GM Signals It's Getting Out of the Volume Game

An ancient auto industry joke, probably dating back to the dawn of industrial time, has it that a car company “loses money on every car, but makes it up on volume.” The joke is, that’s impossible. Obviously, if you lose money on every car, the more you sell, the more you lose.

Without quoting the old saw about “making it up on volume,” Mark LaNeve, vice president, General Motors North America vehicle sales, service and marketing, indicated earlier this month that he gets the concept. He said GM is refusing to chase unprofitable volume. If GM and its competitors can stick to that approach, that represents a big change. The automakers are now engaged in a giant game of “chicken,” to see who will be the first to whip out a big discount program, like GM’s “Employee Pricing for Everyone” in 2005.

The old joke has some truth behind it, because automakers are highly motivated to keep their factories running, even if they’re not making much (or any) net profit on the new cars and trucks they produce. That’s because factories and labor represent high fixed costs. The factories cost a ton of money, even if they’re not producing any revenue. When new-car demand is soft, like it is today, the auto industry strategy has always been able to keep the plants producing even if you’re “losing money on every car but making it up on volume.”

A lot of cars wind up in rent-a-car fleets that way, even though they’re unprofitable. In 2007, about 35 percent of GM’s car volume was sold to fleets, and about 21 percent of the truck volume. Besides rentals, that includes some sales to commercial and government fleets, which are not necessarily unprofitable. That was slightly less than 2006, but not by much. The alternative to pumping cars into rental fleets is to lose even more money, by cutting production without cutting costs.

That’s starting to change. With new labor agreements for the Detroit 3 since last year, the U.S. industry is cutting capacity, closing plants, eliminating jobs, transferring pension and healthcare liabilities off their books, and phasing out a lot of the ways in which workers continued to get paid, even if they weren’t working.

In an April 1 conference call with Wall Street analysts and reporters, LaNeve was enthusing about the Saturn brand in general, and the new 2008 Saturn Astra in particular. The Astra is built by GM’s German subsidiary, Opel, part of a more widespread sharing of products between GM divisions globally.

LaNeve was asked, if he’s so enthusiastic about the Astra, why doesn’t he spend more money advertising it?

“We think the product is very strong, it clinic-ed well (did well in consumer focus groups). It’s affected by a little bit of an exchange issue,” LaNeve said. “It’s not really advantageous for us right now (to spend money promoting it). It’s selling with zero incentives, it’s pure pull,” as opposed to “pushing” it with discounts, he said.

(My translation: The euro is up a lot since we made this decision. We’re losing money on every Astra, but we’re not going to try and make it up on volume.)

Actually, it’s unlikely GM loses money on every one, and certainly not in a legal sense. Importing products for less than they cost sounds like improper “dumping.” The point is, GM is willing to sell fewer Astras in the United States, rather than chase unprofitable volume for its own sake.