The Empirical Data Strike Back

Special to the Star-Telegram

There’s better than even odds that we will soon hear positive financial news, not only out of Detroit but possibly worldwide, concerning the automotive companies’ financial statements. Some people will take this news as proof that the auto world has turned positive, but that’s premature; whether it’s a real and even semi-permanent turnaround is still up in the air.

Here are the reasons why we will have upbeat automotive news in at least the near term. First, because automobile sales fell in the first seven months of this year, most manufacturers from Detroit to Tokyo shut their factories for months to burn off excess inventory. It worked; many dealers were short on inventory to sell this summer even before the CARS program kicked in.

Second, car companies make their profits from producing and selling their vehicles to new car dealers, not to the public. Because most dealers are now cautiously restocking their depleted inventories, production rates are up, which will make automobile production in the third quarter more profitable.

Third, many auto manufacturers had cut back their workforces substantially. In Detroit, the new hires coming onboard to handle the increased production are making just over half the hourly pay rate of those who lost those jobs, and they’re getting fewer benefits.

And fourth, incentives costs are down slightly from this time a year ago; that’s another expense shrinking as production rates rise.

This combination of higher production rates and lower incentive costs should vastly improve profitability for automakers when they report their quarterly earnings in the first week of October. Or not: If car sales slow in September after the CARS program ends, then dealers will in turn trim orders for the 2010 model year. And if that happens, then the increasingly expensive spiral of lower production and higher incentive costs could start the cycle over again.

Where GM Leads, Sales Follow

Some promising things have happened in the automotive market over the last five weeks – and in luxury makes that don’t take many clunkers in trade. At this writing both Sewell Lexus of Fort Worth and Autobahn BMW were having an exceptional August, in each case likely the store’s best month of the year. Do you wonder why, when their buyers are the people least likely to take advantage of any government subsidized program to enhance car sales, these makes should be doing so well?

Here’s why: It’s commonly held that GM is an old line car company and no longer the bellwether for North American sales, but nothing could be farther from the truth. Because when GM sells more cars, everyone in the industry sells more cars.

Remember when GM launched Zero Percent Financing for 60 months in the wake of the 9/11 attacks, which made October of 2001 the best month for new car sales in U.S. history? No one in the industry matched GM’s incentives across their entire model line; yet as GM led the way, every other car company’s sales skyrocketed. As a percentage, some automakers posted higher sales than GM did that month.

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