GM Earnings: Discounts Are Down, and the Sky's Not Falling

Last Updated May 18, 2010 8:11 PM EDT

Maybe it's too soon to cry, "The sky is falling!" just because General Motors and other big car companies have ratcheted up their incentives lately.

Resorting to higher auto incentives is a troubling trend, but it may not be as dire as I recently wrote. It turns out that discounts at GM were so high in GM's pre-bankruptcy days, that by comparison they really are much lower now. General Motors insists that despite its recent Spring Event discounts of zero-percent loans for up to 72 months on some models, it has more or less steadily cut its average incentives per unit since a recent peak of close to $5,400 in February 2009 (see chart; the bars are incentive levels; the lines are market share).

The company said that in April its average incentive was about $3,000. That was a couple of hundred dollars higher than March, but obviously a big improvement from the recent past.

It's unusual for a car company to disclose so much detail for its average incentive figures, but GM in its first-quarter results wanted to prove that it really is sticking to a strategy to cut incentives and capture higher transaction prices for new models as they are introduced.

Cost-cutting, higher production and cutting back on incentives were all big contributors to the fact that GM posted net income of $865 million in the first quarter, versus a loss of $6 billion for pre-bankruptcy GM in the year-ago quarter, according to GM Vice Chairman and CFO Chris Liddell.

"The profitability picture is markedly better than a year ago, even marginally better than the fourth quarter," he said in a conference call.

GM has lowered its breakeven point to an annual level of about 11 million for total U.S. sales, Liddell said, which is about where the U.S. market is now. That's quite an achievement since GM had trouble consistently achieving a profit a few years ago, when U.S. sales were 16 million or even 17 million per year.

"The important thing is, the company is profitable at the bottom of one of the worst cycles we've seen," he said. The master plan is to keep the breakeven point where it is now, and then become hugely profitable when demand picks up.

The recent small increase in incentives is a small step in the wrong direction, but not enough to derail the whole plan.

Chart: GM