Why GM, Ford and Chrysler Should Resist Temptation and Go for Profits, Not Sales

(MoneyWatch)  The U.S. auto industry is approaching a fork in the road between a "push" strategy, where supply exceeds demand, and a "pull" strategy, where the industry builds only enough cars to meet demand.

The Detroit Three followed the "push" strategy right up until bankruptcy last year for Chrysler and General Motors and a close call for Ford (F). With too many cars chasing too few customers, the automakers offered ruinous discounts that corroded the brands and killed profits. High gas prices and the credit crisis delivered the coup de grace to a business model that could not work.

Chrysler, Ford and GM all say they've learned their lesson, and that they intend to stick with a "pull" strategy. As difficult as that is, it's easier to do when they are in crisis mode and with Chrysler and GM still carrying out the restructuring they undertook in U.S. Bankruptcy Court.

Will they stick to that resolve? We'll know more at the next fork in the road, when customer demand starts to pick up again.

In particular, General Motors is visibly impatient to get sales going; the company has already had a couple of shakeups in the sales and marketing leadership. GM Chairman and CEO Ed Whitacre needs some positive results prior to taking GM public later this year. The danger is that he could be tempted to go back to discounting to goose sales; this has, after all, been Detroit's knee-jerk reaction for years. The recent big incentive offers at Toyota (TM) could increase the pressure to lower prices.

A leaner, meaner and more profitable GM can probably afford the discounts more easily, but going in that direction would still be a mistake. The emphasis needs to be on making profits, not just sales, and on restoring prestige to its brands. GM says some of its new models, such as the Buick LaCrosse, are commanding higher prices, but there are a lot of models in the lineup that are not brand-new, including much of their bread-and-butter pickup truck and SUV line-up.

There is evidence that consumers are willing to pay more for good cars. Though sales were lower, customers at some of the nation's biggest chains paid $1,000 to $2,000 more per car in 2009, to an average of more than $30,000 per car. At AutoNation (AN), for example, the country's biggest auto dealer, new-car unit sales fell 25 percent, but revenues per new car increased about $800 to $31,155. The gross profit per new car increased 5 percent, to $2,106 per car. Results for other publicly-traded chains were similar.

When it comes to a "pull" strategy, then, the dealers certainly get it. The jury is still out, however, on whether the carmakers will go back to their bad habits.

Photo: Cars.com