By Mike Colias and Chester Dawson
DETROIT -- U.S. car sales may be slowing, but the profit engines
of Detroit's Big Three auto makers are still in high gear.
General Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles
all beat Wall Street's expectations last week when they reported
first-quarter earnings, mostly because of strength in the North
American market. All three kept their full-year earnings forecasts
intact, a signal they don't expect the wheels to fall off.
That comes despite clear signs overall demand for passenger
vehicles is weakening. April is expected to mark the fourth
straight monthly decline in U.S. vehicle sales when the industry
reports volumes on Tuesday, raising the likelihood that 2017 will
end a seven-year run of increases.
Industry observers say they don't expect a collapse in sales,
even if demand drifts below record levels hit last year. "Total
sales are still strong from a historical perspective and the
decline is very gradual," said Jessica Caldwell, an analyst at
Edmunds.com, an auto-research firm and car-shopping website. "It
shouldn't really be seen as alarming."
Auto makers say they'll stay disciplined and trim production
levels to reflect weaker demand instead of cutting prices to keep
their factories humming.
GM, Ford and Fiat Chrysler are in a relatively stronger position
than some of their foreign-based rivals because they rely less on
sales of sedans, which are in free fall as buyers switch to
crossover wagons, SUVs and pick-up trucks. U.S. brands specialize
in those vehicles, which tend to offer high profit margins.
"The industry shift that we're seeing around the world from cars
and [into] SUVs plays to our strengths," said Mark Fields, Ford's
chief executive officer, on a conference call with analysts on
Thursday.
The shift toward light trucks -- a category that includes
pickups, SUVs and crossover wagons -- is helping auto makers keep
prices high overall, even as they dole out bigger discounts on
cars. In recent months, light trucks have accounted for more than
60% of total sales volume. J.D. Power, a market-data provider, says
the average price paid by buyers from the start of the year through
mid-April was a record $31,380.
While all three Detroit auto makers posted profits that
surpassed Wall Street analysts' expectations in the first quarter,
Ford's earnings dropped by more than a third compared to the same
period last year, when it debuted the latest iteration of its F-150
truck model.
Detroit auto makers' growing exposure to those more expensive
and typically less fuel-efficient cars and trucks could prove
disastrous if consumers become more sensitive to gas-pump and
sticker prices.
For two years now, auto-industry insiders have been girding for
the end of an unusually long upward sales cycle, which began in
2010 as the U.S. was emerging from the Great Recession. Tame gas
prices, cheap credit and pent-up demand from consumers who put off
car purchases in the bad times have converged to fuel the run.
Clouds have started to appear on the horizon, including rising
discounts, cratering used-car prices and overflowing dealership
lots. Concern spread when March sales dipped to a seasonally
adjusted annual rate of 16.6 million, the slowest in two years.
"The competitive intensity is increasing," Fiat Chrysler CEO
Sergio Marchionne said on a call with analysts.
Mr. Marchionne said he is watching North American inventory
levels "like a hawk," but that he doesn't expect spending on sales
incentives to spark a price war like the one hat started in 2007
and sent the industry into a tailspin. "We've all collectively
developed enough sense now not to cause repetition of the problem
that we saw" a decade ago, he said.
Concern about rising spending by auto makers to maintain sales
growth may be overblown, Barclays Capital said in a recent research
note. Industry incentives as a percentage of average transaction
prices came to 11.2% in the first half of April, the lowest level
since June, the brokerage said. "A big driver of the improvement is
GM, which is pulling back on incentives despite elevated
inventories," it said.
In recent months, market watchers have pointed to GM's inventory
as among the most visible signs of trouble. The nation's largest
auto maker ended March with a 98-day supply of vehicles, versus 71
days a year earlier.
GM finance chief Chuck Stevens told analysts the company built
up stocks of some SUV models ahead of scheduled down time at
several factories this summer and fall, and said inventory will
return to normal later in the year. He said that even with more
discounts, price levels remain healthy.
"It's not like we're sitting and waiting for a downturn," Mr.
Stevens said. "Day to day, we're very focused on acting like we're
in a downturn" by cutting costs and trimming vehicle production to
meet demand, he said.
Write to Mike Colias at Mike.Colias@wsj.com and Chester Dawson
at chester.dawson@wsj.com
(END) Dow Jones Newswires
April 30, 2017 15:47 ET (19:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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