General Motors shares fell 5% on Wednesday after May auto sales figures were reported. Most auto manufacturers were hit as sales for the industry fell pretty much across the board. Excuses for the industry shortfall ranged from higher prices for vehicles to Japan parts shortages. GM cannot claim the latter, since they earlier declared that there were no issues with parts supplies. The one telling statistic on GM is one that was not reported in most of the media coverage, which was the fact that incentives at the automaker were, once again, well above industry averages.
According to Edmunds, the “true cost of incentives” per vehicle at GM was $3,373 per vehicle compared to an industry average of $2,094. Ford’s incentives came in at $2,283. GM was not willing to discuss the numbers during its sales conference call, rather citing an “anomaly” for incentives during the month. Well, that’s reassuring. The facts we can come away with is that pricing power in the auto industry is not as strong as many assumed and that GM continues to spend more money than the competition when it comes to incentives. Consumers are pulling back on spending for autos if the deals are not there.
Auto pundits may also be incorrect in assuming that normalized sales for the industry are in the 16 million unit annual range. I was in the car business during the years that sales were at these levels and I don’t believe these are normalized levels. At the time, many customers were coming in with home equity checks and paying cash for new vehicles. Cash was loose with parents buying new cars for kids going off to college and credit was very easy with many sub-prime deals being approved as the bubble was building. When the bubble burst, sales dropped to a rate that was also not normalized, nearer the 8 million unit range for annualized sales. I would guess that a normalized rate would be somewhere between these numbers, perhaps closer to the 16 million, but certainly not a given that sales should return to that level anytime soon. Annualized sales for the industry in May were about 12 million.
The take-away from the May figures is that the industry is still very competitive and sales are dependent upon macroeconomic factors. Investors should be cautious basing decisions on rosy projections by pundits. GM is particularly at risk if their spending continues to exceed those of its competitors and consumers continue to be tight with their spending.
GM’s sales for the Chevy Volt in May fell to 481 units. Many apologists for the Volt will continue to claim that supply is still not available to meet the strong demand. It certainly doesn’t seem that way to me, but time will tell. I recently reported that Chevy dealers, and others, might be gaming Chevy Volt tax credits speculating that demand could not be that high if Chevy dealers were selling inventory to other dealerships. The report has stirred much debate. Most feedback agrees with the assertion that dealerships taking tax credits is wrong, but some accusations have been made that the report was biased by a right wing hatred for green autos. This seems to be a popular political tactic used when certain ideologies are presented with criticism; ignore the facts and attack the source. NY Times writer, Mary Chapman, did a good job following up on the facts in her piece today.
Let’s summarize a few points. The Chevy Volt loses money for GM (and subsequently for taxpayers). Investors should question a management team that focuses on sales of a vehicle that loses money. I don’t really care how many sell, and I’m sure GE and the federal government will make purchases and prop up sales soon. Regarding tax credits the fact remains, as confirmed by GM, that dealerships are taking the $7,500 tax credit by purchasing vehicles and reselling as used. If there are those that are OK with this, so be it. There is, however, a simple solution for tax credit abuse that even the most loyal Chevy Volt fans should have no argument with.
The main concern with the plug-in hybrid tax credit that I have is that, in addition to dealerships taking tax credits designed for consumers, double claiming of the benefit is likely. Yes, that’s speculation and no, it can not be proven at this point. But why would anyone disagree that a simple change to IRS form 8936, which is used to claim the credit, should be made? A field should be added for the VIN to safeguard against abuse. While I do not blame GM for dealership tactics, I believe they do have a responsibility to oversee the behavior of its dealerships. GM and Treasury should work together and get it done to protect taxpayers that have already sunk a lot of money into the auto bailouts. Can anyone argue with that?