Filed under: General Motors (GM), Marketing and advertising, Oil, Recession
GM (NYSE:GM) went back to massive incentives to move out inventory and keep its sales churning, at least at a modest level. Its product mix, with too many SUVs and pick-ups, is bleeding the company as more buyers move to sedans which burn less gas.
Under the company’s latest program, the big car company will “offer zero-percent loans for up to 72 months or cash rebates of up to $7,000,” according to The Wall Street Journal.
What may not be apparent, at least at first blush, is that the program costs GM some real money. It has to come up with the capital to finance the customer’s borrowing. It does not get that money without paying interest. GM sells a automobile, gives up the 4% interest it might have earned each year, and has to find capital to make the loan at a time when its corporate cash balance is falling..
The other problem GM has is that the rebates and low financing devalue the car itself. The consumer is getting a “cut rate” automobile. When the time comes to launch next year’s models, people are not going to be willing to pay big increases which include the normal annual price increase, but without the incentives. In theory, a buyer could move from $25,000 for a 2008 model of a GM sedan to $32,000 for the same model for 2009.
Incentives cut the price that GM can get on a brand, not just in the year it is sold, but for at least a year after. And, the money GM loans the customer is not “interest free” for GM.
Douglas A. McIntyre is an editor at 247wallst.com.
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