July Autos Sales Highlight Small Cars' Success

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GM separately announced on Friday a stunning $15.5 billion second-quarter net loss (BusinessWeek.com, 8/1/08). Standard & Poor's (which, like Businessweek.com, is a division of The McGraw-Hill Companies (MHP)) this week downgraded GM's, Ford's, and Chrysler's debt deeper into junk territory and expressed concern about the companies' burn of cash reserves in the current difficult economy, as well as continued exposure to the downturn in demand and residual values of pickup trucks and SUVs.

In the last week, Ford, along with GM, Chrysler, and several banks, have dramatically retreated from automobile leasing because of declining resale values and challenging capital markets. When the finance arms of auto companies write a lease, they have to bet on what the value of the car will be at the end of the lease. Guessing what pickups and SUVs will be worth three years from now has become impossible.

Chrysler, GM, and Ford executives all said Aug. 1 that consumers will be seeing more cash incentives in the marketplace as a result of the pullback in leasing. The cash is meant to help consumers with down payments, as well as help people whose trade-in vehicles are worth less than the balance on their loans. Cash incentive spending is already up. Nissan and Chrysler are offering nearly $10,000 in incentives on their pickup trucks. Cash deals on large SUVs has gone up $2,000 at some automakers, making some deals worth a total of $6,000 to $8,000.

A Silver Lining?

One of the other big worries for car companies is the tightening of consumer credit. Ford's Farley says it would be a major concern for the second half of the year as would-be car buyers find they can't lease cars or get new ones without sufficient cash in the deal. GM's LaNeve says, "If you are buying a $20,000 car and trying to finance all of it, you are going to need pristine credit."

Tightening credit will hamper some companies more than most. Chrysler, Mitsubishi (7211.T), Suzuki (7269.T), Hyundai, and Kia all have bases of buyers whose credit quality lags industry averages.

There is a silver lining for consumers, if not for automakers. Holding on to a car longer, and waiting out the economic recession, is easier than ever. Because Japanese automakers and the publication of quality ratings have pushed all automakers to increase quality and reliability, vehicles are built to last a decade and more than 150,000 miles. That is significantly more than automakers engineered cars for a decade ago.

Click here to read more about GM's staggering $15.5 billion second-quarter loss.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.