Though there have been some distinctly upbeat predictions from other sources this week, the newspaper USA Today said in contrast that the U.S. auto industry is facing tough times even though new vehicles are selling at a near-record pace.
The big problem, USA Today claimed, is that there is so much competition. Vehicle makers therefore can’t raise prices when U.S. consumers are also expecting big incentives and this slashes profits.
The industry is expected to report March sales as much as 10% lower than strong sales a year ago, the newspaper said.
”Yeah, you can paint a bleak picture. But our view is that the level of sales . . . is a very healthy rate,” Ford sales analyst George Pipas told USA Today.
But, the newspaper said, others are fretting. It noted that Lehman Bros. warned only last Friday that ”we are on the doorstep of an auto industry downturn of unknown magnitude.” Lehman added that it has begun to study ”what a recession would mean to the auto sector,” to predict what stocks might persevere.
According to USA Today, several factors are causing concern.
The vehicle makers spent an average of $2,503 on rebates and incentives for every car and truck sold last month, up 42% from $1,763 a year ago, according to CNW Marketing/Research. ”They’re piling on incentives like crazy,” CNW’s Art Spinella told the newspaper.
In addition, USA Today said, CNW calculates that vehicle makers need to sell 16.4 million units in the USA this year just to break even. That’s up from 16.2 million last year and only 14.3 million in 1996. The current pace of 16.3 million to 16.7 million would push some manufacturers into loss if it lasted all year.
USA Today said that the break-even point increases as the vehicle makers add features and accessories to offer a better deal than rivals but they then can’t raise prices enough to cover the improvements and instead have to discount models to remain competitive.
Production and job cuts are also taking valuable vehicles and their profits out of the loop, the newspaper added.
For example, Ford is cutting one shift and 850 workers from its Michigan truck plant indefinitely, starting this month. That, the newspaper said, will chop 65,000 units a year from the 270,000 Lincoln Navigator and Ford Expedition full-size sport-utility vehicles built there.
Yet large SUVs are the industry’s most profitable vehicles with Ford earning about $14,000 on an Expedition and $18,000 on a Navigator. USA today also said that Ford closed its Wixom, Michigan plant this week, halting production of pricey [and presumably profitable] Lincoln large car models though it is expected to open the plant again next week.
USA Today also said that about six percent fewer prospective new vehicle purchasers are visiting showrooms this year than last. That will be reflected in sales in three or four months’ time, CNW’s Spinella said.
But USA Today closed its report on a brighter note: U.S. used car showroom traffic is up about five percent.
CarMax, the only surviving used car chain, told the newspaper that strong sales were encouraging it to open two more stores this year, four to six more in 2003 and six to eight more by the end of 2006.
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