By on September 26, 2011

[Editor’s note: the following block-quoted passages were sent to us by an enterprising anonymous tipster (italicized passages were quoted in the original from linked sources). I’ve decided to let the argument speak for itself, and simply interject a few thoughts (non-block-quoted) towards the end.]

On their Q2 earnings call, GM gave this presentation [PDF] and made the following claims:

“On Slide 12, we provide what we view as key performance indicators for GM North America. The 2 lines on the top of the slide represents GM’s U.S. total and retail share. The bars on the slide represent GM’s average U.S. retail incentives on a per unit basis. Now U.S. retail incentives as a percentage of average transaction price and compared to the industry average is noted at the bottom of the slide.

“For the second quarter of 2011, our U.S. retail share was 17.6%, up 1.3 percentage points versus the prior year and down 0.6 percentage points versus the prior quarter due to the absence of the first quarter sales programs. Our incentive levels on an absolute basis have declined significantly from the prior year as well as sequentially. On a percentage of ATP basis, our incentives were 8.9%, down 2 percentage points versus the prior year. This puts us at approximately 103% of industry average levels for the second quarter of 2011, flat versus the prior year.

“In terms of incentive levels, our plan continues for us to be at approximately the industry average for the year on a percentage of ATP basis. These results for share and incentive demonstrate the impact of our plan to produce great vehicles the customers are willing to pay for.”

I did not try to verify the first part of the highlighted claim (that incentives have declined compared to previous year totals), but the second part of the claim (that incentives have declined sequentially) is demonstrably false.

GM also claimed

Price was favorable $600 million due to the vehicle price increases and the reduction of sales incentives in the second quarter. On average, our retail incentives were approximately $800 per unit lower in the second quarter.

This claim is true. GM also claimed

And right now, we’re looking at kind of flat incentive spending H2 versus H1, primarily because of the uncertainty around what the Japanese might do once their stock levels up back up to reasonable levels and then what the competition might do relative to following or not.

This claim is demonstrably false. Finally, when probed about their incentive spending, GM’s Daniel Ammann said

Well, what I’ve said, we’re saying approximately, right? And part of the reason we’re saying approximately is it’s not exactly clear, to the earlier discussion, how things are going to unfold with the Japanese with the supply/demand equation. The key message is that for all of last year, for the second quarter of this year, we were clearly at or around, I think last year, we were slightly below. This year — well, this quarter, we’re right on. That’s the way that we’re conducting the business. That’s the way that we’re going to run it going forward. Exactly where the year comes out, given the Q1 and sort of unknowns that could happen this year, we think it’ll be approximately around the industry average, but we can’t be that precise at this point.

It seems like he’s almost walking back the claims made in the presentation, so I looked at the way GM presented the data versus the way Edmunds presents its data. GM’s incentive figures demonstrate spending as a percentage of average transaction price (ATP). So, their chart on page 12 of the presentation looks at a level of spending compared to an average price of all vehicles sold in the fleet in a given month or quarter, and displays it as a percentage. That much may be true, and they may be on par with the rest of the industry when they present the data like that. The GM%/Ind. % bar at the bottom of their chart reflects this, as they want that number to be as close to 1.00 as possible.

However, Edmunds looks at average amount of incentive spending per vehicle sold, and the story now becomes quite different. Using data from Edmunds press releases on average incentive expenditures per unit sold, here are a couple of charts of interest:

So it appears at first glance that GM cooked its books ahead of the earnings call. They are clearly spending far more on incentives per vehicle sold than any other auto manufacturer, and definitely far above the industry average. Their incentive spending has also not been in sequential decline — if anything, it has fluctuated, and seems to be on a rising trend at present, which is consistent with industry trends. No doubt the debt ceiling debate, crashing Dow, S&P downgrade, and any other number of factors could have compelled the auto industry to stoke demand with extra incentives. GM is also not spending on a flat level between Q1 and Q2.

