General Motors Has a Pickup Problem

General Motors (NYS: GM) reported on Monday that its full-sized pickup truck sales fell 8% in November.

That in and of itself isn't a big deal... except that Ford (NYS: F) posted an 18% gain on its F-Series, Chrysler'sbig pickup sales rose 23%, and Toyota's (NYS: TM) Tundra was up over 31%.

If pickup sales are picking up without GM, that's not a trivial problem. The Chevy Silverado and its upscale GMC Sierra cousin are among GM's "crown jewels," its most profitable and important products. Their success is critical to GM's financial health. What's going on?

Are "unexpected" discounts by rivals to blame?
GM says that it was caught by surprise in November as its competitors rolled out "unexpectedly high" incentives. Incentives, the cash back or cheap financing deals that are often advertised on TV, are used by automakers to adjust vehicle prices on the fly.

Incentives have long been part and parcel of the pickup truck business. Pickups are a "need-based" purchase - unlike, say, sports cars, which are often a luxury item, most buyers of pickups buy them because they need them.

Many of those buyers - which include lots and lots of small businesses - are more influenced by price than they are by brand loyalty. Discounts, offered via those incentives, can help move products when competition is tight. While GM's overall incentives were up last month, its offers on big pickups were about $500 below the average of rivals'.

GM could well be right that its unwillingness to match rivals' big discounts was responsible for its slipping pickup sales - though Ford attributed its success in November to several other factors, including the superior fuel economy of its "EcoBoost" V6-powered trucks.

It's also likely that the pickups themselves are to blame. GM's pickups aren't bad trucks, but they're dated - the other guys' offerings are all newer designs, with upgraded features. GM's own all-new trucks are due early next year, but right now, its current trucks don't compete quite as well as they did a few years ago.

But no matter the cause, GM now has a problem: Too many unsold trucks. For jaded Detroit-watchers, that's a worrisome sign.

Rising inventories should worry investors
In the bad old days, GM and its Detroit rivals would occasionally build vehicles for which they didn't have orders. These cars and trucks would be stashed on huge private lots around Detroit - and over time, dealers would be cajoled into taking the extra inventory, often at huge discounts.

The automakers did this for a number of reasons, but the big one was to make sales look better than they really were. That irked Wall Street to no end, once analysts caught on - and Detroit has since sworn off the practice.

That's important to understand, because it's the historical context that has led to rising concern about GM's growing inventory of pickups. GM has been saying for awhile that it planned to make extra pickups during the fourth quarter in order to have vehicles in stock while its factories were shut down to prepare for the new model.

But with over 245,000 pickups in stock as of the end of November, GM is already well past the 200,000 or so that it had planned to have on hand at the end of the year. That's a 139-day supply at current sales rates - for pickups, a day's supply number over 100 is considered problematic.

And that is leading to concerns in some quarters that GM is playing a variation of the old pump-the-numbers game - concerns that are already hitting GM's stock price, because getting out of this sticky situation is going to be expensive.

There's one way to solve this problem, but it ain't cheap
This is awkwardly timed, to say the least. GM is planning to unveil its all-new full-sized pickups next week, at a special event in Detroit. Production of those pickups will start early next year, and it's an understatement to say that the launch of the new Silverado and Sierra are absolutely critical for the General.

So what will GM do? I suspect it'll do the obvious: Hold a big honkin' pickup truck sale, starting pronto. It'll likely wind down production of the outgoing trucks a little earlier than planned as well.

That should alleviate the inventory concerns. But it won't help GM's fourth-quarter earnings: GM's margins are already lagging Ford's by quite a bit, and those pickups drive a big chunk of the General's profits. Stay tuned.

GM has come a very long way since its bankruptcy, but the truth is, the General is still very much a work in progress. Investors around the world are wondering if GM will reclaim its former glory - or whether its bad old habits will doom it to perpetual second-rate status. To help investors understand what's really going on at General Motors, I've put together a brand-new premium research report telling you what you need to know about GM and the state of its turnaround. If you own or are thinking about owning GM, then you don't want to miss this report. Click here now to get full access.

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