July Autos Sales Highlight Small Cars' Success

While nearly every automaker was punished last month in North America, small, fuel-efficient cars offer a lifeline

If July sales for the U.S. auto industry show one thing it's this: If it doesn't have a good fuel-economy story, it's not moving out of dealer lots—it's crawling.

Overall, Ford (F) sales were down 14%, General Motors (GM) sales sank 26%, and Chrysler fell 29%. Imports were not spared either. Toyota (TM) sales were off 14%, and Honda (HMC) was down 2%. Nissan (NSANY) once again was among the few gainers, up 8.5%, but only after ratcheting up sales incentives, including about $10,000 on its slow-selling Titan pickup truck. Volkswagen (VOWG.DE) was up 4%. BMW's (BMWG.DE) fun, fuel-efficient, and microscopic Mini was up 24% in July, and now there is a long waiting list to buy one.

Autodata said total light vehicle sales were down 13.2% in July vs. a year ago. Sales on the year so far are off 10.5%.

Automakers are scrambling to cope with a far deeper drop in demand than they anticipated earlier in the year. GM Chief Financial Officer Ray Young says "the second quarter this year has been one of the fastest-changing markets I have ever seen." Ford marketing chief James Farley calls the drop in July "breathtaking." Chrysler Vice-Chairman James Press says in 38 years, "it is the most challenging times I have ever seen."

Some Shortages

But within the numbers lies the real story. Cars are hot. The smaller, the hotter. Ford Focus retail sales are up 16%. Ford's SUV sales were down 37% and pickups/vans were off 22%. At GM, sales of small cars were up 17% and midsize cars had risen 34% year-to-date. But pickup truck sales last month were down 41%. In fact, overall sales at some companies including Toyota, Honda, and Ford would be higher if they could produce more small and midsize cars to meet demand. Toyota, which sold 197,424 vehicles last month compared with 224,058 a year earlier, has a four- to six-month waiting list for Prius hybrid cars. "We don't have enough of some of our cars to sell," says GM sales and marketing chief Mark LaNeve.

Ford's Farley notes that the company was seeing a surge in demand for its fuel-efficient Ford Focus in Texas, traditionally a limp market for compact cars, as a large percentage of purchasers traded in F-Series pickup trucks.

Toyota is short of Corollas and four-cylinder engines. "Having the industry's most fuel-efficient lineup is of value to us so long as we have the right product mix in our showrooms," says Jim Lentz, president of Toyota's Torrance (Calif.)-based U.S. sales division. "That's why we're accelerating production of four-cylinder models and quickly responding to market conditions."

Consumer Burdens and Incentives

GM estimated that the industry sales rate was the lowest since August 1992. "We're basically in a period that feels a lot like 1991 and 1992 when we had a similar recession," says Michael DiGiovanni, GM's chief sales analyst. "There's a lot of negatives out there that are obviously weighing on the consumer."

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.

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