Other Editorials

GM's Bitter Medicine

Thursday, June 1, 2006

New York - Alarmists will undoubtedly seize upon General Motors' 16% drop in vehicle sales last month as further proof that the once-mighty carmaker's death is fast approaching.

After all, GM (nyse: GM - news - people ) has lost a full three points of market share since last May--to 22.5%. That's an astonishing decline in an industry where carmakers tussle for every one-tenth of a point.

But rather than sympathy, GM deserves congratulations. It's doing what it said it would do: cutting back on costly consumer incentives and discounts to rental companies, even if it means sacrificing market share. Sales to daily rental fleets were down 28%.

The new marketing strategy, which includes lowering sticker prices closer to actual transaction prices, is a critical component of Chief Executive G. Richard Wagoner's turnaround strategy for GM, which lost $10.2 billion last year.

But May's sales results show just how painful that recovery will be. While GM was losing ground, Toyota Motor's (nyse: TM - news - people ) sales rose 17% and Honda Motor's (nyse: HMC - news - people ) increased 16%. And GM's domestic rivals fared better, too. Ford Motor's (nyse: F - news - people ) sales fell 2% and DaimlerChrysler's (nyse: DCX - news - people ) sales fell 11%.

At GM, car sales were down 19% and truck sales fell 13%. But among newly launched models, there were signs of hope. Its redesigned large sport utility vehicles, like the Chevrolet Tahoe and Cadillac Escalade, for instance, are off to a good start, despite high gas prices.

GM has a strong lineup of new vehicles in the pipeline, including a bevy of attractive new Saturns and replacements for its highly profitable Chevrolet Silverado and GMC Sierra pickup trucks. Marketed correctly, they'll sell themselves.

The question is whether GM has the guts to stick with its plan as the summer selling season heats up. On June 1, Ford startled GM and other rivals with an aggressive model year-end clearance offer of 0% financing on most 2006 cars and trucks, plus $1,000 in free gas.

Paul Ballew, GM's executive director of global market and industry analysis, told journalists and investors that GM doesn't want to match the offer. "We may need to tweak how we go to market, but we don't want to overreact. We don't want to deviate from the strategy," he said. Still, he acknowledged that GM is feeling the heat: "Ford has done some things here recently that increase the temperature."

GM needs to stay the course. It's on a path to right-sizing its business. By mid-June, some 30,000 GM and Delphi (nyse: DPH - news - people ) workers are expected to accept GM's special buyout offers to speed attrition. When the announced plant closings are completed over the next couple of years, its remaining factories will be operating at 105% of capacity, instead of the wasteful 90% they averaged in 2005, according to productivity experts Harbour Consulting.

For years, critics have contended that GM was inflating its sales with costly incentives. Now, they're finally letting the air out of the bubble. A smaller GM just might be a more profitable GM.