Which leads us to this question: what happened in January 2011 and May 2011? I seem to recall something about potential UST sales of taxpayer shares at the first of the year and in May. I’m not ultra-conversant in stock market speak, but I wonder if this explains the May incentives leap at GM:

The Treasury, which owns 33 percent of GM, can file as soon as May 22 for a secondary offering. Such a process requires a lengthy review by the Securities and Exchange Commission, so the department will wait until it can use an S-3 filing as soon as July 1 that allows for shares to be sold more quickly, said the people, who asked not to be identified revealing private plans.

My guess is that if GM knew UST was about to sell its shares, finally divesting it of the “Government Motors” moniker, they could have boosted incentive spending in January and May to pad volumes so stock prices would rise, and help the government make the taxpayer as close to “whole” as it possibly could.

Part of this argument comes down to a simple question of how best to measure incentive levels: by unit or by average transaction price. Our tipster argues that Edmunds’ volume-based metric is more credible, but because incentives only matter to the extent that they reduce revenue and profits, measuring them as a percentage of average transaction price is actually the more relevant metric. But don’t write off the tipster’s warning just yet, as he’s right about one thing: according to both metrics, there are signs that GM’s recent progress on pricing and incentive discipline may be hitting the skids.

If you prefer to look at incentives as a percentage of ATP, TrueCar’s August report shows GM’s incentive percentage rising .1%, from 9.5% to 9.6%. And according to the same report, GM’s 9.6% average was .6% higher than the industry average. On a non-ATP-adjusted basis, Edmunds’ data shows GM’s transaction price average fell .8% from July to August, while its incentives per vehicle rose .5%… and only Daimler and BMW had higher average incentives among manufacturers.  Going into September, both Edmunds and TrueCar show GM and its Chevrolet brand as struggling with pricing discipline, as GM vehicles, particularly 2011 model-year Chevies, show up as the most-incentivized vehicles in a number of segments. According to Edmunds, Chevy was the second-most incentivized brand (after Lincoln) on a non-ATP-adjusted basis. In short, our concerned tipster may be on to the early signs of weakness in GM’s pricing power, especially given the context of undersupply at key competitors, but we’re still a long ways from the kind of scenario that anyone is going to lose sleep over. If anything, the scariest part of the story is that GM’s average transaction prices are coming back down after making strong post-bailout gains.

But our tipster is at least as concerned with hypocrisy as the possibility that GM will start bleeding cash again, and here is where his case firms up. After all, the mixed picture can be sliced and diced, but GM’s leadership has been dishing out tough talk on the incentive/pricing issue that simply isn’t being backed up with firm numbers. In fact, in different markets, GM is indisputably “buying market share,” contrary to the public statements of its CEO.

Compare/contrast this quote from GM CEO Dan Akerson, in a recent American Public Media interview:

RYSSDAL: You know, I had a conversation with Alan Mulally on this program about two, three years ago before everything went south, and I asked him about market share versus profitability, and he said, “Oh yeah, I’ll sacrifice market share for profitability any day.” Seems that you have an opposite viewpoint? You want market share and profitability.

AKERSON: Our first priority is profitability. We’d like to get market share because we’re not going to price incent, discount if you will, to buy market share. In fact, our incentives are down year over year and are consistently below our domestic competitors, quite frankly. That speaks about brand; it speaks about the quality of our product and the market reception of our products. But of course, if you’re producing great products and it’s what the market wants and are willing to pay for it and you gain market share, that’s a nice secondary consideration, because I agree with Alan, you should price for profitability or else this could be a corrosive business environment otherwise.

With this story on Bloomberg:

General Motors Co. (GM) is sacrificing profit margins to maintain market share in China, cutting prices of low-cost minivans by as much as 15 percent to offset slowing sales in the world’s largest vehicle market.

Propping up minivan sales through sticker-price reductions is crucial for helping Detroit-based GM remain the top overseas automaker in China, ahead of Volkswagen AG, after the government ended stimulus programs and local authorities restricted purchases to curb highway congestion.

