Is GM Smoking Something?

Industry News: GM To Offer Zero-Percent Financing, Raise Prices, Screen Hummer Buyers

It’s very hard to figure out what GM is thinking these days. In the first link above, the Jalopnik blog highlights an inconsistency I also noticed… it’s the old laws of supply and demand popping up again. It always amuses me, in a way, that this basic law of microeconomics is even considered a “Lean lesson” because Toyota leaders like Ohno wrote about it. The basic supply and demand laws dictate the prices for just about everything — unless you are a monopoly provider or a (obscure econ word warning…) “monopsony” buyer (meaning you are the only buyer, or one of a few buyers for an item). There’s no board game called Monopsony that I’m aware of.

GM likes to flout the laws of supply and demand, as evidenced in the Japopnik post. GM says they are raising 2009 prices for the typical excuse of “rising material costs” — the last excuse of a scoundrel. Just because your raw materials and inputs cost more, that might mean NOTHING to your buyers and their valuation of your final product. Just because flour prices have gone up (and they have), that doesn’t mean people are willing to pay more for bread and pizza. It’s simple supply and demand economics.

So while GM announces they plan to raise prices in 2009 (a “price rise,” as they call it here in England — ah, the small differences), they were also offering ZERO PERCENT financing to buyers recently (basically a price cut). If you’re having to cut prices to spur demand, why announce you’re raising prices? Because you can? Good luck with that. I’m sure we’ll be treated to yet another annual story about how GM no longer plans to rely on incentives and cheap financing to move metal. Let’s see what they have to do to artificially prop up the June 2009 numbers (see “robbing Peter to pay Paul.”) Pulling ahead sales from future months is such a laughably short-term strategy (and old habit) …. but again, typical GM.

So while GM is bitching about price increases, they’re also (guess what) still attempting to squeeze those damn steel suppliers who are (guess what) trying to increase steel prices because of… wait for it… their rising material costs!!! Yes, we are living in bizarro land. The steel suppliers are now exerting THEIR market power for a change. And I bet GM doesn’t like how that feels. From a WSJ article on this:

As emerging countries increase their need for steel to build infrastructure, commercial buildings and automobiles in their respective countries, the demand for steel has outstripped supply. That has caused prices to shoot up, most drastically in the past year.

That has left U.S. auto makers, which had long dominated steelmakers during negotiations, in a weak bargaining position. For decades, U.S. auto makers were the steelmakers’ most lucrative customers and bullied them into selling them long-term contract steel at discount rates.

When you bully suppliers, they want to come back to bully you when they get the chance. Shouldn’t be surprising… you reap what you sow?

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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13 Comments on "Is GM Smoking Something?"

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  1. Anonymous says:

    I dont understand why you are only targeting gm on higher prices

    Toyota has also said that they are considering raising prices for their cars, the 2009 toyota tacoma is getting a 5% increase already.

    LINK

    LINK 2

    in the article above, nissan has already raised prices because of…material costs like steel!

  2. Mark Graban says:

    Fair enough. So Toyota is getting away from their Ohno roots by playing the “we are forced to raise prices because of cost increases.” That’s still bad economics.

    As for GM… I find it funny that they, and the rest of the Big Three / Detroit Three, can’t handle playing the game they’ve played for ages — stick it to the supply chain partner. You’re right, it’s not just GM who has done this. I stand corrected.

  3. Anonymous says:

    The federal government also plays this lame game. It’s called Medicare “cutting costs” by squeezing suppliers (doctors). It’s bullying and heavy handed. The federal government is acting like a monopsony.

    Here is another WSJ article about this:

    LINK

  4. J Thatcher says:

    Let’s be fair here.
    While the 0% financing is a price cut (assuming GM keeps financing in house and I can’t imagine they don’t, I just don’t know offhand), it, combined with the credit screenings, is likely a direct response to the collapsing credit market more than anything else.

    Getting 100% of 50,000 back and not a penny of interest is still a lot nicer than getting 25% and a default on 50k even with a nice sub-prime inflation rate.

    Furthermore, and this is going way out on a limb, the idea of trying to drive in immediate sales at the cost of future both makes sense in terms of the credit collapse and only fails, as you suggest it will, assuming a static level of demand.

    Hypothetically, an immediate influx of cash on hand for costs allows for more generous refinancing on the otherwise horrid losses that come with default on a car loan (Cars depreciate, blah blah). Not terribly dissimilar from John Deere of the 30s in all honesty.

    Of course, I’m going out on a ridiculous limb there as the entire concept predicates on GM not being simply competent but in being preternaturally so.
    It would be nice though and I felt the need to offer an alternative interpretation of the financing move (especially when the two are taken together). :)

  5. Andy Wagner says:

    Wrong question Mark.
    Is GM smoking something? Of course. The question is “What is GM smoking?”
    The fundamental difference between GM and Nissan or Toyota raising prices is that GM is raising prices on a product that nobody wants to buy. (Hummer). Would anybody be surprised if Toyota raised prices on Prius or 30-mpg Corollas these days?
    It is Econ 101.
    As for Toyota “blaming” increased costs for their increased prices. I would attribute that to marketing and not a change in philosophy.

