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Ballooning inventories will test GM's resolve


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Automotive News  /  December 12, 2016

Stocks balloon to 8-year high

The stout sales discipline that's producing huge profits for General Motors has a troublesome side effect: GM's vehicle inventory has ballooned 28 percent since Aug. 1, to the highest level in nearly nine years.

Crowded dealership lots could force the automaker to make more production cuts -- beyond the layoffs of 2,000 workers in Michigan and Ohio announced last month -- if demand slips in 2017. Heading into the slower winter season, the situation shapes up as a critical test of GM's determination to resist profit-eroding incentives and fleet deliveries as relief valves.

It also reveals a stark contrast between GM's rosy outlook for the industry and the pessimism at Ford Motor Co., which has reduced output this fall with downtime at many of its North American plants. While Ford warns of threats to its financial goals and reduces inventory to prepare for a slowdown, GM's production and inventory keep climbing.

GM's inventory as of Dec. 1, 873,200 vehicles, is the highest of any month since February 2008, when it had four more brands to support and less-flexible union contracts that made it tougher to adjust production as consumer demand rose and fell.

"Incentives are elevated, residuals are declining, and rates are rising," Brian Johnson, an analyst with Barclays Capital, wrote in a Dec. 2 note to clients. "And while GM in particular may benefit in the months ahead from new product launches, it's important to recognize that GM's inventory is elevated at the moment, and it wouldn't surprise us if they need to announce another production cut -- which could pressure the stock."

Camaros galore

GM officials acknowledge that the company has more inventory of some vehicles than it wants. In November it said plants in Lordstown, Ohio, and Lansing, Mich., where workers build the Chevrolet Cruze and Camaro and two Cadillac sedans, would lose their overnight production shifts in January. The move amounts to GM's first significant layoffs since 2010, when the company was streamlining operations after bankruptcy.

As of Dec. 1, GM had a 177-day supply of the Camaro and about 120 days' worth of the three other affected nameplates. Average for the industry was 73 days, more than the 60-day supply that executives and analysts say is ideal.

On those vehicles, "we have an oversupply -- there's no question about it," said GM spokesman Jim Cain. "We're going to be living with high days supply of those vehicles until the shift change can work its way through the system."

Cain wouldn't rule out additional production cuts, but he disputed any notion that the excess would revive the destructive habits of Old GM. He said GM is strategically stockpiling crossovers ahead of impending redesigns and can't keep up with demand in some segments, including midsize pickups and large SUVs.

New products

"We're pretty optimistic that we're going to continue growing retail share and the industry is going to stay near these record levels," Cain said. "Carrying higher inventory is actually good business. We feel like we've got a real opportunity to keep improving our results."

GM told analysts Oct. 25 that it was increasing production "marginally" in the fourth quarter. It no longer reports North American output publicly, but Automotive News estimates that GM produced 14 percent more vehicles in October than a year earlier and 18 percent more in November.

"What's really driven the increase is filling out inventory on newly launched products and new entries that we didn't have before, like the [Cadillac] CT6 or the [Buick] Envision as an example," GM CFO Chuck Stevens said in an Oct. 25 conference call with analysts. "Our inventory levels will be dictated by matching supply with demand. We will continue to watch inventories closely, especially cars, and will take actions if and when required."

Ford, on the other hand, after building 10 percent more vehicles in the first half of the year, produced 12 percent fewer from July through November as its forecast shifted.

Ford CEO Mark Fields has said the company is merely being proactive and realistic to keep itself out of trouble.

"It's still a very healthy industry by historical standards," Fields told Automotive News in October, "but there are stresses in it, and we're getting ahead of that.

4-month spike

Ford started 2016 with more inventory than GM despite having fewer nameplates and lower market share, but GM entered December with about 224,000 more vehicles in stock than Ford, the biggest disparity between the two automakers in four years, according to the Automotive News Data Center.

Until 2007, GM regularly carried inventory of more than 1 million vehicles, given that it had to pay workers at idled plants almost as much as when the assembly lines were running. A deal tied to its federal bailout in 2009 eliminated the Jobs Bank, and that change, combined with the permanent closure of some plants, cut inventory to fewer than 400,000 vehicles later that year.

After rising with the industry's recovery, GM's stockpile declined gradually from early 2014 through the end of last year, before beginning to spike in August. The 28 percent gain since then is the company's largest four-month jump in inventory since the aftermath of GM's wildly popular employee-pricing discounts in 2005.

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