Inventory Levels Of These GM Plants Still In "Danger Zone" Even After 2 Hurricanes And 6,000 Job Cuts

Over the past two months, General Motors" stock has rallied nearly 30% on the notion that hurricanes in Texas and Florida solved the company"s nagging inventory problem.  But, even after two of the most devastating hurricanes in U.S. history wiped out hundreds of thousands of vehicles and GM"s preemptive elimination of some 6,000 jobs, Automotive News says the company still has a ways to go at certain plants if they want to bring system-wide inventories down to healthy levels. 

Even after cutting more than 6,000 jobs this year, General Motors might need to further shrink its manufacturing operations to address bloated inventories of some vehicles amid plateauing U.S. sales and pressure from Wall Street to avoid overproduction.

 

The majority of GM"s U.S. assembly plants, including some where a shift already has been eliminated, produce vehicles that on average have at least an 80-day supply, 33 percent more than what the industry generally considers healthy, according to estimates from the Automotive News Data Center.

 

"The danger zone is definitely consistently staying in that 80 to 100 days," said Joe Langley, a senior analyst at economic forecasting and data company IHS Markit. "The ultimate red flag is when volume is at that 120 days or more consistently and incentives aren"t moving the needle."

 

GM has at least seven U.S. assembly plants that on average produced vehicles with greater than an 80-day supply entering October, including four that have more than 100 days, according to the estimates. That does not include GM"s two U.S. plants for the Chevrolet Silverado and GMC Sierra, because pickups commonly have higher inventories to meet demand for a variety of trim and feature configurations.

Making matter worse, it"s not just small passenger cars where GM is currently oversupplied as the company is sitting on 125 days worth of GMC Canyons and roughly 80 days worth of other "popular" pickup truck models.

Inventory numbers point to the potential for a cutback in Wentzville, which has run around the clock since spring 2015. It makes the Chevrolet Express and GMC Savana full-size vans and the Chevy Colorado and GMC Canyon midsize pickups. Slowing sales have left GM with an estimated 84-day supply of those vehicles as of Oct. 1, including 81 days" worth of Colorados and 125 days" worth of Canyons.

 

"The Colorado and Canyon have sold far better than they thought they would," said Ron Harbour, a consultant with Oliver Wyman. "At this point, they"re trying to figure out if this is a long-term trend or not."

 

Langley, the IHS analyst, said he thinks GM would need to cut a shift in Wentzville by next summer if inventories remain elevated.

 

"That"s the one big plant on the truck side that concerns me for getting a shift reduction," Langley said. "That plant is running at a level it was never designed for either. That"s been the story for a lot of these factories."

Of course, no matter how bad the company"s persistent inventory problem looks on paper, there is one group that simply couldn"t care less: GM shareholders.

US Auto Dealers Forced To Rent First "Overflow Lots" In 37 Years Amid Inventory Glut

Yesterday we noted that GM launched an aggressive incentive program in the month of February to clear out some of its pickup truck inventory.  In fact, incentives on the company"s Silverado were up 56% YoY to $6,996, while discounts on the Sierra were up 82% to $5,315 (see "GM Pickup Incentives Surge Over 80% As Auto Bubble Continues To Show Signs Of An Imminent Bust"). 

But apparently GM isn"t the only auto OEM who may have had to splurge on incentive spending in February to clear out inventory piling up on dealer lots.  Inventory days across the industry are up massively YoY and stood at 85 days at the beginning of February, up 22 days from January 1st and up 8 days compared to the same time last year.  As one Honda dealer told Bloomberg, the inventory pile up at his dealership has become so excessive that for the first time in 37 years of business he was forced to rent an overflow lot to park unsold cars in February.

For the first time in his 37 years working at New Jersey car dealerships, Larry Kull had to rent extra space to store unsold new Honda vehicles -- one of the latest signs that the record U.S. auto market is cooling.

Across dealer lots in America, inventory is piling up as automakers produce more cars than are being bought. Dealers had about 85 days worth of cars and trucks on hand at the beginning of February -- about 22 days more than at the beginning of 2017 and eight days more than a year earlier, according to Automotive News Data Center.

“The sales are good, I just have more product on the ground than I’ve had before,” said Kull, who has about 60 days of passenger cars including Civic compacts and Accord sedans stocked at an office parking lot down the road from his Honda store in Marlton, New Jersey. He prefers to have just 45 days worth of cars on hand.

Meanwhile, this news comes just as wall street prepares to digest new car sales data tomorrow.  Overall sales for February are expected to be down slightly while GM is expected to perform "best"  among the D3 on their massive incentive spending (though we"re not sure it"s much of a victory if you"re giving the cars way).

And the import brands are expected to have mixed results as well with VW benefiting from an easy YoY comp associated with their emissions scandal that effectively halted sales a year ago.

As we noted yesterday, there are only two ways to deal with the rising inventory conundrum: i) cut production or ii) splurge on incentives to sell more cars.  Unfortunately, financing terms for autos are about as loose as they can get and interest rates are now headed in the wrong direction so selling more cars the old fashioned way seems unlikely. 

Production cutbacks also have already begun. GM and Fiat Chrysler have eliminated shifts, laid off employees or scheduled days off early this year at plants making slower selling models including the Chevrolet Cruze compacts, Chrysler Pacifica minivans and Buick Lacrosse sedans.

While heavy inventory is a signal of potential pressure on automakers’ profits, it also boosts costs for dealers, which pay interest on inventory as well as any extra expense to store vehicles.

“No one likes to cut production or dial up incentives, and we’re seeing a bit of both,” Thomas King, an analyst with J.D. Power, said by phone. “We’ve got a lot of cars on the ground when the market is moving away from cars.”

Meanwhile, as one dealer points out, part of the inventory problem is a heavy mix towards cars when buyers are now looking to take advantage of low fuel prices and trade up to an SUV.

Raj Murjani, a sales manager at a Lexus dealership in Queens, said he’s selling about 40 or 50 fewer vehicles than usual this month. He sees the gap in popularity between SUVs and sedans continuing to widen, as low gasoline prices encourage consumers to switch to bigger vehicles.

“If it’s a person who’s been in a sedan and they got just the slightest taste of an SUV, they don’t ever want to go back,” he said. “They think going back into a sedan is a downgrade.”

Of course, we"re sure each of these buyers has done extensive modeling on the long-term equilibrium price for crude oil...