Sales Doldrums Cripples General Motors

Declining truck sales and a bunch of condemnation have weakened General Motors Corp.'s turnaround plan, threatening to outdo the automaker's product successes and cost-cutting efforts of the past year.

GM's June sales were down 21 percent from a year ago, with sales down seven percent year to date. The automaker’s June sales report reflected surprising weakness in its new full-size pickup trucks, a key to the automaker's comeback plan. The continuing sales doldrums etches doubt over GM’s early recuperation. In this regard, the dealers are calling for higher incentives to alleviate the waning sales.

An investment analyst downgraded the largest American automaker on Thursday, fueling a three percent decline in GM shares. And with GM still burning cash in its key North American operations, analysts said second-quarter earnings due out later this month are expected to be less than stellar.

"We believe the near term outlook may get rocky," Deutsche Bank analyst Jochen Gehrke wrote in a research note in which he reduced GM's 2007 production and earnings forecasts. "We see no reason for GM to post strong earnings or market share trends over the next few months."

Particularly upsetting is that sales of the redesigned full-size pickup trucks dived 23 percent, while sales of Toyota Motor Corp.'s redesigned Tundra, more than doubled. The Tundra pickup was backed by no-interest loans and other incentives adding up to $5,083 per pickup, according to auto data firm Edmunds.com.

"The bottom line was that it was a tough quarter and a first half that was weaker than we expected," GM sales analyst Paul Ballew said. The Detroit automaker blamed the decline on its strategy of scaling back incentives and low-margin fleet sales, though the extent of the drop surprised critics and analysts alike. Also, foreign rivals offered more aggressive discounting than predicted, which wounded Detroit's automakers.

Knoxville, Tenn.-based Chevrolet dealer Jim Quinlan said GM's Chevy Silverado is as good as advertised but it is being hurt by attractive deals on the Dodge Ram and Toyota Tundra. "We are just not in the game on incentives," he said. "We are not competitive at all."

Pointing to distressing June sales and a market made volatile by rising gas prices and continuing worries in the mortgage market, Bear Sterns analyst Peter Nesvold downgraded GM's stock to a peer perform rating from outperform. Nesvold reinforced his GM rating less than a couple of months ago, saying the automaker could gain significant concessions from the United Auto Workers.

GM's troubles put even more pressure on the automaker and the UAW to reach a deal that will help the automaker cut labor costs. The labor question is the lingering unknown in a turnaround that began after a $10 billion loss in 2005, said auto analyst John Casesa of the Casesa Shapiro Group. Since then, the automaker has fruitfully eliminated waste and downsized to cut costs. It's also becoming clear that the automaker's market share woes aren't going to lift dramatically anytime soon, he added.

"On revenue, the company is struggling, on cost it has done a fabulous job -- the open question is labor relationship," Casesa said. "The turnaround will hinge on automaker's ability to forge a radically different relationship with the UAW." He added the stock price drop isn't cause for too much concern, given GM's gains over the past year.

"We nonetheless believe structural changes will be significant," Gehrke wrote. "And that these changes will prevail in the intermediate term." With reliable cost-cutting measures, product launches, and enhancements of auto parts including the Saturn body kit, GM, according to some analysts, could still get better.