GM: Maker of Cheap Cars?

There's no doubt about it. The employee-price deal General Motors (GM) offered last month was truly brilliant. By selling all cars and trucks at 5% below the list price to the dealer, GM managed a 41% sales increase for the month compared to June, 2004. And sales of GM's large SUVs, like the Chevrolet Tahoe, Suburban, and GMC Yukon, shot up 75% over the same period.

Give Mark LaNeve, the carmaker's vice-president for marketing, a lot of credit. While rivals Chrysler (DCX) and Ford (F) sat on the sidelines, GM solved two of its problems with the move. The company has cleared out so much inventory that it may even be able to boost production, which could help stem losses in the second half. Plus, GM has kick-started sales of its previously slow-moving SUVs, which make money even when sold at a deep discount. A lot of GM's $1 billion first-quarter loss stems from the fact that SUV sales have tanked.


  But let's temper the exuberance a bit. True, GM proved that consumers will buy its cars if the company offers a great price. But the June bonanza still leaves GM with three harsh realities. First, GM lost a whopping $1.2 billion in the all-important North American market, resulting in a $286 million second-quarter loss for the corporation -- a figure that missed Wall Street estimates by a wide margin.

Second, as GM lowers its prices this fall, the vaunted American icon is becoming a bargain player like cheeky Korean carmaker Hyundai, using a combination of low prices and good value to attract consumers to its weaker brands. And finally, despite June's dizzying sales, the big-SUV business is definitely in decline.

LaNeve knows the score when it comes to GM's brands. Back in 2001, when he was head of Cadillac, he launched the CTS sports sedan. Though the car boasts the size and performance of a $45,000 BMW 5 Series, LaNeve sold it for $35,000, even less than the price of a 3 Series. It was a hit.

Now that he is in charge of marketing all of GM's brands, LaNeve has said he will drop sticker prices on at least half of GM's models. The Saturns and the Pontiac G6 midsize car will sell at prices close to the employee discount. "The G6 used to be priced [on par with] the Toyota (TM) Camry and Honda (HMC) Accord, but now it's significantly lower," says LaNeve. "We want people to see a very clear value proposition."


  That's a huge turnabout. GM used to price its cars high and then use rebates of up to $5,000 to close a sale. But when buyers cross-shopped for competing cars on the Internet, they discovered that the $28,000 Pontiac G6 -- priced close to a loaded Toyota Camry -- was just $3,000 cheaper than a BMW 3 Series. Who wouldn't stretch a few thousand more for a Bimmer over a Pontiac?

The risk in LaNeve's strategy is that GM will end up doing some heavy rebating even after cutting sticker prices. That's what happened to Dodge when it slashed the Durango SUV's price -- and it still needed discounts to keep sales going. If heavy rebates are necessary, GM's margins will really be under pressure.

That's especially true now that the SUV market is going soft. After June sales numbers came in, GM apparatchiks said the huge growth in SUV sales is proof that despite a 20% drop in large SUV sales through May vs. the first five months of 2004, Americans still love family trucks.


  Big SUVs aren't dead, as the Sierra Club and others would like to believe, but we're seeing the beginning of a long, steady decline in the segment. Gasoline's rising price is certainly one factor. Morgan Stanley analyst Stephen Girsky, who starts a job as a senior strategist with GM on Aug. 1., wrote in early June that 84% of 500 consumers surveyed said rising gasoline prices have made them think twice about buying another large SUV. And 34% said pain at the pump has already forced them to buy something else.

The other problem with fullsize SUVs is that they're becoming yesterday's fashion. Crossover SUVs like the Honda Pilot and Nissan (NSANY) Murano look newer and more urban. They get 20 miles per gallon or better, while some traditional SUVs get less than 14. The newer models are also easier to navigate and parallel park. Crossovers often seat seven passengers.

GM was able to boost SUV sales last month by giving a good enough deal to compensate for the pain at the pump. But it can do little about the cars falling out of fashion.


  CNW Marketing Research, an automotive research firm in Oregon, says 50% of all large-SUV owners currently buying a new vehicle are trading their big stage coaches in for something else, up from 38% leaving big SUVs last year. Of those making a switch, 60% are buying smaller SUVs or crossovers, and 15% are getting minivans. That means 75% of the buyers who ditched their big SUVs are still looking for something roomy -- other than a big 'ol truckish SUV.

GM figured these things out a little too late. It successfully mined the SUV market for profits for so long that it was lulled into thinking the gravy train would never end. And high as today's gasoline prices are, they haven't hit the levels seen during the last fuel crisis back in 1981, so thinking people would continue to pay big bucks to keep on trucking was an easy assumption to make.

GM's next-generation SUVs promise to ride more smoothly and could get as much as 20 mpg. While such improvements in the new generation of SUVs will GM allow to keep plenty of buyers, LaNeve admits that the segment has passed its peak. "We see the big-SUV business going back to more normalized sales levels," he says. "There's a lot more competition and more alternatives."

The good news is that GM knows what it needs to do to get buyers to shop its big SUVs and weak brands. The bad news is that the company will have to find a way to make money as the market's No. 1 bargain carmaker.

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