U.S. sales of new cars and trucks from Detroit's traditional Big Three automakers surged in July as bargain-basement prices and popular employee pricing discounts lured customers into showrooms, analysts said.
But the results may prove bittersweet since lower prices mean lower profits, for dealers and manufacturers alike.
There is also a lot of talk in Detroit — whose leading automakers are bleeding money and struggling to regain market share from Asian rivals — about the dreaded "pull-ahead" or "payback" effect. Exceptionally strong sales in any one month can weigh on near-term, future demand for mass market brands like Chevrolet, Dodge and Ford.
Following in the footsteps of cross-town rival General Motors Corp. (GM) — which has been selling anybody a 2005 model-year vehicle at the same low prices GM employees pay since June 1 — Ford Motor Co. (F) and DaimlerChrysler's (DCX) Chrysler division began offering similar rebates earlier this month.
"The program continues to exceed our expectations," Deutsche Bank analyst Rod Lache said in a research note.
Through the first 15 days of this month, GM's retail sales were up 42 percent compared to a year ago, while Ford's retail sales jumped 27 percent," according to J.D Power and Associate's Power Information Network, which compiles retail transaction data from more than 6,200 automotive franchises.
Chrysler Group's retail sales climbed 11 percent, J.D Power said.
Analysts expect the big discounts will boost GM's overall July sales as much as 20 percent, while Ford is expected to end its 13-month losing streak by posting a 15 percent increase in sales. Chrysler is expected to see sales growth ranging from 10 percent to 14 percent.
Overall, analysts are forecasting industry sales will jump to a seasonally adjusted annual rate in the range of 18.6 million to 19 million vehicles in July, the highest level since October 2001 and far above the 17.2 million rate in July last year.
But the latest deals from Detroit's automakers, which reduce sticker prices of vehicles by thousands of dollars, are squeezing already-thin profit margins and will hit earnings, analysts said.
"The industry's huge inventory sell down will wreak havoc with the Big Three's earnings for the remainder of 2005, although it will also set it up for improving results in 2006," Merrill Lynch analyst John Casesa said in a note to clients.
"We expect Ford and GM combined to post pretax losses of $4.4 billion in the second half of 2005," he said.
Heavy incentives spending cut into GM's profit margins during the second quarter and the company posted a loss of $1.19 billion in its North American automotive operations.
Both GM and Ford have also been hurt this year by a dramatic drop in demand for mid-sized and large sport utility vehicles amid high gasoline prices.
On the positive side, the rebates have helped U.S. automakers cut bloated inventories of unsold end-of-model-year vehicles, analysts said.
Lean inventories could mean a year-over-year gain in the production schedules of GM and Ford during the first half of 2006 for the first time in almost three years, Casesa said.
Higher output could lead to better earnings in 2006 as automakers book profits on vehicles when they shipped from assemble plants, not when they are sold at dealerships.
Japanese automakers Toyota Motor Corp. (search) , Nissan Motor Co. Ltd. (search) and Honda Motor Co. Ltd. (search) — which have been relentlessly grabbing market share from the two leading U.S. automakers — are also expected to post higher sales in July.
But collectively, their market share could be down to 25.6 percent from 27.3 percent a year ago, Deutsche Bank's Lache said.
"The domestic programs are expanding the overall market, which is lowering the Japanese companies' shares," said Tom Libby, senior director of industry analysis at the Power Information Network.