Can GM Really Abandon Trucks and SUVs?

According to the WSJ, the Obama administration is pressuring GM to abandon its GMC brand. GMC produces mainly SUVs and small pickup trucks.

From a business perspective, this is kind of hard to understand. If GM does anything right, building small cars and SUVs is probably one of them. The division’s products carry the highest profit margins and consumer satisfaction surveys routinely give the vehicles high marks.

GM’s problems aren’t that it doesn’t produce certain products that are profitable and attractive to the consumer, rather that its cost structure doesn’t permit it to produce small cars CAFE standards mandate at a profit. Its survival up to this point in time has been accomplished by subsidizing small car production with light trucks and SUVs.

If the Obama administration vision for the company is one that involves making smaller more fuel efficient passenger cars that transition to a non-carbon using vehicle without the profit contribution from GMC then a couple things are going to have to happen. The cost structure — labor costs — are going to have to be radically reduced and the consumer is going to have to embrace the product. I suppose it’s remotely possible to get the labor costs down quickly via a reorganization but changing consumer preferences is not going to be that simple.

In all of this it might be possible to see the designs of the administration. We know from recent experience that high gas prices have a notable effect on car buyers’ behavior. At $4 a gallon, trucks and SUVs sat on dealers lots while smaller cars and hybrids sold briskly. As soon as gas prices declined Americans reverted to their old buying behavior. Basically, we like big cars and trucks and won’t change absent some external force.

So, if the government plans to recreate GM as the “green” manufacturer it might well mean that they also intend to nudge the consumer towards that type of product. It could be done with subsidies — tax credits, favorable financing — or it could be accomplished by manipulating fuel costs.

Dropping GMC doesn’t make sense from a business perspective. Therefore, it would have to be justified on a social policy basis. That’s fine but you then are faced with the need to change other metrics to get the economics back in alignment.

More: WSJ

Comments

[mcl_mixer:]

Guess you don't know much about GM's product line. GMC's trucks and SUVs are pretty much the same as a Chevy. Kind of like the Toyota Corrolla/Chevy Prizm and Toyota Matrix/Pontiac Vibe. Same cars. Made in the same assembly plant. Different emblem.

Apr 16 10:53 PM

[Samroll:]

Poor, poor research on this article. As the poster above stated the exact same models are made by Chevrolet. Getting rid of GMC is simply getting rid of inefficient duplication of models. Maybe this is why the government thinks GMC should be dropped? Try understanding something about the auto industry before you write your next article about it.

Apr 17 12:13 AM

[thevoice@vo...:]

Warren Buffett believes BYD could be the largest automaker in the world. BYD sells electric cars in China and in October became the bestselling vehicle in China, surpassing Toyota Corolla and Volkswagen Jetta. Currently BYD has a plug-in electric car that goes 62 miles a charge and sells for $22,000.00. Buffet purchased 10% of BYD last fall for $230 million. With car companies such as this coming to the forefront GM does not have much of a chance.

Apr 17 12:56 AM

[Tom Lindmark:]

samroll and mcl_mixer,

I appreciate the comments but you may also want to do some research. Here is a point at which you might want to start. It's from the WSJ. Facts and figures.

As a lifelong truck salesman, he wonders if the task force appreciates the deep loyalty of GMC owners. "There are many GMC drivers who would never buy a Chevrolet," he said.

In the American truck culture, there's a belief among many owners that GMC pickups are higher quality than Chevrolets. GMC's Sierra tends to retain a higher resale value than a Chevy Silverado with identical options.

Amid the 2008 sales slump the Sierra outperformed rivals. While sales dropped 26% for the Ford F150-350, 30% for the Toyota Tundra and 25% for the Chevy Silverado, the GMC Sierra saw only a 19% drop, according to Autodata, a market-research firm.

On Apr 17 12:13 AM Samroll wrote:

> Poor, poor research on this article. As the poster above stated the
> exact same models are made by Chevrolet. Getting rid of GMC is simply
> getting rid of inefficient duplication of models. Maybe this is why
> the government thinks GMC should be dropped? Try understanding something
> about the auto industry before you write your next article about
> it.

Apr 17 01:08 AM

[ANDY K:]

The writer's comment: "Dropping GMC doesn’t make sense from a business perspective. Therefore, it would have to be justified on a social policy basis. That’s fine..."
WELL, That's NOT fine. Why must Government meddle in social policy as is relates to cars? Why shouldn't the FREE MARKET handle it? I personally don't want to live like Europeans. I dont' want to drive glorified skateboards.

Apr 17 06:55 AM

[Miken:]

I agree with you Andy, however, there hasn't been a free market since the government started issuing CAFE standards. This government interference has been dictating what kinds of vehicles car companies have to build to be in compliance for years.

It's very difficult for a car company to profitably build these small cars in the U.S., so the logical thing for the multi national companies to do is build them elsewhere and bring them in. That not only applies to the UAW companies, but the Toyota Yaris, Prius and Honda Fit are built outside this country and imported.

