GM announced it will be increasing its production by 60 thousand units to meet the demands of Cash For Clunkers. Will this decision be a clunker? I think GM needs a simple lesson on supply and demand. According to CNN Money,
Toyota has so far sold 18.9% of the vehicles bought through the Clunkers program, while GM is now second, with 17.6% of Clunkers sales. Ford Motor Co (F, Fortune 500). ranks third in Clunker sales, followed by Honda and Chrysler.
GM has gotten a little too excited. They are rehiring people, opening plants and basing their future on a temporary program. The current demand is still not for GM vehicles, the demand is being driven by the savings of the Clunkers program. I like to refer to this as misdirected demand. In other words an incentive serves as a buffer between a product and a consumer, hence increasing the consumers interest in said product.
The problem with this type of demand is once the incentive is removed, the demand is no longer there. With the government program of Cash for Clunkers all automakers have seen an increase in sales. The ideal behind the program is to reduce the inventory of the automakers and reduce their surplus (I know they say it is to put more fuel efficient vehicles on the road). If GM increases production at this point without further evaluation, you will have a company that slumps in sales again once the program is gone and they will be left with inventory that is not going to move.
It is not fair to hire employees, rehire employees, open new plants and create media hype over sales revenues that do not necessarily represent net revenue. The company is currently in bankruptcy. These are catch up and break even sales figures for GM. GM is showing the prime example of a “knee jerk” reaction.
Over half of the government’s Cash for Clunkers funds have run out already. According to CNNMoney.com, “$1.5 billion of claims have been submitted by dealers who have sold a total of about 360,000 cars.” GM needs to think before they act. The demand is not driven by their cars, it is driven by government incentives that are temporary as will be the need for increased production.
Another great piece, LM. The false reality of the cash for clunkers program, may have duped GM into believing the could covers some of those stock options from the past but as stated, as soon as the program ended, so did the buzz around car sales. Rather than depend on the clunkers program, maybe incorporating water based hybrids that double gas mileage would be something consumers would be more apt to get behind. The economy and $4.00 gas from the early in the millennium blindsided GM’s business “as usual” philosophy. Corporate overhead trickled down and the baby boomers are feeling the brunt. As technology continues to nudge out the industrial age mentality that had driven the country’s largest corporations OPERATION BAILOUT: ENTREPRENUERSHIP is the only thing that will save the corporate culture now…
Peace
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Comment by A. Butler — March 16, 2010 @ 3:05 am