Commentary: GM: Enough With The Come-Ons

What the carmaker needs now is sizzling new models -- not more discounts

When General Motors Corp. (GM ) launched 0% financing deals after the September 11 terrorist attacks, it did so to coax jittery buyers into dealerships again. But GM found another reason for pouring on the incentives: to steal U.S. market share from its struggling Motown rivals. For a while, the strategy worked. In 2001 and 2002, GM's market share grew at the expense of Ford Motor Co. (F ) and Chrysler Group (DCX ).

Nearly three years into the price war, however, GM's gambit seems to be running out of gas. Just look at its lousy June sales numbers. Despite incentives averaging an industry high of $4,100 a vehicle, GM sales tumbled 15%, compared with Ford's 11% slide and Chrysler's 1% advance. The No. 1 auto maker's share has shrunk to 26.8% of the market, down from 28.1% at the end of 2001. GM's solution? Bigger discounts of up to $5,000 on many of its trucks -- with some dealers throwing in an extra grand to boot. But all that discounting is hammering margins and profits per vehicle, which now are weaker than both Ford's and Chrysler's. "GM's in a tough spot," says Deutsche Bank (DB ) analyst Rod Lache. "Things will get worse before they get better."

The Detroit carmaker had bet that a bevy of new models this year would draw in buyers. But that hasn't happened so far. The new Chevy Malibu sedan has had only modest success, and the all-new Chevy Colorado pickup is piling up on dealer lots. While three new vehicles in coming months could do better, for now the weak showing has kept GM from easing off the pricey deals.

By contrast, Ford and Chrysler have some bona fide hits that sell with only minimal incentives. Chrysler's 300 sedan and Dodge Durango sport-utility vehicle are both flying off the lots. And even where they do have to cough up cash, GM's rivals have managed to limit damage from the price war. While GM tends to offer equally big deals on nearly all models, for example, Ford tries to use lower incentives on thinly profitable models like the Ford Focus; it reserves bigger giveaways for its most profitable models. "No one blinked," says Ford Chief Operating Officer James J. Padilla.

Thanks in part to those new models, Chrysler's share has inched up, from 13.2% to 13.5%, since the price war began. The new F-150 has helped Ford outsell GM in full-size pickups. While Ford's share has fallen from 21.9% to 18.8%, it has boosted profitability. GM is losing ground on both fronts.

Indeed, the one-two punch of hit models and selective discounting have allowed Ford and Chrysler to pull ahead of GM in the crucial measure of profit per vehicle. GM now earns just $436 per vehicle, a 50% drop since 2001. Chrysler gets $534; two years ago it was losing money on its cars. But No. 2 Ford has really moved to the head of the class: In two years, profits have soared fourfold, to nearly $1,900 per car. Sharp cost-cutting in the first quarter as well as a better product mix also helped. Ford not only pared low-profit sales to car rental firms, but also gets 70% of its sales from profitable trucks, vs. GM's 60%.

Given its shrinking share, GM may have little choice but to cut back sharply on production. UBS (UBS ) analyst Robert Hinchliffe estimates that even if industry sales pick up in the second half, GM may need to trim production by up to 17% to meet its goal of slashing inventories by 200,000 vehicles. And that would mean another blow to profits, since furloughed auto workers still must be paid. To prepare for the worst, GM aims to dramatically cut costs by yearend.

That would help, but what GM really needs are new hits. Later this year, it will start selling the sharply styled G6 midsize. The new Cobalt will compete with pricey small cars such as the Volkswagen Golf and Honda (HMC ) Civic. And next year, more of the cars designed under the guidance of hit maker and Vice-Chairman Robert A. Lutz will arrive in showrooms. They had better sell. Otherwise, GM will be stuck on Incentives Road.

By David Welch with Kathleen Kerwin in Detroit

    Before it's here, it's on the Bloomberg Terminal.