So, as often happens, the government is working at odds with itself. They are driving auto manufacturing away, while pretending to help preserve jobs.

If they REALLY wanted to promote small cars, they should increase taxation on fuel to stabilize it at $4-5 per gallon. You notice how quickly that affected the market place last year. Even that isn't enough to make hybrids financially viable for the consumer though.

But the taxation will never happen because that would require both parties working together without trying to gain political advantage. And it would be repressive taxation since it would be equally leveled on all people. Maybe we could require people to carry a copy of their income tax return and charge a sliding scale so we could assure that we tax rich people to death on this too.

Oh well, I'm sure congress will come up with the best solution possible.


On Apr 17 06:55 AM ANDY K wrote:

> The writer's comment: "Dropping GMC doesn’t make sense from a business
> perspective. Therefore, it would have to be justified on a social
> policy basis. That’s fine..."
> WELL, That's NOT fine. Why must Government meddle in social policy
> as is relates to cars? Why shouldn't the FREE MARKET handle it? I
> personally don't want to live like Europeans. I dont' want to drive
> glorified skateboards.

Apr 17 08:15 AM

[Cobra 1:]

MIKEN: Why is it that the rich should pay more in taxes than anyone else? I am not rich, I have a problem with everybody wanting to tax the rich at a higher rate, is that what equal taxation is supposed to be about?

That represents an opportunity to move more to a socialist society, then a democratic one. If we are going to level the playing field, then lets get a flat tax at 25% and move on. Ross Perot had done the analysis on a flat tax and the government would have approximately 8 to 10% more revenues to waste, not that it would slow them down from spending more than they take in.

The elected officials in this country think they can operate at a loss forever! If our government was a business, they should have been declared (morally as well as financially) bankrupt long ago.

I hate that people always are going after the rich! General society thinks that there should be a redistribution of the wealth. Be careful what you ask for, the wealthy are going to move else where, we will be left with a middle class that is third world to use someone else analogy!

Apr 17 11:47 AM

[BobMichigan...:]

Tom Lindmark, thank goodness someone here knows something about what they are talking about, and not just crapping out their mouths like most posters.

First off, some customers NEED full size pickups. You Prius drivers, when you get your driveway plowed, your house painted, whatever, do they show up in a mini car or a pickup truck? Get off your latte sucking high horses and recognise that some people in this country WORK for a living.

By and large, GMC costs GM NOTHING. A couple of guys in the marketing division and some tooling for emblems. I don't know how many "would never buy a Chevy", if it came down to it, what else would they buy? Those customers want a vehicle that is less "generic" than the millions of Chevys. Agree or disagree, give the customer what they want. Since it costs nothing, and you make money on it, keep it!

BTW - last year the GMC Sierra outsold the Toyota Tundra. The total cost of keeping GMC isn't 10% of the profit from those sales alone.

Apr 17 12:09 PM

[Toddms:]

From Miken : "It's very difficult for a car company to profitably build these small cars in the U.S., so the logical thing for the multi national companies to do is build them elsewhere and bring them in. That not only applies to the UAW companies, but the Toyota Yaris, Prius and Honda Fit are built outside this country and imported.

So, as often happens, the government is working at odds with itself. They are driving auto manufacturing away, while pretending to help preserve jobs."

Probably one of the most poignant comments I've seen, and a point missed almost entirely in the media and by the govt. This is truly the heart of the matter.

Lindmark has another good point - GMC buyers pay a premium over Chevrolet buyers for the presige and quality (percveived or real). Same reason Honda sells an Accord for more by calling it an Acura TL. Same for Nissan/Infiniti and Toyota/Lexus and Ford/Mercury/Lincoln. GM's unique problem is that instead of 2 tiers which is reasonable, GM had originally 5 tiers from Chevy to Pontiac to Olds to Buick to Cadillac. This is the "excess brand" problem - there just isn't enought room for that much differentiation within one company using the same platforms and powertrains. But getting rid of GMC on the same principle would be a giant error - it is already a proven success (moneymaker).

Another comment - with as much public outcry as we seem to hear about needing higher mileage cars, it has been a fact ever since CAFE kicked in around 1977, that trucks have been the most profitable vehicles assuming reasonable fuel prices. The public (and govt) seem to vote one way with their mouths and another with their pocketbooks, and then bad mouth the auto companies for obeying market forces. If GM, Ford, Chrysler had been really savvy, they would have stopped making the unprofitable small cars in the US completely as Miken suggests, and gone to importing them from low wage countries ala the Chevy Aveo. How would that have gone over in the press, or with the UAW for that matter? GM could have just paid the CAFE fines like BMW and Mercedes do, as a cost of doing business. This would have made way more sense than building 300,000 Cavaliers a year at a loss of $2000 each (just 1 of many examples) just to avoid a few million $ in CAFE fines. Instead GM kept the jobs in the US and met CAFE standards, even if the prime motivator was to appease the UAW, it is what everyone wanted at the time. But as they say, no good deed goes unpunished...

