Market analysis: Why GM is so bullish on production
Buying Strategy Forecast
Tom Stundza, Executive Editor -- Purchasing, 4/22/2002 6:00:00 AM
Gary Cowger, the president of General Motors Corp.'s North American unit is 'very optimistic' the company can increase its production of new cars and trucks for the second quarter as U.S. sales remain stronger than expected. GM said about a month ago that its North American production would total about 1.425 million cars and trucks in the second quarter, up more than 4% from 1.364 million units a year ago. Wall Street analysts reckon GM's second-quarter production appeared to be based on an estimate of industrywide sales of 16 million cars and light trucks in the U.S. this year, while Ford Motor Co. and the Chrysler arm of DaimlerChrysler appeared to be assuming 17 million sales.
'I'm very optimistic about the upside possibilities for production,' says GM's Cowger at last week's annual New York Auto Show. For the full year, the world's largest automaker now expects to produce more than 5.1 million vehicles in North America, up more than 100,000 units from the company's estimate in January.
Even if sales downshift a bit, production levels are expected to remain strong at the U.S. and Canadian assembly plants of all carmakers. That's because car makers are also still working to replace inventories that were depleted in last fall's zero-financed sales blowout, when cars and light trucks zoomed out of car showrooms. Overall inventories for the industry are about 11% below average for this time of year, says Merrill Lynch analyst John Casesa.
Much of that shortfall is at GM, where inventories some 25% below normal. Inventories are much stronger at Ford (9% above normal), Daimler Chrysler (8% above normal) and European carmakers (16% above normal). Japanese and Korean carmaker inventories are running 8% below normal. The mismatch of supply and demand also will impact carmakers' decisions about how aggressive they need to be with costly incentives.
U.S. vehicle sales declined a mild 1% last month compared with March 2001, offering encouragement to analysts and automakers that demand will strengthen and the economy will continue to improve. The Big Three's overall sales were down 6% compared with March 2001. Much of that decline was blamed on lower fleet sales to rental car companies and others in the wake of the Sept. 11 terrorist attacks. But even that effect is starting to fade. Meanwhile, sales by European and Asian companies rose 12% and 6%, respectively, in March. Last month's sales performance rounded out a quarter that six months ago many thought would be utterly dismal, according to Paul Ballew, GM's top sales analyst.
For the first three months of 2002, sales of GM's vehicles are down 4% from the first quarter of 2001, with car sales 22% lower but truck sales up 14%. "If we see greater improvement in terms of direction of the economy and that coupled with the aggressiveness of pricing, it would not surprise us to see an industry maintain the pace that we've seen in the first quarter,'' Ballew says.
"March sales were better than even Detroit was expecting,'' says analyst David Healy at Burnham Securities. "That means that production by all North American firms probably will increase this quarter.
'It's becoming increasingly clear that a broad-based economic recovery is taking hold," says senior economist Jarlath Costello at Ford Motor Co., which also plans to boost output by 4% this quarter.
Continuing incentives and improving economic news drove first-quarter auto sales at an annual pace that's better than had been expected at the beginning of the year, according to J.D. Power and Associates. The research firm has raised its full-year projection to 16.4 million from 16 million. At the start of the year, some Wall Street analysts and automakers had predicted sales as low as 15.5 million. Automakers sold 17.2 million cars and trucks last year, second only to the 17.4 million in 2000.
(This piece originally ran as part of Buying Strategy Forecast, April 8, 2002. For more information click here.)
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