“GM does not rely on the minibus for profit,” said Jenny Gu, a Shanghai-based analyst with industry researcher J.D. Power & Associates.“They only contribute volume.”


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22 Comments on “Can GM Walk Its Talk On Incentive Spending?...”

  • avatar

    That last paragraph makes my head hurt. I once had a boss that chased volume religiously, we ended up busting our butts on jobs that made zero profit. Didn’t make sense then, doesn’t make sense now.

    • 0 avatar

      Russycle, that concept is known as “denying the sale to competitors”.

      It’s true that you don’t make a profit but you keep your employees working and you deny your competitors from getting the money from that buyer. You strive to break even, or you dip into your advertising account and offset your loss, if any, on the ledger.

      Hence the saying, “sell at a loss and make it up in volume”. I’ve known businesses that actually folded because their competition sold at a loss but was better situated to weather the storm.

      All’s fair in love, war and/or competitive bidding.

  • avatar

    Lots of data. I think there seems to be some mixing up of average incentive spend (in absolute $) and incentive spend as % of ATP. GM specifically referred to % of ATP, so the absolute amounts (as shown in chart 2) are not that important. GM’s data says for July (estimated) it was below the industry average (at 0.98) – was this true now July has come and gone?
    I agree the data is mixed and we will see what happens as the year finishes out and the remaining 2011 models sell out and the Japanese comes back to normal conditions. The bottom line is that GM has publicly traded shares and profit is the key thing they will be judged on. We all know large incentives hurt profitability (if unaccompanied by increasing transaction prices). Time will tell.

    The paragraphs about China are worrying but since China generates little profit it is not off too much concern, and maybe it is important to maintain a certain position there for future years.

    • 0 avatar

      “The paragraphs about China are worrying but since China generates little profit it is not off too much concern, and maybe it is important to maintain a certain position there for future years.”

      This isn’t the Change Bank, where volume is its own reward. If GM was selling little vans at break even and then they cut the price 15% to sell more of them, what happened to the bottom line?

      • 0 avatar

        Well at least you don`t seem to be arguing with the main thrust of my post.
        As for China, the operative word is “little” profit. If they cut back to say a 1% profit (or even zero) on one segment, minivans in this case, that does not mean the whole Chinese venture is running a loss. Just less of a profit. They may have cut prices by upto 15% but it doesn’t say anywhere that they were not making money on them before the price cuts.
        The entire GM company needs to make a profit and as with Ford that mainly comes from the US market since Europe is a perennial loss maker. Is is good to exclusively chase volume at the exclusion of profit, no. The bottom line as you mention is that GM is making a profit. If their management considers it important to maintain market share in China then it is for them to decide. The market will determine if they are making acceptable profit – not you or I.

      • 0 avatar

        If GM’s products, both here and abroad, were all that attractive we wouldn’t be discussing the masthead question EN posed. The fact that GM has to stop production in Indiana and put money on the hood tells me that people aren’t exactly standing in line, brawling to buy GM products.

        Granted, the US economy is not good for new-car sales. There also are a lot of people biased against buying GM, each for their own reasons, no doubt. They do seem to buy Ford and the transplants, though.

        But if we are doing this bad at this point in time, how bad will it get when things get worse and even more people will be laid off after the Holidays?

        It’s not a matter of ‘if’. It’s a matter of ‘when’ the Europeans give the rest of the global economy a financial wedgie that’s going to last for years.

      • 0 avatar

        Well, Highdesert, that might be true to a degree. But it’s also true that car brands reputations change at… well, not at a glacial pace, but it changes slowly over decades. People who don’t follow cars tend to be very stuck on brand perceptions that reflect a combination of things they heard and their own unique experiences with various car brands.

        GM has to rebuild a tremendous amount of brand equity. That is a decades long project. Their customer base has been getting major $ on the hood for decades now. You can’t just switch that up because you released your first good small car since the 70s a year ago.

        But honestly, at this point what is the worst car Chevy makes? The HHR? That’s a marked improvement.

