Tuesday, June 27, 2006

GM comments on auto sales

June 28, 2006

GM sees weaker auto market, offers limited sale

Tue Jun 27, 2006 4:05 PM ET
(By Kevin Krolicki)

DETROIT, June 27 (Reuters) - General Motors Corp. on Tuesday cautioned that overall 2006 U.S. auto sales could fall short of last year's total because of higher interest rates and volatile gas prices.

GM, which last year sparked a price war by offering U.S. consumers the same discounts that it gives to employees, confirmed it would launch a limited-time, zero-percent financing offer on many of its 2006 models over the upcoming U.S. holiday weekend.

But executives at the world's No. 1 automaker said the company would stick to its strategy of avoiding massive discounts of the kind that pushed shipment volumes to record highs last summer, even though such a move translates to sharp year-on-year declines in sales.
"It's fair to say that the industry is tracking a bit below expectations," said Paul Ballew, GM's chief market analyst. "It's not that the industry is dramatically different from what we expected, but we are seeing it come in a bit soft."

GM, which has seen its U.S. auto sales slip 8 percent in the first five months of the year, must now hold onto its U.S. share of just above 23 percent in order to avoid further wrenching cost cuts, analysts have said. The company is trying to protect its flank from aggressive Asian rivals.
The automaker's employee pricing offer of last June was matched a month later by both Ford Motor Co. and DaimlerChrysler AG's Chrysler Group. The discounts boosted sales to record levels but eroded the U.S. automakers' profitability.

Chrysler, which has been the most aggressive in offering discounts to clear an inventory of unsold vehicles this year, is expected to announce renewed employee-level discounts starting in July, a move that increases the pressure on its domestic rivals. GM Vice President Mark LaNeve said last summer's sweeping promotions would mean that this year's sales would fall far short for GM. "Our year-on-year comps (comparable sales) are going to be especially brutal," he said.

Ballew said GM's June retail sales were the best they have been all year, in part because of strong interest in heavily-equipped models of the company's new line of full-sized sport utility vehicles, such as the Tahoe, Yukon and Escalade. But GM's overall sales might fall more than 30 percent from a year earlier, down to 2004 levels when sales also lacked the boost of a big discount program, he said. Overall sales should be near 17 million units on an annualized basis, he said.

"It's not unexpected," he said. "It's where we thought we would be." But LaNeve said GM would avoid fire-sale promotional tactics to boost sales and shore up market share. "Do I want (market share) to be higher? Absolutely. But we've got to do it in the right way," he told reporters and analysts on a conference call. "We have to do it on product strength and pricing in the market that's not dependent on incentives."

LaNeve said GM had decided not to extend a special promotion announced in May that subsidized gasoline purchases for buyers of mid-size cars and SUVs in Florida and California. At the time, some analysts had speculated that GM could be readying a national introduction of that program.

"It was not a big enough sales lift to go through on an expanded basis," LaNeve said.
Another challenge for GM is the shifting U.S. consumer preference away from the light-duty trucks that have dominated the market for the last decade, Ballew said. The truck share of the overall U.S. market slipped 2.8 percentage points in the first five months of this year to 51.7 percent, GM said. That was led by a drop in sales of mid-sized SUVs, which had emerged as the American family car of choice in the mid-1990s. Sales in that category are down almost 50 percent since 2003, Ballew said.

"The challenge in the second quarter has been a little more severe," he said. But Ballew said that GM was below the industry average in terms of sales incentives and had seen an increase in average transaction prices that topped the industry-wide performance. The average U.S. vehicle sold for $25,908 in the year to date, up $365. By contrast, GM has increased its average sales price by $1,200 to $26,341, he said. Those gains reflect stronger sales of GM's new SUVs, including the Escalade, which has an average price of just under $60,000.

GM has gained share in the SUV market, despite the tougher sales climate, and executives have been surprised by the demand for margin-boosting vehicle options, like navigation systems, LaNeve said. "We've been struggling with the richness of the mix," he said.

6/27/2006 06:01:00 PM

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