Markets & Finance

Second-Half Outlook: Autos


Domestic auto manufacturers are facing stiff headwinds moving into the second half of the year. Industry analysts say that continually increasing competition in nearly every market segment, the yoke of debt weighing on some, and looming summer incentives similar to those offered by auto makers in the fall of 2005 promise to make the rest of the year and the beginning of 2007 challenging at best.

Auto sales in the U.S. since the beginning of the year are down slightly, to just over 6.8 million light vehicles, after reaching a high in 2005 according to figures published by Automotive News. Standards & Poor's expects overall 2006 sales to fall slightly, to 16.8 million, down from last year's peak of just under 17 million. Morningstar figures that, barring major shakeups in the oil or housing sectors, sales could be as low as 16.6 million.

THEY CAN'T RESIST. Standards & Poor's equity analysts are predicting sharp decreases in sales at all of the Big Three manufacturers. Shares of General Motors (GM) closed down nearly 7% on June 27, on news of worse-than-expected sales forecasts. Despite internal balance-sheet gains made at GM—it will save anywhere from $1 billion to $8 billion this year in a worker buyout program engineered by top brass—sales are down 8%, and market share has fallen to 23.7%.

DaimlerChrysler (DCX) and Ford (F) also continue to struggle, while Toyota (TM) is coming on strong (see BusinessWeek.com, 7/10/06, "The Toyota Enigma").

To grab whatever sales it can, DaimlerChrysler is rolling out an aggressive incentives campaign, mating rebates with 0% financing on all but the most popular vehicles, similar to employee discount schemes. That may force the hands of both Ford and GM, which have been reluctant to hamper restructuring efforts by offering similar plans.

Wes Brown at Iceology, a Los Angeles consumer research firm, thinks the two won't be able to resist. He says, "I guarantee you, no way Ford and GM are going to be able to sit by not doing anything with another month or two of sales like this one."

Growth at Toyota, which is not facing internal restructuring or overstocked inventory, is expected to slow as it comes closer to eclipsing GM as the world's largest auto maker. Efraim Levy, S&P auto equity analyst, says despite a generally positive picture, the earnings outlook at the Japanese giant, which is aiming to increase global market share by five percentage points, to 15%, by 2007, is mixed. "Near-term profitability is being suppressed by increased investments in new plants and research to support long-term growth," he says.

MORE OF THE SAME.And analysts generally expect U.S. auto makers to continue losing market share to Toyota and others. They say high gas prices may erode the effectiveness of incentives as demand for fuel-inefficient sport-utility vehicles dries up. Most fear that such incentives do more harm than good, effectively training consumers to wait longer to buy new vehicles. Levy says of GM, in particular: "They'd be foolhardy to get too aggressive; it'll devalue the brand and pull out sales away from down the road."

Morningstar's auto analyst, John Novak, says investors should look for modest gains at niche-parts suppliers providing safety and fuel-efficiency technology, but expect largely more of the same from the big manufacturers. "It's tough to see the upsides, and there's more risk to the downsides," he says. "Unfortunately, I don't envision too many positive headlines."

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