Originally Posted by Autoweek

GM must fix sinking sales mix to improve revenue; automaker recalling two million vehicles
JASON STEIN | Automotive News
Posted Date: 4/26/05
DETROIT - Now we know what struck panic in General Motors a month ago.

Barely noticed in GM's first-quarter earnings last week was an alarming statistic: Revenue in its biggest market fell off a cliff.

Revenue at GM couldn't be more important. With enormous fixed costs such as health care, pension and labor, revenue at GM pays the bills. Declining revenues eat profits quickly and increase pressure to cut costs.

GM North America's revenue dropped 12.8 percent in the first three months of the year, to $25.38 billion from $29.10 billion in the year-ago quarter.

GM's sales mix - the proportion of high-ticket vehicles it sold - slumped. That caused revenue to fall more sharply than GM's 5.2 percent drop in unit sales. The poor mix was reflected in net revenue per vehicle of $18,396, down $688 from $19,084 a year ago.

"A combination of the pricing pressures and the negative mix has reduced our vehicle revenue per unit," CFO John Devine said last week. "Obviously, this is a tough hit in the first quarter."

SUVs sputter

A decline in its lucrative mid- and full-sized SUVs was especially painful, forcing GM to cut earnings forecasts. As GM sold fewer high-ticket SUVs, sales rose for new, lower-priced cars such as the Chevrolet Cobalt and Aveo and Pontiac G6.

Chevrolet sold 14,034 Aveos in the first quarter - a 78 percent increase from the year-ago period - and GM saw significant increases in sales of its G6 and Cobalt. But sales of the GMC Yukon SUV, for example, dropped 26.1 percent during that period.

"You see the volume" decline, "but the mix is equally damaging in terms of profitability," Devine said.

Devine admitted GM has "a fairly wide gap between profitability in some of our large products and some of our small products."

Also, last month GM cut prices on 22 mid-sized SUVs to make them more competitive.

In North America, GM's light-truck sales are hurt by higher gasoline prices and increased competition from other vehicle categories. Also, large trucks and full-sized SUVs are toward the end of their product cycle.

The automaker is banking heavily on new versions of its full-sized SUVs and pickups to arrive next year.

Total U.S. mid-sized SUV sales have fallen 11.3 percent in the first quarter, but GM's mid-sized SUVs are off 26.4 percent. GM's mid-sized SUV share has dropped from 29.7 percent to 24.6 percent.

U.S. sales of full-sized SUVs have dropped 20.9 percent this year. GM lags the segment, with sales off 24.0 percent. Its share has fallen from 62.0 percent of the segment to 59.5 percent.

'Breakeven' year?

GM's mix might not get much better this year.

Analysts predict that adverse mix means "GM will only break even" this year, Deutsche Bank analyst Rod Lache wrote in a note to investors last week. Full-sized trucks are critical to GM profits, he says.

Lache estimated that GM earned at least $5 billion in pretax profit from its full-sized truck architecture, known as GMT 800, in 2004. That included $2 billion from large pickups and $3 billion from large SUVs, he said.

"The magnitude of the profit concentration is staggering," Lache wrote.

Total corporate net income for 2004 was $3.69 billion.

Lache estimated that GM makes $2,300 of profit on the average large pickup and $3,500 on a large SUV. By contrast, GM lost about $2,000 per vehicle on mid-sized cars, he wrote.

In the past, GM's short-term fix for a lack of revenue has been incentives. Based on last month's results, it may have to continue with heavy incentives.

During a "March Madness" marketing program, GM offered as much as $3,500 on Chevrolet Silverado and GMC Sierra pickups and an extra $1,000 on vehicles that had been on dealership lots for more than four months.

The incentives led to GM's best March for full-sized pickups since 1978. -JASON STEIN