Wednesday, August 3, 2005

July is best month ever for auto sales

Employee deals clean out Big 3 inventories and boost market share, but slowdown could follow.

By Christine Tierney / The Detroit News

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U.S. car and truck sales jumped to a record last month, buoyed by a powerful consumer response to employee discount offers that boosted sales 16 percent to 1.8 million vehicles.

The previous record was set in October 2001, when GM introduced zero-interest financing after the September 11 attacks.

Detroit's automakers were the big winners in July, but enthusiasm over the sales bonanza was tempered by fears of a backlash that could weaken their precarious financial situation.

With their 2006 models, U.S. automakers are trying to wean customers off incentives by lowering sticker prices. But analysts worry their sales may suffer in the fall.

In July, General Motors Corp. took a 29 percent share of the U.S. light vehicle market after selling more than half a million vehicles. GM also slashed its inventories to the lowest levels in seven years.

"By our estimates, sales in July established a new benchmark above October 2001," said Paul Ballew, GM's top sales analyst.

By another measure, seasonally-adjusted annualized sales, July's performance translated into 20.9 million vehicles, the second-best month after October 2001's rate of 21.8 million.

Ford Motor Co. and DaimlerChrysler AG's Chrysler Group reported bigger sales gains after matching GM's program in July. GM initiated the employee discount plan for all buyers of 2005 models in June. All three automakers have extended their offers to run at least through Labor Day, and Ford is offering employee discounts on some 2006 models.

Ford posted a 30.5 percent rise in July sales -- and a 58 percent surge in sales of Ford F-Series pickups to 126,905. "We believe this is the highest sales for any nameplate in the modern era," said George Pipas, sales analyst for the company.

Chrysler Group sales jumped 27 percent last month. "A huge number of people went shopping for cars in July," said Gary Dilts, senior vice president for sales at Chrysler. "Part of that is probably the clarity of the deal, and part of it, we think, is some improved economics in the general marketplace."

Asian brands made gains, but at less than half the rate of the U.S. automakers. Among Japan's leaders, Nissan Motor Co.p. reported the largest sales increase of 15 percent even as it lowered incentives slightly from year-earlier levels, according to Autodata Corp.

Detroit's automakers clawed back nearly three percentage points of market share in July -- about 500,000 vehicles -- from foreign nameplates, relative to year-earlier levels.

But industry experts worry the U.S. automakers have simply pulled forward sales and will suffer a drop in demand for their vehicles in the future. Farmington Hills-based forecasting firm CSM Worldwide believes Detroit's automakers have pulled forward 200,000 sales from customers who would have bought the vehicles later in the year. It left its annual U.S. vehicle sales forecast for 16.7 million units unchanged despite the sharp gains of the past two months.

Domestic carmakers have been trying for three years to wean customers off incentives -- averaging more than $3,200 per vehicle -- and get them to focus on the price and value of the vehicle, said Steve Patton, vice president for the automotive sector at consulting firm Capgemini.

"Mentally there appears to be progress in getting people to focus on the price of vehicles," by offering the same price offered to employees, he said. "The next question is, if you take away this campaign and introduce fair-value pricing, does the consumer view this as value pricing? How long does it take to get the consumer to make the transition?"

It's a crucial issue for GM, which lost $2.5 billion in its North American operations in the first half of the year.

"There will be some payback," GM's Ballew said, predicting a drop in demand toward the end of August and into October. But he said GM was pleased with the employee discount program, which helped the automaker to reach more customers, tout its improving vehicle quality and reduce inventories as it begins a new model year -- with a new pricing strategy.

GM, Ford and Chrysler have set lower prices on their 2006 models to reduce the need for incentives, which have climbed nearly $200 per vehicle from July 2004 levels.

"The real element that drove the effectiveness of this program is that it was simple. That's what we're trying to do in 2006, keep it simple, with a real value proposition," Ballew said. "That doesn't mean incentives will go away, but our goal is to offer our consumers more value going forward and to do it in a very simple way."

Ballew said the economy's growth also boosted demand, as more people are finding jobs, wages are rising and consumer confidence is improving despite rising gas prices. With the strong sales gains of the past two months, the U.S. light vehicle market has risen 4.2 percent so far this year.

According to Autodata, GM's incentives were flat relative to year-earlier levels, while Ford and Chrysler had upped their discounts considerably -- by $250 per vehicle at Ford and by $389 at Chrysler.

Among the biggest Japanese automakers, Toyota Motor Corp. reported an 8 percent rise in sales after increasing incentives by nearly 14 percent to $1,037. However, that was less than a fourth of the average incentives offered by the domestic automakers.

Honda Motor Co. sales rose 10 percent, bolstered by strong demand for its light trucks and Acura premium vehicles. It has increased incentives by only 3 percent from last year's levels.

European brands posted mixed results, with Jaguar and Volkswagen tumbling, while Land Rover, the BMW and Mini brands, and Mercedes-Benz increased sales.

Among the various product segments, pickup sales were particularly strong in July. GM's pickup sales jumped 58 percent in July, for a year-to-date gain of 23 percent. "We're seeing the full-size pickup category continue to grow, as more competitors come in and there are more refinements, such as crew cabs," Ballew said. GM sold a record 160,686 SUVS in July.Ford slashed its inventory to 621,000 units at the end of July, down 229,000 from June's total. "We certainly have the inventory to support a strong sales month in August. There's at least one more month of steam in the summer selling sales period," Pipas said.

Detroit News staff writers Eric Mayne and Brett Clanton contributed to this report. You can reach Christine Tierney at (313) 222-1463 or ctierney@detnews.com.