GM Has a Truck Inventory Problem

The autoblogosphere is all atwitter today about GM’s truck inventory levels.  They’re ridiculously high, and the problem has gotten worse since last month rather than better.  More specifically, the company has 245,853 trucks as of the end of November, which is a 4.4 percent increase over the October 31 total – and represents a 139-day supply.  The industry considers 60 days of inventory to be ideal.  So how did this happen?

GM currently builds its trucks in three plants, and announced a year ago that it would keep cranking out trucks to keep sales flowing during the extensive downtime required to retool the plants for the new trucks – 21 weeks of downtime!  Unfortunately for GM, even though it wanted to build some extra trucks, it didn’t need nearly as many as it built.

Days’ supply is a pretty simple metric, and because it’s a ratio (it is just the number of trucks in inventory divided by the average daily sales), it can be improved from either of two directions:  increasing sales (demand) or decreasing inventory (supply).

GM’s current truck problem is caused by both supply and demand issues.  On the supply side, it built extra trucks to cover its needs during the plant retooling downtime.  On the demand side, GM’s incentives are reduced from 2011’s and aren’t as strong as what Chrysler is offering to RAM buyers.  Throw in the fact that most buyers know that an improved, all-new truck is coming in a few months, add a few “Government Motors” haters, and the fact that GM itself is not really growing as quickly as the market has been (so is losing the marketshare battle not long after leaving bankruptcy), and you can tell why buyers may not be lining up to buy these trucks.

Conspiracy theorists may suggest that GM front-loaded pickup production to improve its financial results in the first half of the year, since it books the revenue on a new vehicle in the U.S as soon as the vehicle leaves the factory.  Build more trucks (we’re not worried about selling them yet) and the money flows in.  Yet the company has to do something about the trucks that it already built.  Eventually the dealers’ lots get full of trucks and they still don’t sell.  GM claims that the incentives on the hood of the RAM caught them by surprise, and as a result, GM had many trucks that Rm buyers otherwise may have bought, but didn’t because Ram offered them a better deal.

GM will likely deal with this issue in two ways.  Expect production to slow down pretty dramatically over the next few months to more closely match supply.  Also, expect additional incentives on GM trucks.  The risk with incentives, of course, is that you’ll lower the value of your brand, conditioning buyers to not wait for the vehicle they want, but instead to buy only for the sake of the deal.  That, in turn, hurts residual values, which pisses off customers and makes leasing less financially viable.

When GM cuts production, its revenue will go down.  (Remember, it doesn’t have to actually sell a vehicle to book revenue, only to build and ship it).  Financial results in the fourth quarter of 2012 (and possibly the first quarter of 2013) will not look great.  Even worse, if GM slaps more incentives onto the hood of its trucks to clear out this giant inventory, that will hurt the company’s bottom line even more – not to mention the brand’s perception.

Finally, there’s GM’s larger problem:  in a recovering auto market where Ford sold 5.4% more cars in the first 11 months of 2012 over 2011 and Chrysler’s sales are up an impressive 22%, GM’s year to date sales increase is a much more modest 3.5%.  The overall new-car market in the U.S. is up 14% through 11 months, so GM is really lagging behind – and losing market share.  Besides GM’s overall market-share problem, the company is also falling behind specifically in full-size pickup sales.  Ford’s F-Series is up 11.6% through 11 months and the RAM is up 20.2%, while the GMC Sierra is up just 4.4% and the Chevrolet Silverado is up a measly 0.1%.  Combined, GM full-size truck sales are up just 1.2%.  With fresher choices from Ford and RAM (particularly the newly-freshened 2013 RAM, which just won the Motor Trend Truck of the Year award), look for GM to continue to lose share in the truck market, at least until the new truck comes out and the company can convince buyers it’s a better buy (either on features or in terms of value) than its competitors.

It will be interesting to see how this all plays out.