Detroit Automakers Rein in Overproduction

Detroit’s Big Three automakers have learned some hard lessons and made some sweeping changes in the way they do business over the last year. According to some in the industry, the move away from the push production model is among the most critical.

The push model that has dominated domestic automaker’s production philosophy for years was based on overproduction, higher throughput by a bloated dealer network, and huge incentives. In short, they churned out an overabundance of vehicles in order to keep their factories running regardless of whether or not consumers were buying, forcing them to offer discounts that drove down residual values.

Ford Motor Company and Chrysler Group have already moved away from the push production model and General Motors Corporation appears to be moving in a similar direction.

According to Automotive News, Detroit’s Big Three began the New Year with the lowest inventories since the publication began keeping records in 1992. For example, General Motors began 2010 with a 52-day supply of vehicles, which is comfortably below the accepted ideal level of 60 days.

Between 2004 and 2007 the U.S. market generated average annual sales of 16 million vehicles, and still production by all three Detroit automakers outpaced the demand. GM and Ford lost a combined $59 billion during the period.

Sergio Marchionne has vowed to wean Chrysler away from such “cheap practices of volume acquisition.”

With Ford under the leadership of Alan Mulally and Ed Whitacre ensconced at the helm of GM, it now appears that Detroit has embraced a new production philosophy that builds the models and volumes that consumer demand warrants.

For the past six months, inventories for all automakers, including domestic companies, has averaged 63 days, aided in part by last summer’s Cash for Clunkers program. As 2010 began, they stood at a healthy 53-day supply.

For Detroit, reducing incentives and stabilizing inventories is critical and the rewards could be huge.

In December, GM dropped its incentives to an average of $2,500 compared with $3,900 during the same month in 2008.

CEO, Sergio Marchionne, says that Chrysler must find its real production level and grow inventories accordingly. During 2009, the automaker’s U.S. market share plummeted to 8.9% from 12.9% in 2006. Marchionne has reportedly said that he wants to see further reductions in inventories with 45-days as his target supply.

Ford began reducing inventories in 2006, prior to the arrival of Alan Mulally as the company’s CEO. Mulally continued the trend and in January said, We chose to act boldly and actually reduce the production to the real demand.” Between 2005 and 2009, Ford reduced production by 43% and during the last six months of 2009, offered incentives ranging between $300 and $700.

GM is the last Detroit automaker to move to the leaner approach to production. In 2001, the company’s deep discounts were credited with jump starting auto sales following the devastating effects of September 11th. When competitors cried foul, the company’s CEO, Rick Wagoner, told them to stop whining.

GM has slashed inventories by 56% over the last year and the company’s head of sales analysis Mike DiGiovanni says, “We’re a company that’s now more focused on profitability.” He says that means No more pushing inventory into rental sales, overproducing and turning to huge incentives, losing money on leasing,”

Although Detroit appears to be on the right track, some analysts remain skeptical.

Autofacts’ North American lead analyst, Dan Montague said, “I give the industry credit for doing a fairly efficient job of removing excess capacity, to the extent that they were able to, but he warns, The real challenge right now is to be very vigilant about adding back manufacturing capacity.”

AutoNation CEO Mike Jackson puts it more succinctly saying, “You have to be skeptical after 30, 40 years of doing it the wrong way,” but concedes, So far, so good.”

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