July Turns Up the Heat on Detroit

Thanks to declining truck sales and uninspired products, U.S. auto makers have another bleak month as the Japanese post solid gains

Unfortunately for the big three domestic auto manufacturers, history isn't repeating itself. Unlike last year's blockbuster July sales, figures announced on Aug. 1 appeared dismal in comparison. A year ago, domestic auto makers blew cars out the door with such big attractions as employee pricing for everyone.

After surprising analysts last month with a $123 million second-quarter loss, Ford Motor (F) said its July sales were down 34% compared with the same month last year. Even worse, sales of light trucks and SUVs, Ford's bread-and-butter business, dipped a staggering 44.1%, from 243,228 in June to 136,014.

In a prepared statement, Al Giombetti, president of Ford and Lincoln Mercury sales and marketing, characterized the monthly results as "solid." But Ford's market share fell 4 points for the month to 15% and is down 1 point so far this year to 17%, underscoring the trouble Chairman and CEO William C. Ford Jr. and his "Way Forward" restructuring plan will have returning to profitability by 2008.

The picture at Daimler-Chrysler (DCX) was just as bleak. The Chrysler Group reported a 37% plunge in sales, with a 40% decline in truck sales. Sales languished despite the company's attempt to rekindle last year's sales frenzy, the result of aggressive employee-pricing discounts offered by all the domestic manufacturers. This summer, Ford and General Motors (GM) have yet to bite, leaving Chrysler with heavy price cuts and market share that is dropping from 13.8% to 13% this year.


  GM, meanwhile, revealed a 19.5% decline in vehicle sales to 410,332 vs. 530,027 during the same period last year. But the company's market share was 27%—a big improvement from the 22% to 24% GM has been tracking for most of 2006. Paul Ballew, director of market and industry analysis for GM, admitted that incentives and other marketing programs have played a role in July's market-share gains, but said new cars like the Buick Lucerne and Pontiac G6 are also making gains.

Plus, GM's strategy of cutting sticker prices to emphasize value rather than the fire-sale marketing ploy of big rebates is taking hold with consumers, says Jim San Fillippo, an analyst with Automotive Marketing Consultants.

It is important to note that Americans are still buying cars—they just aren't buying American cars. Overall, the Big Three are still struggling to fend off Japanese competition. At the same time, they are battling headwinds from higher interest rates and fuel prices, which crimp household budgets for new cars, Ballew says.

But foreign car companies facing the same economic realities continue to make gains. Toyota Motor (TM) sales were up 12%, while Honda (HMC) gained 6%, and Korean Hyundai was also up 6%. Nissan continues to struggle, with its sales plunging an unsightly 20% for the month.

Analysts, speaking after the announcements on Aug. 1, suggested that the drastically expanded scope of last year's July sales served to exaggerate the losses. "Last year's numbers were inflated," says John Wolkonowicz, senior market analyst for North American autos with Lexington (Mass.)-based Global Insight. "The reality is these huge declines are due to the incentives last year."


  Analysts also identified some rare bright spots for both GM and Chrysler: New full-size pickup trucks are due this fall from Chevrolet and GMC. Both models have been redesigned inside and out, unlike Ford's mainstay F-Series, which was last overhauled for the 2004 model year.

Most notably, though, the trucks incorporate active fuel management and variable valve timing technologies to pump up fuel economy. "Style aside, this is going to wind up being about fuel economy," says Wolkonowicz. "These trucks are going to make everything else look like yesterday's dinner."

A strong upcoming lineup that includes a mixture of minivans, small cars, and crossover vehicles puts Chrysler in a similar position. Analysts concur, however, that employee pricing has largely been a misstep. Despite the tactic, the company still has 560,210 vehicles on hand in its nationwide inventory. The vast majority of those are unsold trucks.

When hammered on a conference call on Aug. 1 about the recently announced extension of the program, which had been slated to end that day, executives insisted the campaign had momentum. "The campaign was designed to do more than one thing," said Mike Manley, Chrysler Group vice-president of sales strategy and dealer operations.


  The promotion does include television spots that feature Daimler's Chairman, Dieter Zetsche, intended to highlight the mix of German and American technology found in the company's vehicles. But the incentives component doesn't appear to be spurring sales.

The results of a survey conducted by Bandon (Ore.)-based CNW Marketing Research show that outside the industrial Midwest, Northeast, and Atlantic states, barely 10% of potential new car buyers understand German engineering as a positive attribute. CNW's President, Art Spinella, says the incentives were unlikely to work as well the second time around: "Frankly, they're stuck now that GM and Ford haven't followed suit. They have to tough it out."

Serious questions loom over Ford. The company highlighted growth in sales of its newest sedan, badged as the Ford Fusion, Mercury Milan, and Lincoln Zephyr, none of which were available this time last year. Sales of all three models are up 18% from June. The most successful of these, the Fusion, has sold more than 71,000 units since the beginning of the year, well on the way to meeting Ford's 100,000 annual target. But both those numbers still pale in comparison to the 218,517 Toyota Camrys and 178,116 Honda Accords sold in the same time period.


  Ford is preparing refreshed 2007 models of its larger Ford Expedition and Lincoln Navigator SUVs, two traditionally strong sellers. Both are bound for showrooms next month, and the Expedition is aggressively priced at just under $30,000. The 2006 Explorer, however, landed with an ungainly thud when it was similarly redesigned and reintroduced in North America.

Analysts are divided over those coming models' potential. "People covet the new," Spinella says. Wolkonowicz counters that he "would expect another thud," though he calls the introductory price of the Expedition "very attractive, indeed."

The most serious concerns remain common to all three manufacturers, though. All count on midsize and full-size SUVs and full-size trucks for the majority of profits. It's clear now that consumers are actively abandoning at least two of those pillar segments. Says Spinella, "It's true that last year was way out of whack, but the fact is these markets have dried up."

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