Penny Wise; Pound Foolish

When February's sales numbers came out, there were several stories to tell. One of the most impressive gains, at first glance, was the incredible 49% jump  posted by General Motors. The fly in the proverbial ointment, though, was the cash GM was laying on the hood to get buyers into showrooms.

GM immediately started defending their spending, among the highest in the industry, as "targeted incentives," meant to raise sales in months that are traditionally slower.

"Our plan was to get off to a quick start this year, and we did just that," said Don Johnson, vice president, U.S. Sales Operations. "Having the right vehicles in inventory, combined with aggressive advertising and targeted consumer marketing has been the key to our success in the first two months this year."

Once crunched, though, the numbers paint a clear picture: GM is paying dearly for those sales. When comparing Average Transaction Prices (ATP) to average incentives, GM is second only to Chrysler when it comes to putting cash on the hood:

Incentive % of ATP by company, February 2011

   1. Chrysler: 13.1%
   2. GM: 11.1%
   3. Nissan: 9.8%
   4. Toyota: 8.5%
   5. Honda: 8.5%
   6. Ford: 8.1%

A near 50% jump in sales is remarkable, but where did those sales come from? In addition to aggressive cash back, extremely discounted financing, and low down payment leases, GM offered current lessees the equivalent of up to 4 months lease payments if they turned in early. There are certainly those of us who believe GM's product didn't magically appeal to 50% more people than they did in February of 2010, but that they've simply pulled ahead sales from the next few months into February's numbers.

And this is what will be a true test of "new" GM. They've said that they will roll back incentives to below-average later this year, so that their levels would be average by the end of 2011. They're going to have to decide which is more important as those months draw nearer: Trying to restore the pricing integrity they've sacrificed in January and February, or keep up their high incentive levels to continue winning the sales race.

I certainly know which way I think this will go, but as a domestic car fan I hope I'm wrong. No matter which way they lean, a lesson will be learned: Momentum is a naturally occurring event, despite their best efforts to manufacture it.