    -Andy

  6. Doug B says:

    Mark, the opportunities for complaint here are seemingly endless. Some observations:

    1. Thinking there is no demand elasticity: Obviously, GM doesn’t believe that there is a lot of elasticity in their demand. They think that they can raise prices and still, people will buy.

    2. Silo thinking: The manufacturing division raises prices, the finance division lowers interest rates. Is the car cheaper than it was before? No. Does it appear that the car is cheaper than it was before? If 0% financing is pushed in the advertisements, and the price increase is not, then, yes, some people will believe it. I think that a lot of people perceive paying interest as paying for nothing, whereas paying more for the car is, at least, paying for something tangible. Makes no sense to me, but I could see it happening.

    3. Supplier relations: Classic. This seems to be how the whole automobile supply chain works: it is buyer-seller relationships instead of partnerships.

  7. Adam Zak says:

    In this morning’s Wall Street Journal the financial pages column breakingviews.com gave us an interesting insight into what GM Chairman & CEO Rick Wagoner might wish for if the “Genie of the Tank” magically appeared before his eyes.

    Key highlights:

    Rename the company Focused Motors. I guess this means something like use a rifle instead of a shotgun when deciding what vehicles to make and sell.

    Make fewer models than he currently does. A natural outgrowth of being more focused. Reduce from about 70 car and truck models to just eight or so (what Toyota offers).

    Assemble a work force of 36,000 in total (again, about what Toyota employes in the US) instead of the 54,000 union workers alone at GM. Oh, and “no special deals on health care or pensions.”

    And now about the dealer network. Again, using Toyota’s 1,500 or so as the benchmark, the majority of GM’s 7,000 current dealers would have to go. After all, we’re talking about just keeping the stuff that really adds value, right?

    I suspect the “Genie” would not have looked kindly upon Mr. Wagoner if he’d asked for the ability to raise prices or offer zero percent financing for 72 months.

    Sounds like this Genie must really know some of the secret inside scoops over at Toyota.

    And the brief article concludes with “If only it were so easly for GM boss Rick Wagoner.” And if only there were such a thing as a “Genie of the Tank”.

  8. Mark Graban says:

    Adam – interesting stuff. Certainly, there’s no easy answers for GM. I wouldn’t even blame Wagoner… he’s dealing with decades of bad decisions. Still, I’m amazed he hasn’t been given his golden parachute yet. He has a job that I wouldn’t wish on anyone…

  9. Dick Kusleika says:

    I have a question about the Ohno philosophy of “the market sets the price”. While I agree in general, Toyota isn’t selling these cars at auction. They have to put *something* on the sticker. I think it’s not so easy to guess what the maximum someone will pay for a Camry is. And I think it’s different for every person that walks on the lot.

    So if we can agree that initial pricing is a WAG, that’s a start. Once the initial price is set, Toyota should adjust the price as the market adjusts – but the market changes so fast there’s no way they can be accurate 100% of the time. There is no known, magic market price except in auctions.

    Now steel goes up and margins go down. Should Toyota hold their WAG price or should they increase it to keep their margins at an acceptable level? Since they’re not 100% sure their current price is really what the market will pay, why not increase it and find out. And once they decide to do that, should they announce “we’re raising prices because we think you’ll pay” or “we’re raising prices because steel costs more”. I think the VP of Marketing would have a heart attack if the former were even proposed.

    So the question is: what are you suggesting they should do? (or alternatively: what are the flaws in the above scenario?)

  10. Mark Graban says:

    Good question, Dick. I think an alternative would be to just announce a price increase — no gloating that “we can” and no excuses either.

    News search for “price increases announced”:

    Pactiv “necessary to offset significantly higher raw material costs”

    A company Modine said “These actions reflect the reality of the current business environment,” said James R. Rulseh, Modine Regional Vice President – Americas. “They represent one of the ongoing steps necessary to ensure the viability of both our current production and legacy businesses.”

    Milliken says Leading textile and chemical manufacturer Milliken & Company has announced immediate price increases of up to 15% for all of its products and services, citing unprecedented increases in raw materials, energy, freight, and other costs.

    “Our initial and ongoing efforts to address these challenges have been focused on resisting increases, improving our productivity, and aggressively pursuing cost avoidance and savings opportunities,” said Joe Salley, President and CEO. “However, the speed and magnitude of recent cost escalations make it impossible for us to maintain our current pricing.”

    Is the middle one more honest or better because they don’t directly blame materials prices? I don’t know.

    The “necessary” or “make it impossible” language is really negative and self defeating.

  11. Mark Graban says:

    For those who were nit-picking that 0% financing isn’t the same as cutting prices, now GM is offering employee pricing widely…. that is clearly a discount to spur sales.

    So why announce a price increase for next year?

    WSJ LINK

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