      • 0 avatar

        toxicroach, there is no doubt in my mind that GM has improved the quality of its products, and I would like GM to do well so they can repay the tax payers all them bail-out bucks.

        But I don’t think that will ever happen because the bottom line is that GM is still not selling enough product worldwide to be able to make it on its own and be profitable.

        GM could very well be making the best products in the world right now but they’re not attracting enough buyers to where it matters. To get to that level could, indeed, take decades, just like they lost their clientele over decades prior to bankruptcy.

        But even that is grasping at straws because GM, as we know it today, won’t be around in three years. It would not surprise me if we see Holden cars in the future rebadged as Chevy, and high-end Opels rebadged as Cadillac.

        With all the incentives GM is still not selling as well as they must.

  • avatar

    GM drastically reduced incentives as early as 2006, if not earlier. My personal shopping since then [up to 2004+, they were practically giving the iron away] has shown high transaction numbers. Today, I see Malibu leases going for $179/mo with $4K up front – not as cheap as they look.

  • avatar

    false statements are not necessarily lies. the marketing/incentive folks at GM are far too ignorant to properly explain what they are claiming, which is expected since they don’t even understand what they are doing.

  • avatar
    Extra Credit

    Regardless of all the mathematical gymnastics and double-speak, it’s more alarming that the incentive $/unit scale on the graph starts at $2,500! Where do they think they can go from here?

  • avatar

    When I read gobbledegook like this from GM marketing I shake my head. Does this outfit have any idea what their marginal costs are? In this case, I mean what is the out of pocket expense to pop out one more car given that, by definition, fixed costs are already taken into account, so only extra parts and energy costs enter the equation. (I’m speaking at a very basic level, for all you utility system designers and others of comparable professional stature just to make a point)

    In most businesses, this is basic stuff, and week one of an MBA course. I get the impression that these marketing people are flying blind without a clue as to know HOW to price product, because they don’t really know cost. So they blindly fling paint at the wall, and at the end of a quarter, or half, but most definitely at end of year, they check the bank account. If there is more dough than last year, it’s all good.

    From the contradictory statements made in this article, financial controls appear to be at the level of successfully running a corner store. Akerman’s statement makes no sense to me.

    Therefore, I agree entirely with Buickman, not for the first time.

    • 0 avatar

      As somebody who worked in the halls of GM in product development for “some time” ( I could not take it anymore and got the hell out), I can promise ya’ all GM has NO IDEA what any of their costs are. It is a mess and it was not fixed in bankruptcy and it is not fixed now. I view all of GM’s past financial statements, and statements for the next several years, with a healthy dose of skeptism. GM is a ticking time bomb…

      • 0 avatar

        I’m not suprised to hear this. Back in 2008-09 GM was pushing the ‘critical’ plan to close down thousands of dealerships to support pricing and foster healthy competition within its dealer network. This was supposed to improve the bottom line by $ billions and reduce the need for incentives, etc.

        Of course later they backed off on the plan, and now its never mentioned.

        Any other company would have faced huge investor scrutiny over such posturing and then abandonment of large scale plans. With GM we sort of shrug our shoulders and then move on to the next ‘fix’.

  • avatar

    When they said this during the conference call:
    “Exactly where the year comes out, given the Q1 and sort of unknowns that could happen this year, we think it’ll be approximately around the industry average, but we can’t be that precise at this point.”

    He was being precise in his language. The industry average is not in their control, they can’t predict the future. If Toyota and Honda crank up the factories and pile on the incentives to move he metal and GM doesn’t change their incentives GM will look to have improved relative to the industry average. What they were trying to say in the call is that the industry average incentive is a known unknown.

  • avatar
    dvp cars

    ……this is like Yogi’s proverbial deja-vu……..when are the general and his domestic cohorts going to stop chasing the market share god. That’s what got them into trouble in the first place. Better to shrink and turn a profit than get bragging rights and go under again. There are a substantial number of people who will loyally buy GM regardless of any reasonable price penalty, but you have to build them the cars they want, exactly the way they want them. De-emphasizing “packages”, encouraging special orders, and building profitable medium volume vehicles is the way out of endless incentives……incentives that, at little or no profit, only get rid of mediocre dealer inventory that never should have been built in the first place…….a perpetual fire sale.

