By Quentin Fottrell
General Motors (GM) may be on the road to recovery with a range of new models, but analysts say consumers may soon have to pay more for its cars as the company continues its restructuring.
The company is targeting a net income of $10 billion a year, the Journal reported Monday, and will make progress toward that goal by reporting a net income of around $8 billion for 2011 when the company releases its results on Feb. 16. That’s a big turnaround for a company that received a government bailout three years ago.
But GM may struggle to keep prices low as it rebuilds its empire, analysts say. It’s planning to raise its profit margin to 10% from 6%, CFO Daniel Ammann told the Journal. This may be bad news for consumers. “Higher prices equal higher profit margins,” says Joe Wiesenfelder, executive editor at Cars.com. He says transaction prices were depressed by overproduction and oversupply in recent years, which led GM to offer incentives like cash-back, but says GM is now better matching supply to demand. “GM runs a risky game if it increases prices,” says Alec Gutierrez, senior market analyst at Kelley Blue Book. “That’s not what we’re seeing from Ford, Hyundai Kia, Toyota and Honda.”
For its part, GM says by focusing on creating a simpler global production process, it can reduce costs and keep prices competitive. Jim Cain, spokesman for GM, says GM currently has a lot of complexity and duplication across its global production facilities in China, South America and Europe. For example, the days of an American renting a GM car in Europe they’ve never heard of may soon be over. Cain says the Chevrolet Cruze fuel efficient compact car is sold around the world, whereas its predecessor the Chevrolet Cobalt was not. The Cruise has a transaction price of $19,000 – $4,000 less than the Cobalt, he says.
Prices aside, tech features have become almost as big a battleground for car manufacturers as price, experts say. While the smoothness and ease of acceleration are always a major consideration for consumers, he says built-in GPS systems, weight reducing technology that saves on gas and entertainment systems are a priority too. “It’s astonishing how important it has become to many buyers, especially younger ones, that their smart phone interfaces with the car, supplying music, communication and other features,” Wiesenfelder says.
In 2012, GM faces another roadblock: the return of the Japanese car after production was slowed due to Japan’s earthquake in early 2011. “We can’t fixate on one competitor,” Cain says. As SmartMoney.com reported, Toyota sees global sales surging by 20% next year to 8.48 million vehicles after falling by 6% to 7.9 million vehicles. Plus, Toyota’s incentive per vehicle has risen while the U.S. car industry has been pulling back on incentives. One advantage in GM’s favor: Ted Marzilli, a senior vice-president and global managing director of YouGoveBrandIndex, says Toyota’s brand was tarnished by recalls in 2010 and 2011.
And, despite Clint Eastwood’s “half-time in America” Superbowl advertisement for Chrysler, which gave a shout-out to manufacturing in Detroit, consumers are more focused on value than lineage. “I’ve seen no evidence that the desire to buy American cars strictly because they’re American,” Wiesenfelder says, but he says consumers will pay more for a cool design feature they like. Cain agrees that most people are focused on the best design and value, “and that’s how we’re approaching the business. We’re far from standing still. We’re actually moving very aggressively.”