Could GM Possibly Be "Up To Its Old Tricks"?

TTAC has a rule of thumb: if the Detroit Free Press is laying into GM, the trouble must be staggeringly unavoidable. And sure enough, the latest Freepian blast is the result of a predictably bad decision: cranking up production in the face of slack sales and a tough post-clunker market. GM’s decision to bump production by 45 percent next year has a host of analysts lined up to prognosticate profit-sapping incentives when The General finds that it’s building cars faster than people are buying them. “I don’t see what they’re thinking,” says a JD Power senior forecasting manager. “I’m seeing a little bit of shades of the old GM,” adds Edmunds’ Michelle Krebs. GM’s defense?

It’s clearly not the old GM because we don’t have overcapacity, which is what caused the problem before. If you look at the analysts’ own reports, we’re probably being conservative to middle of the road as to where the industry is going to be.

That retort by GM spokesfolks was echoed by outgoing Sales boss Mark LaNeve. “We think the industry will be up 15% and that we’ll hold our share,” says LaNeve, showing off the kind of willfully ignorant optimism that practically defined Old GM. And it begs the question: why would GM risk a drop in profits when it is supposedly tuned for profitability in a 10m unit US market?

The question doesn’t turn on the size of the overall market though. GM’s estimates about the 2010 car market are actually more conservative at 11.5-12m units, than CSM (13.6m) or JD Powers’ (13.9m). The issue rather seems to hinge on GM’s share of that market, which has been in steady decline this year. GM’s plan to build 2.8m cars would require the market to reach 14m units without losing any of its current 20 percent market share in order to sell all of its planned production. In short, by predicting a 12m market and 2.8m production, GM sees its market share growing by at least 3.5 percent next year. All this without incentives, or as LaNeve puts it “we want to do it profitably.”

Forecasters are putting GM’s production needs at 2.4 to 2.25m units, at least 400,000 fewer than GM now plans to build. LaNeve calls the decision to build up inventories “real simple math,” but he might want to run those numbers one more time. If the market hits 14m and GM doesn’t give an inch of market share, the RenCen will be flooded with champagne this time next year. Those are two huge “ifs” though, and even GM is predicting that at least one of those things won’t happen. In reality, the market isn’t likely to rise over 13m next year, and more importantly GM has shown no signs of stopping its market share erosion. Neither of which would be a problem if GM were actually tuned to make a profit in a 10m annual market. Which must not be true either, if The General is so quick to trade the possibility of a profit for such an unrealistic growth scenario. Old tricks, indeed.