    • 0 avatar
      John Horner

      Building substandard vehicles is what got GM, Ford and Chrysler in trouble. Maximizing short term profits by going all in for the truck and SUV craze of the 80s and 90s is what got them in trouble. Market share goals are not, in fact, what got them in trouble.

      On the contrary, had all three of them not publicly made the strategic decision in the 90s to let their cars wither on the vine in order to maximize profits from the body on frame truck/SUV business then they wouldn’t have gotten caught with their pants down when the market shifted.

      As far as the buying model goes: The US market is instant gratification oriented. It is stupid and wasteful, but that is how the vast majority of consumers in the US behave. Very few people are patient enough to wait for their vehicle to arrive. These same people go out-of-their-minds crazy to chase a Groupon deal and Black Friday specials. Not very enlightened and not very efficient, but that is the culture we live in.

      • 0 avatar

        GM did not become a going concern because it chased the SUV craze in the 90’s at the cost of the small car market. GM’s cars had been “withering on the vine” for decades.
        One could argue they were slowly cornered into the “SUV decision” by decades of market penetration into the car market by the Honda/Toyota/Datsun on the Chevy end, the Audi/VW/Acura on the Buick side, and the BMW/Mercedes/Lexus on the Caddy side. GM’s car offerings were for shit as early as the mid 60’s and the customer began to recognize this.
        By the time the “90’s” arrived GM had very little to no brand equity or customer loyalty left. There was very little competition in the truck and SUV market, little investment was needed in the 50 year old body-on frame designs and I would argue they had no choice but to focus on trucks.
        The popular wisdom is that GM somehow dropped the ball when they focused on “profitable” trucks. I believe they had no other choice but to focus on the trucks because of their business model with the UAW, their abject failure in the car market over SEVERAL decades. In the meantime, Toyota and VW focused on the “unprofitable” small and econo cars.
        Who is in business today? In retrospect how profitable was the SUV market? To your point, it was short term thinking but they had no choice but to make this decision.
        The same decisions are being made today with regard to product development, market share and incentives. They are thinking about next quarter and not 2 decades from now.

  • avatar
    John Horner

    Market Share and Profitability are NOT independent of one another. They are, in fact, tightly coupled. As in many industries, automotive design, manufacturing, marketing and distribution have monstrous fixed costs associated with them.

    Over the long haul, he with the most market share makes the most total money. Do you think Google would be raking in the big bucks if Yahoo was still the #1 search engine by share?

    Toyota makes a lot more money than does Honda or Nissan. Why? Because Toyota sells boat loads more vehicles, that is why.

    Yes, price bombing the product to keep the factories humming can be counter productive and destructive, but the popular armchair quarterback’s knowing prognosticating about incentives, profitability and market share is at best incomplete and misleading.

    Businesses who play to win over decades do, in fact, push hard for as much market share as they can have while still making profits along the way. Both are important, and at various times it makes sense to optimize more for one or the other.

  • avatar

    GM’s incentive figures demonstrate spending as a percentage of average transaction price (ATP).

    GM also provides a per-unit number at the bottom of the graphic. It would seem that the “tipster” missed this.

    However, Edmunds looks at average amount of incentive spending per vehicle sold, and the story now becomes quite different.

    As I just noted, both are reporting a per-unit figure. So that statement is inaccurate.

    Edmunds and GM are reporting different numbers from each other. My first presumption would be that there is a difference in methodology.

    If I am not mistaken, Edmunds’ TCI includes factory-to-dealer incentives and holdback. My guess is that GM’s figures probably exclude the holdback.

    I would suggest that someone at TTAC contact both Edmunds and the GM investor relations folks to nail down their definitions of “incentive.” I would presume that they are using the same terminology to describe somewhat different things.

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