A Cold July for Carmakers
Scott McCormick remembers 2005 as the good old days. The 45-year-old attorney was so flush from a 50% gain in the value of his house in Bergen County, N.J., that he splurged on a third car despite having only two drivers in the house.
Today, he still has the BMW (BMW) M3 performance car that he always wanted. But even though he would like to trade in his 2002 Toyota (TM) Avalon sedan, he won't because his current house in Ann Arbor, Mich., has lost nearly 20% of its value in just two years and he's feeling pinched. Says McCormick: "I guess I should be glad it's a good quality car, because I think I'll want to get three more years out of it."
McCormick is one of the legions of consumers and would-be car-buyers who are making an already-tough time for several carmakers a bit grittier. Traditionally, the dog days of summer have been a good time to buy an outgoing model-year car as the dealers tried to make way for the new ones. But this year as they wait for better news about the housing market—which has been hit by high energy prices and the tightening of credit due to the increase in subprime mortgage delinquencies—more and more older cars are staying in the driveway.
Revising Previous Estimates
The light traffic at U.S. car dealerships caused big declines in sales last month at General Motors (GM), Ford (F), and Chrysler, and even drove down monthly sales at sales juggernaut Toyota for the first time since 2004.
Sales in July were so soft despite heavy spending on rebates that some automakers are revising their previous estimates for 2008 industry sales, as well as their own individual sales. "We are going to reassess this once we get the final data for the July sales," said Ellen Hughes-Cromwick, Ford's chief economist.
Paul Ballew, GM's sales analysis chief, said the industry is facing a tough rest of the year: "The twinfold headwinds of gas prices and housing are clearly having an impact on the business," he notes. Indeed, the extent to which Americans between 2001 and 2006 tapped their rising home equity to buy new cars is only now becoming apparent to car companies and dealers as these drivers stay away from showrooms.
No Help From Rebates and Incentives
Ford's sales were down 19%, while GM reported a 22.3% drop. Chrysler sales were off 8%, and Toyota reported a 3.5% drop. Not including Lexus or Scion, sales of Toyota brand vehicles were even worse, sliding 10%. "The industry stumbled this month, on continued housing weakness," said Toyota's North American sales chief Jim Lentz.
The average new car incentive, including cash rebates and subsidized financing deals, was $2,524 per vehicle in July, up 4% from a year earlier, according to industry tracking service Edmunds.com. The Detroit-based manufacturers spent the most courting customers with Chrysler at $4,082, followed by GM at $3,130, and Ford at $2,984, on average, Edmunds said. But Japanese companies also discounted aggressively in July. Toyota increased its incentive spending almost 48% year-over-year to $1,492 per vehicle in July, while Honda's (HMC) spending jumped 28% to $1,146.
The truck and SUV market is taking a beating from high energy prices and the housing market's softening. Because builders and contractors are big buyers of pickups, the two categories tend to track together. Sales of Ford's F-Series pickups were down 18% in July.
A Few Bright Spots
And Toyota's launch of its all-new, much-ballyhooed Tundra pickup has been much slower than expected—despite big sales incentives offered on the first day it went on sale last January. GM, Chrysler, and Nissan (NSANY) truck sales are off as well. It's a nasty hit to Detroit automakers, who still make most of their per-vehicle profits from trucks and SUVs, while they make nothing or very little on passenger cars.
As is always the case, automakers with brand-new models in the categories that are in demand are doing the best. Nissan, for example, posted a 2% gain—in large part driven by a new subcompact Versa model that is good on gas and has been well-reviewed in the automotive press, as well as a redesigned Altima sedan that comes in a hybrid version for better gas mileage. Nissan's truck and SUV business, though, was down 10% and 12% year-to-date, respectively. Honda's was off 7% in July.
The brands that subsist in the middle of the market,—neither snazzy and cheap nor posh and premium —are suffering the most. Those with a lot of emphasis at the bottom and top of the market are weathering the slow times better.
Korean carmaker Kia (KIMTY) posted a record month, just barely ahead of July sales a year ago. Mazda's Mazda3 sedan, its cheapest car, was up 27% in July. At the other end of the spectrum, BMW posted a 20.1% sales gain, while Land Rover was up 19%. Audi, Porsche (PSEPF), and Lexus were all pretty much flat, compared to a year ago, which is pretty good considering the overall industry performance.
Consumers who have been sitting on the fence about buying a new car will want to check newspaper ads in August, because the incentives to buy should get even richer as carmakers try to save the summer despite a lousy July.