The auto industry, including Detroit manufacturers, reported strong sales numbers for the month of August. Sales for the industry rang in at pre-recession levels hitting over 16 million units on an annualized basis. While General Motors got its fair share of the wealth, one unusual tactic to drive sales stands out. That is the use of "stair-step" incentives which are paid to dealerships in the month following the reported sales.
Stair-step programs pay dealerships based upon predetermined sales goals being reached at showrooms. As higher goals are attained, more incentive money is allocated towards each vehicle sold. Automotive News reported last week that GM has been "running an unusually broad" level of the incentives. It also seems "unusual" that the brand new Chevy Impala has been included in the program.
Using the stair-step tactic allows GM to report a lower amount of incentive spending for the month. As GM proclaims that its spending is at low levels, hidden incentives like the stair-step (along with GM Card incentives) are not included in the numbers. During its sales conference call, GM also hinted that ad spending is on the rise. The Impala stands out as the new vehicle being hyped at GM as they point to the recent lofty reviews by Consumer Reports. If the car is such a great value, why are they spending money on hidden incentives to help sell the vehicle?
It appears that the Impala might be becoming the new flagship at Chevy and GM, replacing the Chevy Volt as the most hyped car. The Impala and Chevy Volt both received positive commentary from Consumer Reports. While the Volt couldn't live up to the hype, it is now important for GM to assure that the Impala does not become the second much-hyped vehicle to fall short of sales expectations. Stair step programs are one way GM can boost sales without appearing to be spending heavily on incentives.
A second question arises as GM points to Consumer Reports reviews in its media communications to promote its cars. Why is the company allowed to be in repeated violation of Consumer Reports' "No Commercial Use Policy?" Here's a snippet from the policy:
At Consumer Reports, we believe that objective, impartial testing, reviews and Ratings are critically important for consumers. That is why we have a strict "No Commercial Use Policy" preventing the use of our name and information for any promotional or advertising purposes. The policy helps ensure we avoid even the appearance of endorsing a particular product or service for financial gain. The policy also guarantees that consumers have access to the full context of our information and are not hearing about our findings through the language of salesmanship.
Why it's important
For consumers, our No Commercial Use Policy provides peace of mind that the information they are receiving is free of influence, bias or commercial interference.
For manufacturers, service providers and other retailers, adhering to the policy bolsters their own reputation for honesty and integrity. Our more than eight million subscribers to our information products and services recognize and support our organization because it allows them to make their own purchasing decisions based upon expert, independent, unbiased reviews and recommendations.
While I haven't seen any TV ads boasting of the high marks the Impala and Volt received from Consumer Reports, GM has referenced the reports on conference calls as well as crony websites like GM Authority and GM Inside News touting them. According to the Detroit News, GM CEO Dan Akerson even referenced the Impala reviews on the latest earnings coference call. Akerson previously pointed to Consumer Reports customer satisfaction ratings when hyping the Chevy Volt.
Consumer Reports' policy states, "We encourage consumers, businesses and others to report any apparent commercial, advertising or promotional use of any Consumer Reports content." Well Consumer Reports, if you weren't already aware, consider the GM use of your material reported!
Look, the auto sales for August was good news, but the fact remains that GM has not been very trustworthy since the Obama Administration appointed the management there. The sales jump in August may or may not be sustainable. Even GM's management refused to update its sales projections for the year. GM will do whatever it takes to give the appearance that it is now a risk-free investment. Particularly since the government and the UAW still have to unload their shares of GM stock on the public.
There are many bright signs at GM, but the risks remain. A recent study showed that quality at GM, along with Chrysler and Ford, are lagging the competition. Focusing only on GM, the Chevy Malibu (which sells in the most popular mid-size segment) has to compete with the Honda Accord, Toyota Camry, Hyundai Sonata, Nissan Altima and Ford Fusion; a very tough field. If GM has to rely upon tricky incentives to compete, profitability will be hurt in the end. The added cost of UAW labor makes the task even more difficult.
Betting against GM while the Obama Administration is in office is kind of like betting against the Harlem Globetrotters. You can be assured that GM will get whatever help it can to maintain the appearance of success and profitability. Government-owned Ally Financial continues to finance vehicles and inventory for the company. There is no telling what other ways our government might influence such a politically important company. Eventually, however, GM will have to survive on its own in a very competitive industry that currently is supported by a low interest rate environment, loose credit and a bounce-back from recession-level sales. That may not be as easy as it currently seems.
Mark Modica is an NLPC Associate Fellow.