Can GM Walk Its Talk On Incentive Spending?

Edward Niedermeyer
by Edward Niedermeyer

[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.”

Edward Niedermeyer
Edward Niedermeyer

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2 of 22 comments
  • John Horner John Horner on Sep 27, 2011

    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.

  • Pch101 Pch101 on Sep 27, 2011
    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.
  • Probert A few mega packs would probably have served as decent backup.
  • Lou_BC Lead sleds. Now-a-days GM would just use Bondo.
  • Jrhurren This is a great series. Thanks Corey
  • Tane94 Not as stylish as the Soul which it is replacing but a practical shape and bonus points for EV only.
  • Ronin What is the magical white swan event in the foreseeable future that will suddenly reverse the trend?Success tends to follow success, and likewise failure. The perception, other than among true believers, is that e-cars are a lost cause. Neither government fiat, nor government bribery, nor even the promise of superior virtue among one's peers have been enough to push past the early adapter curve. Either the bust-out is right now for e-cars, or it doesn't happen. Marketing 101.Even subtle language-manipulation, such as deeming those possessing common sense as suffering from some sort of vague anxiety (eg, "range anxiety") has not been enough to induce people to care.Twenty years from now funny AI-generated comedians will make fun of the '20s, and their obsession with theose silly half-forgotten EVs. They will point out that, yes, EVs actually ran on electricity generated by such organic fuels as coal and natural gas after all, and then they will perform synthesized laughter at us.