Ballooning inventories will test GM's resolve

DETROIT -- The stout sales discipline that's producing huge profits for General Motors has a troublesome side effect: GM's vehicle inventory has ballooned 28 percent since Aug. 1, to the highest level in nearly nine years.

Crowded dealership lots could force the automaker to make more production cuts -- beyond the layoffs of 2,000 workers in Michigan and Ohio announced last month -- if demand slips in 2017. Heading into the slower winter season, the situation shapes up as a critical test of GM's determination to resist profit-eroding incentives and fleet deliveries as relief valves.

It also reveals a stark contrast between GM's rosy outlook for the industry and the pessimism at Ford Motor Co., which has reduced output this fall with downtime at many of its North American plants. While Ford warns of threats to its financial goals and reduces inventory to prepare for a slowdown, GM's production and inventory keep climbing.

GM's inventory as of Dec. 1, 873,200 vehicles, is the highest of any month since February 2008, when it had four more brands to support and less-flexible union contracts that made it tougher to adjust production as consumer demand rose and fell.

"Incentives are elevated, residuals are declining, and rates are rising," Brian Johnson, an analyst with Barclays Capital, wrote in a Dec. 2 note to clients. "And while GM in particular may benefit in the months ahead from new product launches, it's important to recognize that GM's inventory is elevated at the moment, and it wouldn't surprise us if they need to announce another production cut -- which could pressure the stock."