Lagging Car Sales May Spur Production Cuts at Ford, GM

Hurricane Charley's (search) damaging path through Florida and the growing ineffectiveness of sales incentives caused U.S. car and trucks sales to slip in August, raising the likelihood of costly cuts in vehicle production, analysts said.

Charley left many cars damaged at dealer lots when it hit one of the nation's biggest markets in mid-August, and kept some consumers busy repairing their homes rather than shopping for new vehicles.

"Certainly a lot of the (Florida) consumers who were in the market to buy vehicles are now on hold," said Mark McCready, director of pricing strategy and market analysis with Internet car buying site (search). "Florida is a very populous state, it is going to have some effect."

Several analysts said they expect industry sales for August to fall to a seasonally-adjusted annual rate of around 17.2 million, down from 17.9 million in August last year and unchanged from the rate in July. But a couple of others expect a far weaker annual sales rate of 16.7 million.

Auto companies are scheduled to report sales on Sept. 1.

Japan's top two automakers, Toyota Motor Corp. (search) and Nissan Motor Co. Ltd. (search) , are again expected to post stronger results at the expense of Detroit's General Motors Corp. (GM) and Ford Motor Co. (F). GM's sales are seen dropping between 6 percent and 9 percent, similar to estimates of a 5 percent to 9 percent drop for Ford. The Chrysler arm of DaimlerChrysler AG could fare slightly better with sales flat to down as much as 4 percent, analysts said.

Incentives in August rose about 4 percent from July's levels, but automakers are having a tougher time convincing consumers to buy, said Art Spinella, president of CNW Marketing Research (search).

"August sales are disappointing considering the high level of incentives, and more importantly, because of the need to clear out excess inventories (of unsold vehicles)," Merrill Lynch analyst John Casesa said in a research report to clients this week.

Automakers are also expected to set their forecasts for North American vehicle production for the fourth quarter when they report sales next Wednesday. GM Chairman Rick Wagoner (search) indicated last week that fourth-quarter production would be weaker than year-ago levels, just as third-quarter production was down 3.6 percent from a year ago.

GM and other automakers such as Ford with high inventories could cut production further than expected, but may resist excessive cuts, analysts said.

"Automakers will opt to raise incentives in the near-term and postpone any painful production cuts," until next year, JP Morgan Chase analyst Himanshu Patel said in a research note.

However, Goldman Sachs analyst Gary Lapidus was more pessimistic. He said GM's fourth-quarter production could drop by 5 percent to 6 percent, and Ford could be down 7 percent, which would hurt their major auto parts suppliers Delphi Corp. and Visteon Corp.

Production cuts directly impact earnings because the industry counts profits from vehicles when they are shipped to dealers rather then when they are sold to consumers.

"We believe GM and Ford will cut production as much as they can without jeopardizing their (2004) earnings targets," Lapidus said.