Suddenly, Saturn's Orbit Is Getting Wobbly

Last summer, Saturn Corp. was selling so many cars that dealers literally ran out of them. Now, General Motors Corp.'s $5 billion small-car venture is faltering badly. From a peak of 24,862 units in June, sales plunged 42%, to 14,377 cars, in January. Saturn's inventory of unsold cars is a problem, too, jumping from 18 days in July to current levels of 100 days (charts). "The bloom is off the rose," complains one unhappy East Coast dealer.

What happened? Much of the blame rests with cash-strapped GM, which pressured Saturn so hard to turn an operating profit that the company hurt sales by cutting corners too drastically. Saturn slowed the pace of dealer expansion. To curtail spending, it virtually eliminated advertising on its products during the boom. GM didn't help by delaying approval for a new plant and by forcing Saturn to push back product improvements.

PLANT PROBLEMS. Now, Saturn officials are frantically seeking to regain lost momentum. They're boosting advertising budgets, offering aggressive new leasing deals, and adding new dealers. Those steps will help some, but Saturn's aging models face tougher competition from rivals such as Chrysler Corp.'s zippy new Neon subcompact.

With sales figures headed in the wrong direction, Saturn's future could be dicey. Cash-strapped GM now seems even less likely to cough up $1 billion for an oft-delayed second factory. And over the long haul, Saturn's survival depends on adding capacity. Only if it sells more than 500,000 cars a year can Saturn make enough money to survive as an independent unit.

Plans for a new factory have been on hold for nearly two years while Saturn struggled to make an operating profit--a tall order for a small startup. Although Saturn inched into the black last year, GM doesn't appear ready to give the green light to new capacity. "Saturn has got to fight for capital like any other business," GM Executive Vice-President William E. Hoglund says. "It's causing them some trouble."

Saturn still has plenty going for it. Customer satisfaction is second only to Japanese luxury brands Lexus and Infiniti, according to J.D. Power & Associates Inc. Likewise, Saturn cars have among the lowest defect rates of any U.S. brand. Half of its customers say they would have bought a foreign nameplate if Saturns hadn't been on the market.

But it will be difficult for Saturn to overcome the problems caused by GM's ongoing cash crunch. GM's decision to delay plans to provide a face-lift for Saturn's existing models pushed back a new interior, including passenger air bags, from the 1994 model year to 1995. That puts Saturn at a disadvantage to rival Toyotas, Hondas, and Neons, on which dual air bags are standard. And a major makeover, including all-new exterior styling, a quieter engine, and an improved chassis, has been pushed back a year, to 1996. Result: Chrysler has nearly two years to get Neon production up to full steam and grab some market share.

To recapture customer attention, Saturn is planning to unveil a national three-year lease program by the end of February that offers cars for as little as about $180 a month. That should help boost leasing to as high as 20% of sales, vs. just 4% now, says Donald W. Hudler, Saturn's marketing boss.

NEW MARKETS. To clear out inventory, Saturn in mid-January began offering discounts to non-Saturn GM employees for the first time. They can get 13% off the sticker price, which should sell another couple thousand cars a year, Hudler figures. He is even considering sales to big fleet buyers, who are attracted to Saturns because of their good quality and high resale values.

Advertising, which was scaled back to virtually nothing during the summer boom, is coming back with a vengeance. The company doubled its January ad budget compared with a year earlier. And upcoming ads will emphasize price more aggressively, instead of focusing on Saturn's image. Finally, Hudler is picking up the pace of dealer expansion, which virtually halted when cars were in short supply. Saturn has just 285 outlets now, a fraction of Chevrolet's 4,453, and it serves only about 60% of the U.S. "We have a hell of a lot of midsize to small markets that we haven't even started to touch," says Hudler.

Saturn executives are betting that demand from those new markets will produce the same sort of shortages they had to contend with last summer. If not, GM's feisty little startup can forget about financing for a new plant. And that could leave Saturn stuck in the breakdown lane for good.

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