Smith Faculty Opinion Article	October 27, 2006
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

GM Reports Quarterly Loss - Train Wreck Ahead?

Today, GM reported a quarterly loss of $115 million--a significant improvement over the 2005 loss of $1.7 billion. Excluding special items associated with restructuring, GM recorded a net profit of $529 million.

A key part of GM strategy, like Ford, has been to better align sticker prices with actual transactions prices, and reduce various incentives and discounts. In the balance, both have sought to raise net prices. GM is at a sweeter point in its product cycle than Ford, but both may be sweeping problems under the carpet.

The key question is: are GM and Ford sacrificing too much in sales to be profitable? Clearly Ford is, and likely, so is GM.

According to Edmunds.com, GM and Ford have unsold inventories of about 88 and 84 days respectively, well above the norm of 65 days and Toyota's 26 days. At Chrysler the figure is well above 100 days, not including the 50,000 vehicles it has spread around Detroit in parking lots unassigned to dealers.

The vehicles are booked as sold but those transactions don't include unanticipated incentives. Hence, unless demand picks up for their vehicles, GM, Ford and Chrysler will have to engage in huge fourth quarter or 2007 discounts, and this will result in massive losses.

Factoring in Chrysler's projected loss of $1.5 billion, the Domestic Three lost between $2 and $8 billion in the third quarter, depending on what special items really are not reoccurring.

When it comes time to clear the dealers lots, GM will be in the soup. It will have lots of company with Ford and Chrysler.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.