Buy A Car, Get 50 General Motors Shares

From the WSJ:

The steady stream of bad news coming from the U.S. automotive industry prompted one Texas dealer to take some creative license on its latest incentive: Buy a new car, get 50 shares of General Motors (GM) stock.

Frank Kent Motor Co., based in Fort Worth, will give away the shares to the first 100 customers who buy a Cadillac, Buick, Pontiac, GMC or Hummer. The stock gift, currently valued around $325, would be in addition to any incentive offered on the vehicles.

“We thought this would be a way for us to break through the clutter that is out there, give back to our customers and hopefully create some more faith in America and GM,” said co-owner Will Churchill.

Dealers and auto makers have been pushing incentive boundaries all year amid a souring economy that has kept consumers out of showrooms. Earlier this year, Chrysler offered a gasoline card that locked in costs for buyers of new vehicles at $2.99 a gallon for three years. Volkswagen offered to deposit $1,500 into a college account for customers who make a down payment on the new Routan minivan. A few dealerships have even offered half off their pickup-truck inventory.

The stock gift could raise some eyebrows since GM shares are at their lowest levels in six decades. The dealership has already spent $30,000 to buy about 5,000 shares in preparation for the offer, Mr. Churchill said…

…October is shaping up to be one of the worst sales months for U.S. dealers this year. Sales of cars and light trucks in September dropped 27% from a year earlier to 964,873 vehicles, the first time since February 1993 that monthly sales fell below one million.

Ford Motor sales have dropped 17% through Sept. 30 while GM has declined 18% and Chrysler has fallen 25%. The declining sales have fueled speculation that there could be a U.S. auto maker consolidation with GM acquiring Chrysler.

The fundamental problem with the incentive and promotional programs offered by Detroit is that by establishing themselves as the low cost provider, they’re actually cementing the idea(s) in the minds of customers that they’re products are lesser/inferior/not as valuable as those offered by the competition. In other words when Consumers elect to spend more money on a Honda Accord vs. a Chevy Malibu they feel like they’re getting more value for their money, so offering a Chevy Malibu for less (or selling it with deep discounts, incentives, etc) simply validates the consumer’s original opinion.

E.g. discounts aren’t going to work in a marketplace where the consumer has explicit stated that they would rather pay more for the competitor’s products.

Better yet who has the more valuable product: the company that has to give away part of the company and bribe you with heavy incentives to buy their cars, or the company that offers minimal incentives and sells more cars despite having higher prices? Detroit cannot sell the American consumer on the value of their products when they have to damn near give them away in order to get them off the lots.

Not to mention the fact that the foreign automakers are often a more attractive array of products; no one cares if a product they’re not interested in is on sale/offered at a steep discount. It’s hard to sell people on the idea of “Buy American/Have Faith in Ford/GM/Chrysler”, if the consumer question feels as if they have to choose between the foreign car they want and a domestic one they think is inferior/they’re not especially interested in. At least, that’s often how I feel when I get ads in the mail from the local domestic dealers.

Mind you I understand the potential economic damage that would be caused by one of the Big 3 failing, but what average consumer can afford to make a $20-$30k sacrifice just to save Detroit?

Discounts aren’t the solution, Detroit has to rebuild their brands, sell the consumer on the value of their cars and simply build world-beater products so that the guy with the Accord feels like he got a raw deal compared to his neighbor with the Malibu.

Admitted the above is easier said then done and it’s a hard think to think about when you’re just trying to product market share and halt sliding sales, but it’s the only thing that will save Detroit in the long run.

Of course for the time being Detroit has to worry about its immediate survival and at this point (recent merger deals notwithstanding) I think the American car companies my have to become GSEs to survive, it’s fatuous to think that two failing companies that are burdened with product duplication, weak brands and debt up to the stratosphere can survive by joining forces. GM already has too many brands and buying Chrysler’s (with what money?!) isn’t going to solve anything; it’s nothing more than a desperate shot to get at Chrysler’s credit lines and is only a very short-term solution that creates significantly larger medium to long-term problems.

You can read more here.

Source:

The WSJ: “Buy a Car, Get a Stake in Company” — Jeff Bennett, October 20, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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