GM Uncorks Employee Pricing; Forget All That Stuff About Restraint

(MoneyWatch)  Forget what I said in April about General Motors "getting out of the volume game."

Having said that, here's another prediction: U.S. auto sales will stink in January 2009. I'll come back to that.

With regard to my April statement about GM's strategy, I definitely should have added, "within reason." Obviously, as the nation's biggest automaker GM is in the volume game. And if volumes fall below a certain level, GM is going to do something about it.

Until now, GM was showing at least some restraint with incentives, and with fleet sales. The company cut back, a little, on unprofitable sales to rent-a-car fleets, and resisted the temptation to throw good money after bad, by piling up incentives on vehicles that were already losing money in the first place, like the Saturn Astra. Mark LaNeve, vice president, GM North America vehicle sales, service and marketing, insisted repeatedly GM would not "buy market share" by cutting prices.

But that was before Aug. 19, when GM resurrected, "Employee Pricing for Everyone," the 2008 version of the mother of all fire-sale, end-of-model-year discounts. For instance, the 2008 Chevrolet Malibu, which has already been selling well without a big discount, gets an employee-discount price of $19,008.50 for the base model. That's $1,541.50 below suggested retail. The program has got to be costly for GM, even though some other cars and trucks already had such a big discount that employee prices might not be much cheaper. The deals expire Sept. 2.

In the summer of 2005, faced with a big inventory of unsold 2005 models, GM rolled out the first version of Employee Pricing for Everyone. It was such a big success, Ford and Chrysler reluctantly followed suit.

U.S. sales went through the roof. The Seasonally Adjusted Annual Sales Rate topped 20 million in July 2005. The SAAR is a closely watched barometer that tells how many cars would be sold in a year, if sales continued at a given month's sales pace. That was the highest monthly SAAR since a GM-led wave of zero-percent financing inspired a similar sales spike in 2001, following the Sept. 11 attacks. To put that 20 million monthly SAAR in context, the all-time record for U.S. auto sales was 17.4 million in 2000.

Now, about that January 2009 prediction: following the big sales spikes in late 2001 and 2005, showrooms were just about deserted in January 2002 and January 2006, and stayed deserted for most of the first quarter of those years. The auto industry calls that phenomenon "pull-ahead." People who were only kinda-sorta in the market were "pulled ahead" into buying their vehicles sooner rather than later. U.S. auto sales are typically slow in January anyway, but pull-ahead made them even slower than usual.

If the 2008 version of Employee Pricing for Everyone works, pull-ahead could be worse than ever when prices go back to normal, since demand is so low to start with. GM knows that, but the company must have made the tough call that the short-term sales crisis outweighed the downside of pull-ahead.

What if it doesn't work? Chrysler tried a version of Employee Pricing for Everyone for 2006 that fell flat. Ford and GM didn't even bother following suit. In 2008, maybe the worst-case scenario for GM and for the U.S. auto industry is that demand is so weak, not even the biggest discounts will work.

If demand is that low, sales will stink in January 2009, regardless. Having been burned once, I'll add a qualifier: January sales will stink unless something wild happens that nobody predicts, like gas prices suddenly nosedive.