Profitability is taking a back seat to cash flow at General Motors Corp, as auto executives worldwide focus on how to survive the US market's long and brutal price war.
Consider, for example, the Chevrolet Silverado full-size pickup truck. Silverado is General Motors's top seller and one of its most profitable models, which is why GM is reluctant to discount it.
Yet in December the cash rebate on the Silverado rose to US$3,000, the most ever, amounting to roughly a 16 percent discount on the US$18,853 retail price of an entry-level model. The cash discount now stands at US$2,500.
Strong sales driven by discounts helped General Motors post a US$1.74 billion profit last year in January, up from US$601 million in 2001 -- representing a 0.93 percent net profit margin, compared with an average of 2.62 percent for the world's largest automakers, according to data compiled by Bloomberg.
More important, however, was the automaker's cash flow for the year -- total cash generated from operating activities -- of more than US$17.1 billion, almost twice as much as in 2001.
The No. 1 automaker has been feeding a tremendous appetite for cash, exemplified last year by a US$4.8 billion cash infusion to its pension fund to help offset an unfunded liability and US$1 billion contribution to its trust that pays for retiree health expenses -- on top of the company's US$7.4 billion capital expense.
In other words, the profitability of Silverado and other GM models has taken a back seat to their essence as cash generators.
With Fiat SpA the latest automaker to plunge into financial crisis, staying alive until prices get stronger has moved to the forefront of every senior auto executive's mind.
In bygone years General Motors might have considered slowing assembly lines or closing a plant for a few weeks to wait for higher prices.
That's a non-starter, though, in light of current financial pressures, as well as cutthroat price competition with Ford Motor Co. and other automakers.
The retail price of automobiles, as tracked in the US Consumer Price Index, rose steadily from the early 1970s until 1997, when it began to trend downward.
CNW, an automotive consultancy in Bandon, Oregon, estimated that average per-vehicle financial incentives were US$2,884 in the US last year.
General Motors sparked the latest round of price cuts after Sept. 11, 2001, and it remains the most visible and influential discounter because of its size, accounting for about 29 percent of the US market.
"There's tremendous pressure on the industry," says Pierre Gagnon, chairman and chief executive of Mitsubishi Motors North America. "It's cheaper to build a car than not to build it."
To compete, Mitsubishi is letting its most credit-worthy customers defer all payments on new vehicles for a year. Even this plan isn't getting the attention it received when Mitsubishi tried it once before in 1999.
"I don't want to predict that players are going to go out of business," Gagnon said. "But you might see this with Isuzu in Japan and the way the big three are losing market share."
David Littmann, senior vice president of Comerica Inc, a bank holding company, said "the overhang of too much vehicle making capacity worldwide is forcing prices downward.
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