Chevy's plan: More from less
GM puts a lid on Impala output to boost pricing

Jamie LaReau | | Automotive News / March 20, 2006 - 6:00 am

Price bump
GM wants to protect the transaction price for the Chevrolet Impala, which is riding high with the launch of the new version.
Feb. ’06 $22,082
Feb. ’05 $20,387
Feb. ’04 $20,006
Feb. ’03 $20,245
Source: Power Information Network

DETROIT -- How do you make more profit while selling fewer vehicles? By controlling inventory and squeezing more revenue out of each transaction.

General Motors is capping production of the Chevrolet Impala sedan at 250,000 units for sale in the United States and Canada this year, a knowledgeable source says. That means GM is sacrificing about 60,000 sales of its best-selling car. GM also will emphasize higher trim levels to increase transaction prices.

The automaker is trading unit volume for what it expects will be higher transaction prices, lower incentives and higher residual values. One key goal: Cut fleet sales of the Impala, which hit 50 percent of total Impala sales last year.

GM also will cut costs by cutting the third shift at the Oshawa, Ontario, plant where the Impala is assembled.

GM is adjusting production on other good sellers to manage inventory and extract more revenue out of each transaction. The source says GM will hold production of the Chevrolet HHR at 120,000 units rather than add capacity to build more of the popular sport wagon.

By contrast, GM is increasing production of higher-priced versions of the so-far-successful new Tahoe large SUV.

Sale prices rise

GM's is seeing higher transaction prices for the new Impala, which came out last fall, and the new Tahoe.

According to J.D. Power and Associates' Power Information Network, the 2006 Impala's average transaction price last month was $22,082, compared with the 2005 model's average transaction of $20,387 a year earlier. (See box.) The base Impala starts at $20,990, including shipping. The top Impala model starts at $26,990.

The 2007 Tahoe's average transaction price in February was $41,233, compared with the 2006 model's average transaction price last February of $34,546, according to the PIN data.

The 2007 Tahoe's average turn rate is 13 days, compared with 94 days for the 2006 model. The top-line model Tahoe has a sticker price at $38,990, including shipping.

U.S. Tahoe sales for the first two months of 2006 were 28,524, up 49.8 percent from the year-ago period, according to the Automotive News Data Center.

Chevrolet General Manager Ed Peper says demand is strong for the high-trim versions of the Tahoe, prompting GM to build more 3LT and LTZ models.

Chevrolet executives monitor dealers' orders daily and make production adjustments, Peper says. One surprise, he says, has been sales of the high-trim Impala SS models with V-8 engines, which the old model didn't have.

In 2004 GM built 296,594 Impala sedans, and last year built 258,524 as it phased out the old version and ramped up to build the new one. GM sold 311,135 Impalas in the United States and Canada in 2004, the last full year of production of the old model.

GM could easily sell 300,000 Impalas this year, the source estimates. But GM is set to cut a third shift sometime this year at the Oshawa plant. GM added the shift in June 2002.

GM would have to keep that shift if it were to build the maximum capacity, the source says.

Peper would not comment on the shift. But he says GM wants to limit fleet sales and increase retail sales to bolster residual values.

50% fleet

Last year, fleet sales were slightly more than 50 percent of Impala sales, says a source familiar with the data who asked to not be identified. Those data include 2005 and 2006 models. Fleet sales of a key competitor, the Toyota Camry, were less than 10 percent of overall 2005 sales, the source said.

According to figures from Automotive Lease Guide in Santa Barbara, Calif., the 36-month residual on the 2006 base Impala LS is 42 percent. That jumps to 44 percent on the LT model with the 3.8-liter V-6 and 45 percent on the high-trim SS model.

The 36-month residual on the base Camry is 49 percent, and it's 51 percent on the top-line Camry XLE V-6, according to Automotive Lease Guide.

At the end of last year, Chevrolet increased production of the HHR and will boost it again this year, Peper says. He declined to give a specific number. But a knowledgeable source says that after "several capacity adjustments," GM plans to build about 120,000 HHRs this model year.

"That's max without building additional capacity," the source adds.

Chevrolet launched the HHR last June and sold 41,011 of the sport wagons in 2005. During the first two months of this year Chevrolet sold 16,610, according to the Automotive News Data Center.

Managing Tahoe production is complicated by the fact that it is part of a group of full-sized SUVs coming out of the Janesville, Wis.; Arlington, Texas; and Silao, Mexico, assembly plants. That means that any changes to Tahoe production must take into account the coming launches of the Chevrolet Suburban SUV, due in late April, and the Avalanche pickup, due this summer.

Other full-sized SUVs built in those plants are the GMC Yukon and Yukon XL and the Cadillac Escalade, Escalade EXT and Escalade ESV.

In 2005, according to the Automotive News Data Center, GM built 495,201 trucks at all three plants combined, on two shifts.

 

Interetsing and confusing that they would cap production on their volume leader no matter what the reason.

Not sure this is the greatest idea in the world, to be honest.

It's not like limiting production to a quarter of a million cars is going to make someone pay a premium for the car because it is rare or something.

 

Ya, I can definately understand wanting to build more units with higher trim and more options to make more money per unit...

