Double-digit drops in US auto sales at General Motors and Ford in June pressures them to raise profit-eroding incentives to “ballistic” levels and could also spur costly production cuts, analysts told Reuters.
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The fall in sales by Detroit’s two largest automakers pushed industry-wide US auto sales to a nearly six-year low and added to evidence that the economy may not have been as robust as thought in the second quarter, industry analysts reportedly said.
“With (vehicle) inventory at critical levels, aggressive incentive spending will likely be necessary to maintain planned production schedules,” Goldman Sachs analyst Gary Lapidus said in a research note cited by Reuters. The automakers “would likely implement ballistic incentives before cutting 2004 production,” he said.
Analysts reportedly said the traditional two-week summer shutdown of Big Three plants in North America will help trim inventories, which are about 25% to 30% above ideal levels.
Ford will likely have to cut production next year, Lapidus said, according to Reuters, but other analysts reportedly said both GM and Ford may have to cut production sooner, in the third or fourth quarter.
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By GlobalDataThe news agency noted that production cuts have an immediate impact on automakers’ profits because they book them when vehicles are shipped from factories rather than sold to consumers.
According to the report, the Chrysler group posted a 1% gain in June sales, thanks to strong sales of its new Chrysler 300 sports sedan, but it also has bloated inventories of unsold vehicles – any increase in incentives by GM and Ford will also pressure the Chrysler group to match the offers.
Big Three production cuts would hurt earnings at suppliers also, UBS analyst Rob Hinchliffe told Reuters. “The risk at this point is maybe the suppliers don’t make their numbers for the full year,” he reportedly said.
Citing Autodata, Reuters said GM has been offering incentives averaging about $US4,325 per vehicle, which includes interest-free loans for terms of up to five years on many of its 2004 models.
Ford has been offering substantially lower incentives than GM, an average of $3,515 according to Autodata, the report said. But Ford will have to narrow the incentive gap with GM as it ramps up production of its top-selling F-Series pickup truck, Lloyd Hansen, Ford’s vice president in charge of incentives and marketing, told Reuters.
“We have a lot more of them (pickups) to sell … so we will become more competitive on incentives,” Hansen reportedly said.
Reuters said the sudden drop in car sales added to evidence that spending by US consumers slowed in June – the two largest US retailers, Wal-Mart and Target, warned of weaker-then-expected stores sales for June, but blamed the shortfall on cooler weather.
“We’re looking for a slightly weaker second quarter than we previously had,” Bank One senior economist Peter Glassman told Reuters. “It sort of pushed that growth that we expected toward the second half of the year.”
The news agency noted that other automakers, including Mitsubishi, Volkswagen, and Ford’s Jaguar and Land Rover brands, were also hit by the sudden downturn in June sales.
Reuters said Mitsubishi, which suffered a 48% drop in June sales and has been hit by a scandal in Japan over recalled cars there, offered a longer warranty on its vehicles sold in the United States and will also offer free routine maintenance, such as oil and filter changes and tyre rotation, for three years for cars and SUVs sold over the next two months.
With interest rates on the rise, analysts expect more of Mitsubishi’s type of unique incentive offers as a means of backing away from interest-free loans, the Reuters report added.
