Government Motors, Part III: GM's Incentive Spending

3. GM’s Incentive Spending: Slashing prices through discounts and incentives to juke market share is not a healthy business model

Famed investor Warren Buffett once said, “If you have to have a prayer session before raising prices by ten percent, then you’ve got a terrible business.” So, what does it mean if your business is slashing prices month over month through discounts and other incentives? Take a look at the graph below.

From GM’s IPO last November through February, the incentives and discounts the company is offering to consumers have increased from 29.8% above the industry average to more than 50% above industry average according to Edmunds.com.

What this means is simple: Yes, GM can crow about its 46% sales surge in February, as it did last week. But what they aren’t telling you is they are offering discounts and incentives 50% higher than the industry average helping to inflate their numbers, and that these discounts have grown by leaps and bounds every month since the IPO.

During GM’s IPO announcement in November, the company promised that it would offer fewer incentives that crimped margins. In February, GM Vice President Rick Scheidt said regarding incentives “it’s way to close to the bankruptcy for us to be sliding back into old habits. We know everybody’s watching.” Last week, GM said it will fall back to regular industry incentive levels in March.

Yet, the same week, GM announced a new 72-month, interest free financing plan on several GM models. The announcement prompted Edmunds auto-analyst Jeremy Anwyl to note “GM’s rhetoric has been saying one thing – discipline, discipline, discipline – and their actions have been going completely in another direction.”

The Wall Street Journal’s Evan Newmark remarked “We learned that GM North America is back to juicing incentive payments and boosting fleet sales, two of the very practices that got the ‘old’ GM into trouble.”

And Automotive News analyst Jamie Lareau said, “GM chased that market share right into federal bankruptcy court in 2009. Here’s hoping history doesn’t repeat itself.”

We couldn’t agree more.