The Numbers

GM started this latest marketing scheme with its desperate move in June when it offered its employee discounts to all customers for all its cars and trucks (except for the few people might want). It turned out that what customers liked best was the no-haggle pricing policy. GM's sales rocketed 46.9% and for the first time in many years, GM actually had a 30% share of the US market.

So what did this do for GM? Its dealers are screaming because they make very little money on these cars and the sales staff make as little as $100 for each vehicle sold. It undermines the value of GM's vehicles in the minds of consumers who are only looking for the rock bottom price on something they ordinarily wouldn't have considered at the MSRP. It also destroyed residuals for cars and trucks that already had low residuals. GM's precarious financial situation wasn't helped much because GM already loses money on most of its cars (before the huge discounts) and the profits from big trucks and SUVs were significantly diminished.

The sale also has the taint of desperation. While GM is crowing about its 20 nameplates with an EPA highway mileage of at least 30 mpg, those same cars are being sold at a bargain basement price to a few customers -- but mostly to rental fleets. That sends a conflicting message to customers, doesn't it?

On the positive side, GM got rid of lots of slow-moving inventory. It also got great bragging rights, albeit short-lived, to say it was back on top of its game. The dealers also gained new showroom traffic they hadn't seen in ages. Now the dealers get to service all the vehicles just sold, although too many service visits won't be good for future sales.

GM's success was mostly due to the 100% increase in sales of the Silverado pick up truck. This success came at the expense of Ford's F-150 and the Dodge Ram. Chrysler's sales were only up 1.1% while Ford took another decrease of 2.5% in June.

The less-reported figures are more interesting to us here in LA. Toyota had its best ever June with a sales increase of 10%. Nissan continues to ride its wave of great new products with a 14.2% increase while Honda had an increase of only 4.7%. Honda's car sales were actually sharply down. However, sales of the new Ridgeline pickup truck and the Odyssey minivan were enough to pull the entire line up into positive territory. Honda is rushing to freshen the Accord and roll out its new Civic to reverse the negative trend in its car lineup.

The Germans didn't fare very well. BMW's sales were down 7% in June while Mercedes' sales were up only less than 1%. BMW's sales of its X5 SUV are down as the model nears replacement and as Mercedes' all-new ML SUV gains market acceptance and momentum. In fact, Mercedes' truck sales were up by 51% in June, entirely due to the excellent new ML.

Volkswagen, unfortunately, keeps losing market share for lack of new product. The Jetta is great, but as I've written before, it needs more variants available now. The Golf is still inexplicably missing in action and we are still waiting for the new Passat. The excellent Touareg is keeping pace with last year, Jetta sales are up as are sales of the Beetle Convertible. However, with no new Golf (down 45.6%), no Jetta new wagon (down 65.4%) or replacement small SUV, the dead Phaeton and Passat sales off a staggering 60.3%, VW is lucky that June sales were only down 16% in total!

The Competitors' Response

So how do Ford and Chrysler respond to GM? Like lambs to the slaughter, Ford and Chrysler copy GM and offer the same employee discounts with no-haggle prices.

Ford is desperate. Ford's new cars/trucks are flops; market share is shrinking and losses (just announced) increased by 19% in the second quarter. Chrysler, on the other hand, has a few good new models and some momentum; however, we forget, here in LA, that Chrysler still has lots of distressed merchandise it needs to move. (We forget because we don't see much sign of Chrysler's other products around here other than those in the rental fleets.)

Let's look at the list of excluded vehicles from the employee discount pricing plans GM, Ford and Chrysler:

• Ford: GT, Mustang, Hybrid Escape, 2006 models and some large trucks
• Chrysler: Dodge Viper, Dodge Magnum, Chrysler 300, Jeep Liberty diesel, 2006 models and all SRT models
• GM: Chevrolet Corvette, Pontiac GTO, all medium-duty trucks and all 2006 models

[Note: All three companies have stated that these discounts end 1 August 2005]

When I look at the excluded model list, it's sad to see how few "desirable" cars our domestic manufacturers produce. And here in LA, as far as I can see, the only reason to buy any of the other vehicles (excluding real pickup trucks) is solely due to cheap pricing. Pickup trucks are a staple of contractors in every US city and many families use the four-door versions as both a family and work vehicle. In that respect, LA is no different from any other city.

I continue to believe that these massive, sweeping discounts can only further damage the domestic brands as no customer will want to buy a new vehicle from these brands unless some spiff is offered. I would be very surprised to see the Japanese or Germans follow suit. Their marketing departments are very conscious of brand image and would never want to be positioned as a discount brand with substandard merchandise.

GM's Sales in LA

While watching a national cable channel a couple days ago, one of GM's Employee Discount commercial came on. It had the same voiceover; however, it had been slightly modified in two ways. First, it gave the latest expiration date of August 1st and second, there was a brief statement that GM's sales in Los Angeles were up 80%! I don't think I've ever heard a car commercial that disclosed sales increase in a marketing region. I don't know how GM defines "Los Angeles"; however, in general, I think it encompasses a rather large area.

That number sounds great, doesn't it? However, let's look at what it says about GM's sales in LA before the Employee Discount sale. It says that LA sales of GM junk were fully half of the average in other regions of the country. We've always known that GM sales were weak in LA, but we didn't know how far below the average we were. Does anyone at GM think that this sales volume will continue in LA? I'd also be interested to know what portion of the increased sales were sales of light trucks. GM reported a 75.8% increase in light-truck sales in June. It's very possible that 75% (or more) of the increase in LA were due to sales of the Chevy Silverado/GMC Sierra sales. Contractors rejoice!

It's nice to know that the full-size (called light-truck) pickup market is being satiated in these times of desperation on the part of GM, Ford and Dodge. But with Toyota's new Texas truck plant coming online next year and Nissan actively chipping away at that same market with the Titan (approaching 100,000 units sold this year), what brand will these LA-based contractors choose when real, large, powerful full-size pickup trucks are available from both Nissan and Toyota? The Japanese alternatives will be sure to promise better reliability, quality and fit and finish. And from my experience, most contractors already own a foreign car because their wives drive them!

If GM, Ford and Chrysler don't think they can lose their die-hard pickup truck customers, they should think again. The generations that never switched brands or shopped more than one deal are almost a thing of the past. In five years, the full-size light-truck market may be split in very different ways than it is now.

The Japanese are very patient. Toyota, Nissan and Honda now own nearly the entire small truck market (think Tacoma, Frontier, and Ridgeline). These companies fiercely guard their brands' image. They also know that wholesale sales of the entire fleet just to increase sales doesn't build brand image and such never-ending discounts undermine the strong residual values currently enjoyed by these brands. It really comes down to the customers' perception a brand which include design, quality, reliability and residuals -- total cost of ownership -- that is sadly lack from domestic offerings.

GM says it will end the steep discounts this August and go to "value pricing" with its 2006 models to be introduced in the fall. The goal is to bring the sticker price down to the actual transaction price; therefore, (pour the Kool Aid) customers won't expect huge discounts off the sticker price. This is delusional. GM's vehicles are already considered substandard and the only way to sell the product is through discounts, rebates, cheap leases and low financing rates.

Employee Discount for Everyone was a quick fix to make Wall Street happy; but it's very short sighted. Expect GM to start a new quick fix plan as soon as sales drop off from this giveaway. The only sustainable answer to this problem is to make top quality product that customers actually want to buy.