But limiting total production on a mainstream, volume, bread-and-butter vehicle doesn't make a whole lot of sense to me.........

 

I can see limiting production to keep cars at a 60 days supply, but not to limiting total #. Who knows, If they sell very well GM could built extra at the end of the year or if there is a shortage.

 

Toyota ftw.

 

For a company so bent on market share, this is an interesting philosophy. I completely understand it, and don't at the exact same time.

As I said in another thread, it was great to see 10 Impalas at the local dealership, of which 6 are SSs! That alone could help profitability...selling more LTZs and SSs. Limiting overall production? It just seems odd.

Also, if the rental fleets don't get the cars they need, what happens to them? Run the cars longer? Attack another car line? Hmmmm...

 

I read an interview with Lutz where he said he'd rather be a strong #2 than a weak #1. So hopefully that mentality is changing a little.

 

Sounds like they are cutting a shift, to become a little more lean? Like instead of selling 300k out of 350 max, they'll cut that extra shift and try to sell right at 250k out of 250k max, and hoping overall, the numbers balance out to still make as much money.. and hopfully improve the stats on resale value and such.

 

I always thought one of the reasons for practically giving aways cars is due to needing to keep the asembly lines busy, or they would have to pay workers even when idle. Does this shift cut mean GM has to still pay the union employees?

 

This is to me a step in the right direction if they can actually cut production costs accordingly. High volume sales, even at less than stellar pricing helps offset fixed production costs (i.e. if you have to pay the workers anyway, you might as well have them do something). If they can in fact lower these fixed costs, than this is a win/win for everything except market share. As far as that goes, I would rather see them give up #1 in order to put more $ in their coffers, which would lead to better product, which could then lead to a return to #1 as a stronger company than previously.

 

This may be a good step towards resale value.

Overall this should be an interesting plan to watch unfold.

 

Its a great step for resale, but it begs the question...

If the car was just BETTER, then it could go 300k sales per year without being capped AND without needing rebates! I like the new Impala, but it needed a stronger look to it.

 

2 words: BAD MOVE.

 

It's easy to understand what they are doing. They are trying to make money the same way that Chrysler is and one of the ways Ford is cutting their losses. Selling fewer cars for more money and increasing the residual value of their cars coming off leases.

The idea is HIGHLY counter productive on vehicles that are selling at good profit, with limited numbers going to fleet, being produced at an efficient plant. However, it's a very good idea for vehicles in the position of the Impala, and perhaps to a smaller degree, the Malibu as well (at least until new striking models come out).



In a way the idea of capping production defies logic, but is proving pretty effective at making more profit per car. In short, say you make 300k cars per year, and 55% of them are sold as fleet cars (could be government as well as rental agencies). Combining the averages of both types of sales, the vehicles average price is $22,000. There is so many cars that at the end of a typical lease, the car's resale value $500 more than what you get it back for. Say it's made at a huge plant that has 8,000+ workers working 3 shifts, around the clock.

Now say you cut production by 1/3, and you cut fleet sales to around 10% all in conjunction with a reduction in workforce by (to pick a random number) say 33% to match the production cut.

First the price of the car goes up. Without fleet sales dragging down averages, the average price jumps up to say $24,000. Because there's less used models coming off fleet sales, that $500 you made reselling cars coming off lease might jump to $1000+.

Secondly, you are selling far more cars to the general public. That 45% public sales of 300K equaled around 160,000 cars is now 90% of 200,000 cars that runs 180,000.

Third, by reducing your workforce by 1/3, you have 2/3s of your workforce producing something that has increased in value. More directly, you have fewer people making something that brings in more profit. Sure, the reduction in workforce is going to cost you via buyout and early retirement packages, but these are still cheaper than keeping employees on the payroll over an entire career or even a few years.


Ford is taking this approach, but is combining it with a move to vanilla cars on Volvo and Mazda chassis (to complement the massive cuts to their engineering force), save the Mustang and the next generation large trucks and SUVs. Chrysler had this formula baked in, and has often outearned GM despite selling a small fraction of the cars GM sells, but is only recently (since the LX cars) started to de-emphasize fleet sales.

GM 'should' have better luck than Ford or Chrysler for 2 reasons. First, the size of GM plays in their favor. GM has long struggled to make money despite product overlap with pressure to sell all in 6 digit figures and the massive costs to design & market essentially the same car in multiple divisions. If they've manage to make some money despite this, they seem certain to make more money this through production cuts in volume vehicles that tend to go for low prices.

Also, GM is shedding something like 30,000 jobs. Cutting employment at certain plants makes it easier to close and move production elsewhere. Capping Impala at 250K instead of 300K Impys, means another vehicle made at another plant selling around 50K (say the Buick Lecrosse for instance) can be made on the same assembly line as Impy, with far fewer workers than both cars required previously, enabling one plant to close.


On paper, it's a good (and unconventional) idea, that actually works in most cases where an automaker finds themselves in that catch-22 of producing cars at high volume simply to cover the costs of keeping those same people producing those cars.

 

No why would they be looking to move a product line to the Impy plant? Why would they be looking to "free up" a plant in Oshawa?