Are you being hella stupid?

Ramit Sethi · September 1st, 2005

I’m working feverishly on an entirely new series on entrepreneurship. Before I launch that, here’s a related article that caught my attention.

Remember those recent auto ads about employee pricing that flooded the market recently? The ones about “Buy it for same the price we pay”?

General Motors lost an average of $1,227 for each vehicle in the first half of the year in North America, while its crosstown rival, the Ford Motor Company, lost $139, according to new research from Harbour Consulting.

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From the article: G.M. Sold Lots of Cars and Lost $1,227 Each

Yes, these low-priced offerings resulted in lots of sales and some change in market share, but all in all, the company lost money. That’s what happens when you combine selling lots of cars for a really low price and an aging workforce that you promised to support.

In this case, more sales = bad. But in the short term, it looks great because all the charts go up and everyone looks really smart!!

Get a life, please. Long-term, this is bad.

And I think this relates to personal finance and entrepreneurship in a big way. Sometimes we make decisions that get us great short-term gains but sacrifice long-term ones. The cost is significant.

I know this sounds a little vague, but I’ll go into it more. Soon. And with some examples that will make you think, I hope.

Stay tuned for the series on entrepreneurship. If you have anything you want me to write about, you know what to do.

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  1. They may have lost money on the initial sale, but they’ll more than make up for it on the financing and parts and service. At this point GM is a finance company with a sideline in auto manufacturing.

  2. And still people wonder how this company has such a low market cap.
    Their cars are bugridden, they make an operational on every car. Will they survive?

  3. When GM sells a car with a low interest loan, the manufacturing division pays GMAC (the financing division) the difference between market rates and the low interest loan. Originally they did this to cut down on the profit sharing of their employees: union and low level white collar workers got profit sharing bonuses on manufacturing division profits, and the upper tiers of white collar workers get paid bonuses on the corporate wide profits.

    Further, to make the numbers even scarier than they are, profits on SUVs are about three times the profits on passenger cars. What would the loss be if they had only passenger car levels of profitability?

    Gerald, no, I don’t think any US car manufacturer will survive.

  4. I agree with Ramit about sacrificing short-term gains for long-term gains. However, from a business perspective, GM has to get rid of the excess old inventory to make way for the new inventory because cars depreciate in value as time passes. GM can’t sell 2005 model cars as new cars (even if they are new) in 2006. Sure, they lose money when they sell the cars but it cuts down their losses. What else can they do with the excess inventory? I don’t trust American cars because of their reputation for poor reliability. For GM’s long-term benefit, I suggest they start looking here.

  5. “Cost” is relative, especially in manufacturing. Many plant overhead costs still apply, wheather the line is producing cars or not .. and then there is also the need to move inventory .. all the sub assemblies that are contracted out in advance and on hand for assembly of cars. Lastly there is the issue of “street” price which is determined by market conditions, not by costs. GM, or any other car maker wouldn’t be selling vehicles below the “street” price and they have many tools at their disposal to evaluate what the “street” price every day. For an economist, I’m a bit surprised you don’t know and dwell on these issues rather than some mindless splashy headline grabber.