Mark Graban

Is GM Smoking Something?
July 12, 2008

Industry News: GM To Offer Zero-Percent Financing, Raise Prices, Screen Hummer Buyers

It's very hard to figure out what GM is thinking these days. In the first link above, the Jalopnik blog highlights an inconsistency I also noticed... it's the old laws of supply and demand popping up again. It always amuses me, in a way, that this basic law of microeconomics is even considered a "Lean lesson" because Toyota leaders like Ohno wrote about it. The basic supply and demand laws dictate the prices for just about everything -- unless you are a monopoly provider or a (obscure econ word warning...) "monopsony" buyer (meaning you are the only buyer, or one of a few buyers for an item). There's no board game called Monopsony that I'm aware of.

GM likes to flout the laws of supply and demand, as evidenced in the Japopnik post. GM says they are raising 2009 prices for the typical excuse of "rising material costs" -- the last excuse of a scoundrel. Just because your raw materials and inputs cost more, that might mean NOTHING to your buyers and their valuation of your final product. Just because flour prices have gone up (and they have), that doesn't mean people are willing to pay more for bread and pizza. It's simple supply and demand economics.

So while GM announces they plan to raise prices in 2009 (a "price rise," as they call it here in England -- ah, the small differences), they were also offering ZERO PERCENT financing to buyers recently (basically a price cut). If you're having to cut prices to spur demand, why announce you're raising prices? Because you can? Good luck with that. I'm sure we'll be treated to yet another annual story about how GM no longer plans to rely on incentives and cheap financing to move metal. Let's see what they have to do to artificially prop up the June 2009 numbers (see "robbing Peter to pay Paul.") Pulling ahead sales from future months is such a laughably short-term strategy (and old habit) .... but again, typical GM.

So while GM is bitching about price increases, they're also (guess what) still attempting to squeeze those damn steel suppliers who are (guess what) trying to increase steel prices because of... wait for it... their rising material costs!!! Yes, we are living in bizarro land. The steel suppliers are now exerting THEIR market power for a change. And I bet GM doesn't like how that feels. From a WSJ article on this:

As emerging countries increase their need for steel to build infrastructure, commercial buildings and automobiles in their respective countries, the demand for steel has outstripped supply. That has caused prices to shoot up, most drastically in the past year.

That has left U.S. auto makers, which had long dominated steelmakers during negotiations, in a weak bargaining position. For decades, U.S. auto makers were the steelmakers' most lucrative customers and bullied them into selling them long-term contract steel at discount rates.

When you bully suppliers, they want to come back to bully you when they get the chance. Shouldn't be surprising... you reap what you sow?

Posted by Mark Graban on July 12, 2008 | Comments (0)