Guzzler-Based Strategy Prompts Layoffs, Draws Wall Street Warning as Oil Prices Soar

(LOS ANGELES) October 26, 2004 -- General Motors' rollout of a third gas-guzzling Hummer model at this week's California International Auto Show in Anaheim marks yet another critical misstep by the embattled auto giant, signaling more hardship for its workers and shareholders. Record oil prices have already saddled GM with rebate costs as high as $6,000 on many of its full-size SUVs, but the company is plunging ahead with a dead-end strategy that threatens additional layoffs and loss of market share.

"General Motors seems intent on riding the gas-guzzler business model all the way to the bottom," said Roland Hwang, the chief motor vehicle analyst at NRDC (Natural Resources Defense Council). "Unfortunately, management is taking company employees, suppliers and shareholders along for the ride. That's an expensive mistake at a time when the economy can least afford it."

Sales of the current Hummer H2 are down more than 20 percent since last year. This week, an entire shift was laid off from the Indiana factory that produces the hulking truck. But Hummers aren't the only ones hurting: stuck with a record-breaking glut of formerly popular SUV and pickup models, GM and other U.S. automakers were forced to ladle out massive "incentive" packages to clear dealer lots this fall. GM also announced this month that it is laying off 900 factory workers at a Michigan plant that makes Chevrolet Silverado and GMC Sierra full-size pickup trucks.

Yet dire problems persist. According to the Detroit News this week, at least one GM dealership in Missouri has resorted to giving away a free compact car with the purchase of a Chevy Tahoe, Suburban or Silverado Crew Cab pickup.

"Sure, some people will buy this truck," said Hwang. "The question is whether and how long GM can stay afloat while ignoring the new market reality of growing oil dependence and rising pump prices."

Warning From Wall Street

Wall Street has not overlooked GM's problem. This month Standard & Poor's cut the company's long-term credit rating to "BBB-minus" - one step above junk bond status - citing concerns about heavy discounting, weak profits and rising oil prices. Fitch Ratings also cut GM's long-term rating, and Moody's says it may follow suit. S&P also downgraded the GM's short-term rating.

"Buyers are sending a loud signal that it's time for a new direction, but that signal is falling on deaf ears," said Hwang. "Today's market is more about brains than brawn. Do the math. If the company wants to succeed in the long haul, it needs to be investing in cleaner, more efficient technologies."

GM depends even more on gas-guzzlers than its competitors. Like Ford and Toyota, about half of GM sales are classified as light trucks, but Hwang said GM's pickups and SUVs tend to be bigger and heavier than its rivals, making GM especially vulnerable to a sustained upturn in oil prices. GM spent an average of $4340 in incentives for every light truck it sold in August; September figures are expected to be higher.

Humming Along in the Slow Lane

Despite a smaller price tag and reduced heft compared to its stablemates, the new Hummer H3 unveiled this week looks like the wrong idea at the wrong time. A downsized version of the hulking H2, the H3 officially gets only 16 mpg in the city, 21 highway, leaving it squarely in the middle of a highly troubled segment.

Meanwhile customers are waiting as long as six months to pay full price for tens of thousands of hybrids from Ford, Toyota and Honda. But GM's own hybrid program is stuck in the slow lane. Retreating from grandiose plans advertised nationwide last spring, the company now says it will sell just 2,500 "soft hybrid" Silverado pickups this year, to customers in only six states. The modest technology in the Silverado delivers a 2-mpg increase in city driving, and only one mpg in combined city/highway use.

"GM needs to put its hybrid programs into high gear, or it will fall even further behind in the race for market share," said Hwang.