GM using shutdowns and layoffs to offset impact of low sales
Boston firefighter Frank Gribos and the General Motors Corporation have a problem. Mr. Gribos wants to buy a light truck, and GM wants badly to sell him one. But GM cannot convince him, with current buyer incentives, to go ahead and take the plunge.
Gribos had been considering a purchase for about six months but decided instead to plow $400 into repairs to his 1977 Volkswagen Rabbit. He says now he's inclined to keep the car awhile.
Similar scenarios were repeated thousands of times in January and February, a tough two months for GM that has seen hordes of potential customers slip off the hook -- unconvinced by 7.7 and 9.9 percent loan rates.
The result is that GM found itself carrying an inventory of an estimated 1.2 million cars -- far more than it had planned. Now the company says it will temporarily close four of its assembly plants to relieve the pressure.
GM estimated it would build 1,270,000 cars in the first quarter of the year. But plant closings later this month and other trims will cut the number by about 50,000 and furlough about 13,000 workers. The plants are in Lakewood, Ga.; Van Nuys, Calif.; Pontiac, Mich.; and Flint., Mich.
This is the auto giant's way of admitting it was overoptimistic, analysts say. They expect the company to launch even stronger incentives this spring to bolster weakening demand.
Even with new incentives, the problem GM, Chrysler, and Ford face is a deepening consumer debt that is discouraging spending. The ratio of consumer installment debt to income was a record 18.8 percent compared with 16.8 percent a year ago, says John Hammond, an automobile industry analyst with Data Resources Inc.
There is also little pent-up demand to tap among consumers, Mr. Hammond says. Demand for US domestic production in January/February 1985 was at an 8.5 million unit-a-year rate and is at an 8.3 million unit level this year. That's relatively flat he says. But, as the year continues, demand will sag further to the 7.5 million-a-year level, he predicts.
Lower demand makes excess capacity and excess inventory into critical problems, Hammond says. ``You're likely to see a stream of such announcements over the next few months by GM and Chrysler. GM is, in effect, admitting it can't reach its sales plan. Ford has no inventory-buildup problem. It's actually had a shrinkage in capacity.
Though demand is expected to fall this year, the long-term expectations of analysts through 1987 and '88 show an increasing US appetite for cars.
But that should not be taken as good news for the domestic auto industry, since foreign competitors are expected to eat into the increases and eat even further into the domestic makers' share of the market. Thus overcapacity and burgeoning inventories among two the ``big three'' automakers is not a good sign.
``They are portents over the long haul that the industry is heading for a big shakeout in market share,'' says Harry Stark, editor of Ward's Automotive Reports. ``GM has really run into a tight situation. In my estimation it's a crucial point, since GM has vowed it will not lose market share.''
Analysts say the auto companies have been much less aggressive lately, trying moderate incentives to work off their inventories. But consumers are getting tired of those and are much more heavily debt laden.
``What surprised us was that they boosted their [sales] estimate by 300,000 units,'' says Mr. Stark. ``GM is typically the most aggressive and leads the domestic makers. This time it was overambitious in the market for midsize, rear-drive cars, where there's a lot of competition from the Japanese.''
He says GM plans to battle with new products, and has thus far refused to raise prices along with the Japanese.
``GM has great muscle. They could turn this thing around overnight,'' says Stark who believes sales will rebound this spring along with new incentives. Data Resources' Hammond says low-interest-rate loans will have to be at least 6.5 percent and rebates at least $500 per car to draw crowds to the showroom.
``They're always doing things to get you to buy, so it's not as though you have to jump now,'' says Mr. Gribos, who will still buy if he gets the right incentive.
``The special deals will be around tomorrow, and they'll be here next year. People do watch the interest rates closely though; they're attuned to it.''