NATION Automakers' incentives lead to rising sales and sinking profits

KNIGHT RIDDER NEWSPAPERS
DETROIT -- Despite lackluster sales in January and February, automakers say a March surge in buying has put them back on track for the first sales increase in four years.
But at what cost?
Once again, automakers are jacking up incentives to keep the sales rolling and deflate swelling inventories. So far this year, incentives are up 35 percent. Sales are up 4 percent.
Automakers say they need extra vehicles on dealer lots to handle the peak April-to-August sales season, and that incentives -- bonuses to dealers, cash for consumers, low-interest loans -- are just part of doing business these days.
But investors and Wall Street analysts are afraid the companies are just treading water through another year of profitless growth. If the pace of sales doesn't pick up considerably -- 4 percent to 5 percent higher for the rest of the year -- automakers may need to cut back production plans, which could include more temporary layoffs.
"No wonder we are seeing incentives going up even as management mouths satisfaction with auto sales," analyst Ron Tadross of Banc of America Securities said in a note to clients.
Analyst's concerns
Higher discounts spur sales, but hurt profits. The alternative is to cut production, which was half of the reason that Steve Girsky of Morgan Stanley lowered his expectations of Ford Motor Co. and General Motors Corp. profits in 2004 and 2005. (His other main concern was that interest rates will rise and squeeze profits out of the credit operations that have created most of the automakers' profits in recent years.)
All of the major automakers are expected to post profits in the first quarter of the year, but they aren't showing the sort of gains usually seen in an economic recovery. The stronger yen hurts Japanese automakers; American rivals just aren't getting many hot products yet.
For Detroit automakers seeking to gain market share, the stakes are high.
Three months into 2004, GM has gained 0.2 percentage points of the new car and truck market, while its average incentives have risen 42 percent to $4,226 per vehicle sold, according to Autodata Corp.
GM's share of the U.S. car and truck market was 26.8 percent for the first three months of 2004, up from 26.6 percent for the same period a year ago. This means GM has met its goal of not getting off to the same slow start it did in 2003.
While it is an improvement, 2004's share is still a sizable drop from the 28.3 percent share GM had for the first three months of 2002.
January optimism
As recently as the Detroit Auto Show in January, Vice Chairman Bob Lutz and other executives expressed hope that -- with 29 new or significantly improved vehicles from GM alone -- 2004 would be the year automakers could slow the rise of profit-eating incentives.
"We are, right now, putting like $4,000 on a vehicle. I'd hope to reduce it to $1,000 or $1,500 per vehicle," said Lutz at the Detroit show. "If only we could get that $4,000 down to even $2,000, then we would be enormously profitable."
So far in 2004, GM has not been able to back away from ever-higher incentives. Nor has any other automaker -- despite a number of new products.
The Chrysler Group's incentives also leaped by 42 percent, and it lost 0.1 percentage points of market share.
Ford Motor Co. boosted incentives by only 25 percent, and the incentives are running about $600 lower than at domestic competitors. But its market share tumbled by 1.2 points, to 19.1 percent, compared with 20.3 percent last year.
Foreign makers' incentives
Foreign automakers also have raised incentives substantially, but they remain far lower. Honda Motor Co. boosted discounts 75 percent higher over the first three months of the year, according to Autodata.
Toyota's incentives averaged $903 in March, compared with $932 for Honda. At $1,744, Nissan's incentives were almost double those of the other leading Japanese automakers, but less than half those of the domestics.