US Market Share Nearly a Full Percentage Point While Increasing Incentives by Only $100/Unit Month-to-Month”

    Or how about this? “GM’s April 2010 Incentive Spending Down $2000/Unit Compared to April 2009″

    Oh wait, that doesn’t fit the preconceived narrative.

  • avatar
    Tommy Boy

    >>I am still waiting for the second coming of GM Death Watch.

    Second that!

    >>Time will tell how it all works out, or not, but GM is certainly doing better today than many people expected. The IPO which was dismissed here on TTAC several months ago as a pie-in-the-sky idea is starting to look doable.

    Given how the Obama administration stuck it to the bondholders, what professional investor with a fiduciary responsibility to its clients is going to invest in the “new” GM while the UAW is still on the premises, and particularly while Comrade Obama is still in the White House?

    http://www.investors.com/NewsAndAnalysis/Article.aspx?id=534273

    http://www.washingtonexaminer.com/politics/White-House-puts-UAW-ahead-of-property-rights-44415057.html

  • avatar
    shiney2

    The bondholders, and the entire country, did better than they would have if GM had simply failed and collapsed at the height of the credit market freeze – which would have happened if the government had not stepped in and financed the bankruptcy.

    Its interesting that the “Investors” link fails to even mention UAW employing Ford as conflicts with the premise of the article. It also repeats the completely idiotic lie that somehow the UAW had more to do with the failings at GM and Chrysler than criminally inept MBA management, and the short term quick profit taking mentality they brought to decision making.

    I refuse to even open the Washington Examiner link, its a pure propaganda paper with all the credibility of the Weekly world News.

    • 0 avatar
      Tommy Boy

      >>The bondholders, and the entire country, did better than they would have if GM had simply failed and collapsed at the height of the credit market freeze – which would have happened if the government had not stepped in and financed the bankruptcy.

      That’s Democrat / UAW propaganda. It wasn’t an either bailout or liquidation — a run of the mill Chapter 11 reorganization would have enabled even greater reduction in expenses / liabilities and so postured GM far better for the future. But a Chapter 11 reorganization would not have insulated the UAW the way the Obama administration did, and so the continued UAW presence merely starts the same dysfunctional cycle all over again. As for the credit freeze, the government could have guaranteed debtor in possession financing with a true Chapter 11 reorganization.

      >>It also repeats the completely idiotic lie that somehow the UAW had more to do with the failings at GM and Chrysler than criminally inept MBA management, and the short term quick profit taking mentality they brought to decision making.

      Bad management was no doubt a factor. But the UAW was responsible for a lot of that bad decision-making. The costs imposed by the UAW — far above market wages and benefits, work rules and other forms of union featherbedding, and the “union attitude” amongst the workforce — meant that management had to cut content and quality to offset the UAW costs and still peddle their products at going rates. Eventually consumers caught on to the relatively deficient quality and content of GM / Ford / Chrysler, and rationally transferred to the higher quality products.

      The UAW leopard hasn’t changed its spots, and is still going to push the same agenda, and so GM / Ford / Chrysler are still long-term uncompetitive, and so the taxpayers’ bailout is going to be money down a rathole. Just like the British taxpayers experience with British Leyland.

  • avatar
    hreardon

    x2 on Washington Examiner.

    That said, it’s hard to tell what kind of haircut the bondholders would have taken in a legitimate BK because it obviously didn’t play out that way. The government stepped in and essentially told everyone what they would get.

    As far as GM’s relative health – of *course* their financials should look Godly, how could they not when they were able to lop tens of billions worth of legacy costs off the balance sheet and restructure? I’ll give credit where credit is due – they’ve got some good product in the pipeline as well, but the big issue was (and still is) DEBT.

    Look, one of the theorized reasons why consumer spending has been up so much these past few months is because you have 2.5 million people, a large number in upper-middle income brackets, who simply are not paying their mortgages and the banks have yet to default. So, sure, remove a $1,300/month liability from my pocketbook and my finances look rosy, too.

  • avatar
    Monty

    Maybe what we’re seeing here is the beginning of an exponential increase in improvement. The first 4 to 6 quarters will only exhibit slow marginal improvement; then Wham! all the efforts of the previous 6 to 8 quarters will start to show some serious results. I’m including the previous two quarters because there were some small changes in the corporate culture, and efficiencies were found in manufacturing and supplies. The TTAC meme of Ed Whitacre as the devil incarnate, and blah, blah, blah GM sucks and nothing will ever change is getting tiresome. Maybe it’s time to admit that a culture shift may have occured at GM, and the engineers and assembly guys are back in charge.

    I subscribed to that meme myself, but evidence is mounting (including posts here on TTAC in the past two weeks) that there have been visible changes at GM. A quarterly profit, incentives down by nearly half, some of the new vehicles recognized as very class competitive, far fewer sub-prime loans than a lot of competitors. It sounds like GM is making the neccessary incremental changes that their balance sheet can support.

    It seems to me that some of the GM haters are as delusional as some of the GM fanbois were during the “death watch”.

    I’m not a fanboi, and I’m still pissed at GM (the former BoD and executive levels, that is), but is it possible that real change has occured?

  • avatar
    Power6

    This seems like good news. It is plain to see that market share is sort of flat, while incentives have trended downward.

    Call ‘em as you see ‘em Edward, but don’t forget to keep an open mind. Things do change.

  • avatar

    Wagoner refused to allow this to be distributed at the shareholders’ meeting. time has come perhaps? another look at least… we may not agree 100% (that’s probably a good thing) but this could be the plan upon which we build. odds are Reuss and company are following these threads. this is our chance to get together, the B&B @ TTAC. yeah there are other sites, but this is the best, at least my fav for sure. we give it to ‘em straight…’cause we care.

    http://generalwatch.com/editorials/editorial.cfm?EdID=2

    your thoughts?


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