ARLINGTON, Texas – Roughly 100,000 Chevy Tahoes, GMC Yukons and Cadillac
Escalades are stacked on dealers' lots nationwide, a supply that is about
50 percent higher than average.
A few years ago, General Motors Corp. would probably have dealt with the
glut by slowing production of the vehicles for a while. But on Monday,
the GM assembly plant here resumed weekly overtime.
It expects to build 6.6 percent more Tahoes, Yukons and Escalades this
year – a projected annual total of 234,506 trucks.
In this new business era for the auto industry, GM is relying on cash
flow from its most profitable products to fund incentives and cover
hefty employee health care and pension costs – keeping production up
even when inventories are adequate, officials say.
BRAD LOPER/DMN
Julia
Lewis- Russell touches up the paint on a Chevy Tahoe at the
Arlington, Texas, General Motors plant, where employees are working
one hour of overtime each day.
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"Though the market is slow, it's sales and marketing's job to sell more
product, and they've done a good job," said plant manager Mike Glinski,
pointing to promotions such as the 24-hour test drive and employee
discount certificates. "We as a company want to look at how we can sell
more profitable vehicles, and we happen to be building profitable
vehicles."
Some industry analysts estimate that GM's full-size SUVs generate $8,000
or more each in gross profit, which would permit the Arlington plant to
contribute at least $1.8 billion this year to the company's gross profit.
"These are very important products as far as profitability," said GM
manufacturing spokesman Dan Flores. "We're running some overtime at some
of our [full-size] pickup plants. And most of our full-size SUV plants
are on overtime for a variety of reasons."
The 2,700 hourly employees at the Arlington plant are now working one
hour of overtime daily. In August, they are scheduled to start working
one or two Saturdays a month as well, Mr. Glinski said.
Extra production is scheduled because some dealers expect the economy to
improve and don't want to be caught short-handed when it does, officials
said. Also, GM and the other domestic automakers, now in labor talks
with the United Auto Workers, typically fatten up their inventories
during negotiations in case of a strike.
But revenue is a major driver for the scheduled overtime, which costs GM
about $35 an hour per worker.
Recording revenue
Like others in the industry, GM records its vehicles as revenue when they
roll off of the assembly line – before they are actually sold to dealers,
the automakers' primary customers. All of the vehicles have been ordered
by a dealer or a customer, GM says.
"In most plants, you have a 'pay point,' " Mr. Flores said. "The point
is where the vehicle is turned over to a carrier and the plant books the
revenue."
Since about 2001, when the stock market began to sag, the Big Three
automakers have essentially put a priority on cash flow, rather than
profit. Maximum production of profitable vehicles may be the best way
for the domestic automakers to contend with their high costs, said Dr.
David Cole, director of the Center for Automotive Research in Ann Arbor,
Mich.
"We're in a different ballgame now, a very challenging and difficult
period," Dr. Cole said. "Keeping volume high is important because it
allows you to spread the [health care and pension] legacy costs over
more volume."
But it also requires the automakers to be "extremely aggressive" with
incentives – which are approaching an average of $4,000 per vehicle – or
inventories can quickly get too high, he said.
Last week, GM said its second-quarter profit fell 30 percent because of
high costs and slowing sales. Although total corporate revenue was $48.3
billion – the same as in second quarter 2002 – net income declined to
$901 million. At GM's North American division, profit plummeted from
$1.28 billion a year ago to $83 million.
Unconventional model
Mr. Flores acknowledged that GM's approach isn't widely admired on Wall
Street. But it works for the company, where employee health care and
pension benefits account for nearly $1,900 of the cost of every vehicle
built.
"From a GM perspective, we've set up our business model for what's best
for us," Mr. Flores said. "Certainly, there are some questions about it
from analysts and our competitors. But with our legacy costs, it's in
our best interest – and the best interests of our workers – to keep our
plants running."
The Arlington plant is ready to do its part, said Mr. Glinski. For the
last couple of weeks, the plant has worked 40-hour weeks coming off the
recent two-week summer shutdown at all GM facilities.
Though the plant has been on overtime for nearly two straight years, the
extra work is not an issue in local labor negotiations.
"We understand that the auto industry is cyclical," said Jimmy Conway,
president of UAW Local 276, which represents GM's hourly employees at
the Arlington plant. "When we have work, we work."
Dr. Cole of the Center for Automotive Research said the bigger question
for GM and other automakers is: How long can this business model be
sustained?
"In the past, we had high volume and high profit," he said. "Now, we
have high volume and low profit. I look at this entire period as a
transition."
The problem is, no one seems to know exactly where the industry is
headed.
"The plane has taken off, it's heading someplace pretty fast, but we
don't know where it's going or who's on board," Dr. Cole said.
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