3.5 MILLION UNSOLD VEHICLES: Automakers have a big glut
Production cuts are possible; customers may see better deals
July 14, 2004
BY JEFFREY MCCRACKEN
FREE PRESS BUSINESS WRITER
They sit on dealer lots, abandoned mall parking lots or at assembly plants across metro Detroit and the rest of the country.
An inventory of hundreds of thousands of unsold cars and trucks -- especially at General Motors Corp. and Ford Motor Co. -- has reached the point where the two automakers hypothetically could shut their plants the rest of the year and not sell out some of their best-known models until after the presidential election.
There are, of course, no plans to shutter all their plants all year, but the pressure is on the automakers to post huge sales in July and August, or potentially be forced to shut down plants to ease the glut of unsold cars and trucks.
That's an expensive proposition because big cuts to production often hurt the automakers' profits and those of their parts suppliers, who enter the second half of the year unsure how closely automakers will stick to production plans for the rest of 2004.
A glut of unsold vehicles is never a good sign for the automakers. It puts them between the proverbial rock (cut production) and hard place (offer profit-eating incentives). But the glut can be good news for consumers, because GM and most other automakers are opting for higher incentives. GM is offering $5,000 cash back on most trucks.
At the very least, hourly workers who have gotten used to lucrative overtime hours at GM plants such as in Michigan or in Texas will see that OT disappear.
At the end of June, the whole industry had 3.5 million unsold vehicles, a record for the month and about 570,000 more than usual, according to J.D. Power & Associates and other analysis firms. GM has by far the most excess inventory, while the Chrysler Group is in relatively good shape.
Already, Ford is shutting five assembly plants next week -- including one in Wayne and two in Ontario -- on top of its normal two-week shutdown in July. GM also has its normal two-week shutdown and will idle plants in Tennessee and Georgia, but insists it can otherwise get by without a severe production cutback.
"We know our inventory is high and we need to bring it down, but we think we can manage through this with a good July, the summer shutdown and conservative production in the third quarter -- like cutting back on the overtime at our utility plants," said Paul Ballew, GM's executive director of industry and market analysis.
Dealers admit their inventories are high, but say that will push them to quit ordering new vehicles from automakers, which in turn forces automakers to offer bigger rebates to consumers.
"I sort of like the higher inventories because then GM is under pressure to get us better deals to get things moving. If anything, it's an opportunity for us," said David Butler, general manager of the Troy-based Suburban Collection, which sells Buick, Cadillac, Hummers and Oldsmobile products.
The glut means the automakers are making far more cars and trucks than people want to buy. It's a sign of inefficiency because new products sit unsold.
Automakers could opt to idle plants and make fewer vehicles, but that's also expensive and inefficient because their workers still get about two-thirds of their pay if they don't work. Plus, it's a poor use of resources to have multimillion-dollar plants sitting idle.
Some analysts on Wall Street predict major production cuts for Detroit's automakers, especially GM.
Robert Hinchliffe, auto analyst for the Wall Street firm of UBS Inc., says if GM has the same kind of second half as it did in the first half -- with a market share of 27.1 percent on average annual sales of 17 million -- GM will need production cuts of nearly 20 percent.
"I know GM will start out with incentives to see if that works, but they will still have too much inventory. I worry that if they don't cut production, they will have a lot of excess inventory going into next year and threaten earnings for 2005," Hinchliffe said. "They've told Wall Street they will make $10 per share by mid-decade and they'd be better off with a weaker 2004 and a better 2005 than vice-versa."
GM's Ballew insists the automaker "won't do anything to jeopardize 2005 earnings."
Nonetheless, GM has the most excess inventory of any automaker, about 206,000 excess vehicles, according to Merrill Lynch. Ford is next with about 72,000 units of excess inventory. Chrysler is in the best shape of the three with 49,000 units.
Automakers like to carry about 60-65 days' supply of a vehicle for their dealers to tap into. GM, by comparison, has more than 110 days' supply of several vehicles, from the Cadillac Seville sedan to the Chevrolet Suburban SUV to the GMC Canyon pickup.
One vehicle that GM has way too many of: the Buick Ranier, a luxury SUV. The automaker has an unusually large 229 days' supply of the Ranier, or enough to last dealers into baseball's spring training next March.
"We know the issues we've got to work through. There's weakness in the trucks and we will be prudent with our utility plants," Ballew said. "July is off to a good start."
Another concern: If too many 2004 models are sitting around in September, they will eat into sales of the 2005 models when they roll into dealer lots later this year.
"I'm worried that GM and Ford will have excess 2004 models sitting on the lots when people start shopping this fall for new models," said Erich Merkle, senior auto analyst at IRN, a Grand Rapids-based auto-consulting firm. "That could cannibalize 2005 models, like if GM has, say, extra 2004 Chevy Silverados sitting around when people come in to look at the 2005 Silverado, then you hurt the 2005 model."
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