General McClellan Senses a Change in the Weather

GM to Slow Production of Big SUVs Inventory Buildup Illustrates Risk of Near-Term Strategy As Gasoline Prices Stay High —Wall Street Journal

That’s the headline, and I am not making it up.

Back in December (“McClellan Awaits Battle…in Detroit”), I compared the slow pace of General Motors CEO Rick Wagoner’s movements to Abraham Lincoln’s most stubbornly lethargic senior general, George McClellan.

McClellan, as Civil War buffs know (WARNING: Civil War buffs are not normal human beings—mentioning “Civil War” to them is like making eye contact with that guy in the subway who looks sort of glassy-eyed and eager to tell you something IMPORTANT about THE FBI: you will regret it the rest of the day, if not your life) could not bring himself to fight.

With McClellan, it was always something: he didn’t have enough troops, he didn’t have enough equipment, the weather was bad (I am not making that up), or there was too much pollen in the air (okay, I made that up).

And so with Wagoner. Seems he just recently discovered that rising gas prices and heavy dependence on SUV sales do not make for a profitable company.

As today’s Wall Street Journal reports:

General Motors Corp. Chief Executive Rick Wagoner said the company will slow production of its new lineup of large sport-utility vehicles during the second half of the year to cope with rising inventory as average U.S. gasoline prices stay at more than $3 a gallon.

Gasoline prices higher, SUV sales lower—D’oh!

Three months ago my pal who works in the drum shop at the local Guitar Center told me he was ditching his used SUV for a used Camry, owing to the fact that it was costing him $60 to fill up his used SUV. “Can’t afford it, man.”

Now, you would think that somebody in Detroit—particularly a major executive who is highly paid to deal with changes in the economic environment in which his company operates—would have sensed this sort of thing coming when gasoline prices first hit $3.00 a gallon a year ago, after the hurricanes.

But apparently at least one major executive did not—or could not, or would not. As the Journal says:

GM’s earnings have benefited from building and stocking the new line of SUVs, which it has said would do well despite high gasoline prices because the vehicles are more fuel-efficient than competing models. But sales of the large SUVs to consumers haven’t kept pace with production. Large-SUV sales overall fell 22% through the first half, according to Ward’s Automotive Reports. According to Ward’s, GM built 106,334 Chevy Tahoes in January to June. According to Autodata Corp., 84,933 were sold in the same period, a 4.2% increase from a year earlier. As of the end of July, GM and its dealers had 82 days’ supply of unsold Tahoes, 89 days of unsold GMC Yukons and 75 days of unsold Chevrolet Suburban ultralarge SUVs. Historically, auto makers have aimed for a 60- to 65-day supply, or less, to avoid resorting to profit-draining discounts to clear stock. I realize that not everybody—even highly paid executives at Ford or Chrysler or Toyota—anticipated $3.00 a gallon gasoline prices, and that it’s not their fault that crude oil hit prices never anticipated by anybody except maybe Mark Faber, of the Barron’s Roundtable, who called for $80 oil years ago.

But, as Lincoln pointed out to McClellan whenever the general complained about the weather, generally speaking the weather is bad for everybody, not just McClellan.

According to the 2005 GM proxy statement, Mr. Wagoner was paid $5.5 million in total compensation in 2005. And $10 million the year before. And $12.8 million the year before that.

My guy in the drum shop was advising GM to stop making so many SUVs three months ago.

And his advice came free.

Jeff Matthews I Am Not Making This Up © 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.