We are the only country that has anything like CAFE - everyone else manipulates auto purchase behavior (ultimately fuel consumption) via fuel taxes. But we seem wedded to the bass ackwards CAFE approach which does nothing but confuse and inflame the public and cause our manufacturers to make ridiculous business decisions, while doing nothing except encouraging people to drive more, while not conserving fuel.

Apr 17 12:37 PM

[Tom Lindmark:]

One of the most misunderstood things about CAFE standards is that they do not allow any car company to import cars in order to meet the standards. It is known as the "two fleet rule."

Only domestically produced automobiles are used to compute compliance with the law. GM could import Opels - a very popular, fuel efficient car it makes in Europe - to its heart's content and it would have zero effect on its compliance with CAFE limits.

The law was written in this manner to protect U.S. labor. Legislators recognized at the time they wrote the law that without this provision the manufacturers would just import autos that they already made overseas in order to meet the standard. In effect, the "two fleet rule" is a job protection provision.

Note that this applies to Toyota as much as it does to Ford or GM.


On Apr 17 12:37 PM Toddms wrote:

> From Miken : "It's very difficult for a car company to profitably
> build these small cars in the U.S., so the logical thing for the
> multi national companies to do is build them elsewhere and bring
> them in. That not only applies to the UAW companies, but the Toyota
> Yaris, Prius and Honda Fit are built outside this country and imported.
>
>
> So, as often happens, the government is working at odds with itself.
> They are driving auto manufacturing away, while pretending to help
> preserve jobs."
>
> Probably one of the most poignant comments I've seen, and a point
> missed almost entirely in the media and by the govt. This is truly
> the heart of the matter.
>
> Lindmark has another good point - GMC buyers pay a premium over
> Chevrolet buyers for the presige and quality (percveived or real).
> Same reason Honda sells an Accord for more by calling it an Acura
> TL. Same for Nissan/Infiniti and Toyota/Lexus and Ford/Mercury/Lincoln.
> GM's unique problem is that instead of 2 tiers which is reasonable,
> GM had originally 5 tiers from Chevy to Pontiac to Olds to Buick
> to Cadillac. This is the "excess brand" problem - there just isn't
> enought room for that much differentiation within one company using
> the same platforms and powertrains. But getting rid of GMC on the
> same principle would be a giant error - it is already a proven success
> (moneymaker).
>
> Another comment - with as much public outcry as we seem to hear about
> needing higher mileage cars, it has been a fact ever since CAFE kicked
> in around 1977, that trucks have been the most profitable vehicles
> assuming reasonable fuel prices. The public (and govt) seem to vote
> one way with their mouths and another with their pocketbooks, and
> then bad mouth the auto companies for obeying market forces. If
> GM, Ford, Chrysler had been really savvy, they would have stopped
> making the unprofitable small cars in the US completely as Miken
> suggests, and gone to importing them from low wage countries ala
> the Chevy Aveo. How would that have gone over in the press, or with
> the UAW for that matter? GM could have just paid the CAFE fines
> like BMW and Mercedes do, as a cost of doing business. This would
> have made way more sense than building 300,000 Cavaliers a year at
> a loss of $2000 each (just 1 of many examples) just to avoid a few
> million $ in CAFE fines. Instead GM kept the jobs in the US and
> met CAFE standards, even if the prime motivator was to appease the
> UAW, it is what everyone wanted at the time. But as they say, no
> good deed goes unpunished...
>
> We are the only country that has anything like CAFE - everyone else
> manipulates auto purchase behavior (ultimately fuel consumption)
> via fuel taxes. But we seem wedded to the bass ackwards CAFE approach
> which does nothing but confuse and inflame the public and cause our
> manufacturers to make ridiculous business decisions, while doing
> nothing except encouraging people to drive more, while not conserving
> fuel.

Apr 17 01:20 PM

[Miken:]

Cobra:

I guess I wasn't sarcastic enough about taxing the rich. That's the dumbest thing ever. Read "Atlas Shrugged" by Ayn Rand. You'll like it.


On Apr 17 11:47 AM Cobra 1 wrote:

> MIKEN: Why is it that the rich should pay more in taxes than anyone
> else? I am not rich, I have a problem with everybody wanting to tax
> the rich at a higher rate, is that what equal taxation is supposed
> to be about?
>
> That represents an opportunity to move more to a socialist society,
> then a democratic one. If we are going to level the playing field,
> then lets get a flat tax at 25% and move on. Ross Perot had done
> the analysis on a flat tax and the government would have approximately
> 8 to 10% more revenues to waste, not that it would slow them down
> from spending more than they take in.
>
> The elected officials in this country think they can operate at a
> loss forever! If our government was a business, they should have
> been declared (morally as well as financially) bankrupt long ago.
>
>
> I hate that people always are going after the rich! General society
> thinks that there should be a redistribution of the wealth. Be careful
> what you ask for, the wealthy are going to move else where, we will
> be left with a middle class that is third world to use someone else
> analogy!

Apr 17 10:32 PM