PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
To get a feel for how schizophrenic the U.S. auto market is becoming, take a stroll through Frank Ursomarso's Ford dealership. The Wilmington (Del.) dealer says he has "flat sold out" of the new Focus subcompact, but across the showroom floor, F-150 pickups require hefty rebates to move, even though they were selling "hotter than pistols" until recently.
U.S. auto sales are starting to cool down from recent all-time highs. June sales inched up just 0.2% from a year earlier, to a 16.9 million-unit annual rate, well off February's blistering 19.2 million pace. Perhaps more telling, though, a sharp split is emerging between autodom's leaders and laggards. The disparities could signal tougher times ahead for Detroit, especially if rising rebates continue to crimp profits.
Lehman Brothers Inc. analyst Nicholas Lobaccaro calls it the "Tale of Two Cities Effect": The best of times for vehicles in high demand, the worst for older models. At DaimlerChrysler's Chrysler operations, for example, sales of its aging mainstay minivans are off 7% this year and carry rebates as high as $2,000, while the hot new PT Cruiser is sold out through yearend, rebate-free.
HOOKED.
Carmakers' response to slow-sellers: Slap on more rebates. As a result, average marketing incentives -- rebates and subsidized lease and loan deals -- hit a record $2,456 per vehicle in June, up 64% from a year earlier, says Art Spinella, general manager of CNW Marketing/Research in Bandon, Ore. Detroit has grown increasingly addicted to incentives to move cars customers don't much want.
Take the sport-utility vehicle. Three years ago, the average SUV incentive equaled 2.5% to 3% of the truck's price. Today, as the field gets increasingly crowded with new models, that incentive runs 10%, Spinella says.
But big rebates don't necessarily create big sales. In June, incentive-light Japanese and European auto makers fared far better than Detroit's Big Three, despite the latter's record levels of rebates and cut-rate financing. Honda, with incentives averaging a modest $1,581 per vehicle, according to CNW, posted a 16.1% sales gain, and Toyota, averaging $1,809 per auto, had a 7.8% sales increase. At Chrysler, where incentives averaged a juicy $2,482 in June, sales fell 9.8%. General Motors Corp.'s sales fell 5.4%, despite incentives averaging $2,457 per vehicle. Marvels Spinella: "GM is throwing money at the market at a phenomenal clip, and it continues to lose market share."
PROFIT-SAPPING.
Rebates and incentives take a toll on the bottom line. Just look at GM's profit margins in the first quarter, when the auto maker piled incentives on slow-selling cars. Despite an 11% rise in revenues, to $46.9 billion, the auto giant's net income shrank 14% in that period vs. the year before, to $1.8 billion. That pushed net margins to 3.8%, from 4.3%. GM Chief Financial Officer J. Michael Losh blames that decline entirely on lower prices.
So why bother with profit-sapping rebates? Because auto makers need to run their factories nearly full tilt or they lose money from high fixed costs. GM, for instance, is using just 90% of its plant capacity, while Ford uses 95%, says Merrill Lynch & Co. analyst John A. Casesa. GM says the way out of this pickle is to increase the percentage of popular trucks in its lineup. So it's dedicating 70% of its product spending through 2002 to that category.
But that strategy is fraught with risk. Steeper gas prices have auto execs fretting that consumers may begin to balk at the prospect of $100 fill-ups for their jumbo SUVs. In the Midwest, where pump prices are topping $2 a gallon, GM is already seeing the first signs of a shift away from trucks, says Paul D. Ballew, the company's director of market analysis. In the past six weeks, he says, GM's car-truck mix has shifted to 55% cars from its previous 50-50 split. Still, Ballew quickly adds that a fundamental trend isn't building -- and that steep gas price hikes are temporary.
CHEVY WORRIES.
If persistently high gas prices, rising interest rates, or a slowing economy eventually cause consumers to slam the brakes on auto purchases, the industry's weaker players will bear the brunt. Dealer Gordon Stewart worries more about his three Chevy franchises than his Toyota store, whose buyers are better heeled. "Chevy will get hit a little harder because of its customer base," he says.
Merrill's Casesa figures players like DaimlerChrysler, with a strong roster of new products on the way, and the perennially strong Toyota and Honda, will prosper. "I think this is going to be another slowdown where the Japanese will gain share," he says. Then the rebate-fueled battle to stay in the game will really heat up.
By Kathleen Kerwin, with David Welch and Joann Muller in Detroit
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
