U.S. Auto Price War Leads to Profit Squeeze

October 18, 2002

Justin Hyde writing for Reuters gives his opinion on state of US auto industry; "Here's a telling battlefield report from the auto industry's price war: Ford Motor Co. commanded about $770 more than General Motors Corp. did for every vehicle sold in North America during the third quarter -- but GM made a profit per vehicle and Ford did not.

GM and Ford have kept U.S. auto industry sales humming this year through incentives such as zero percent loans and cash rebates. But third-quarter results released this week show just how hard they must work to make money building and selling cars and trucks.

With Ford losing money on its vehicles and GM earning profit margins of less than 2 percent, investors have worried what might happen to their overall profits should Americans slow their vehicle buying despite more generous incentives.

GM and Ford's shares have each fallen about 16 percent since Oct. 1, and prices for their corporate bonds have also weakened. Both automakers bounced back slightly Thursday after slumping Wednesday amid worries over pension costs.

Higher incentives at GM helped slice third-quarter revenue from each vehicle built in North America about $516 from a year earlier to $20,703. That rate of decline exceeded 2 percent --more than GM had forecast and its steepest this year.

But GM still managed to boost its profit per vehicle $46 from a year ago to about $400, thanks to stringent cost controls, higher production and more sales of sport utility vehicles and pickup trucks, which carry fatter margins.

But analyst Ron Tadross with Banc of America lowered his earnings forecasts for GM in part because of the price decline. He said the days when GM could boost demand with incentives and make up the difference with a richer mix of vehicles were probably over for now.

"The company has no major truck introductions ahead of it through 2004, making revenue per unit improvements difficult from here," Tadross said in a research note.

Ford's navigation

GM's story was reversed at Ford, where per-vehicle revenues, including vehicles built in North America and those imported for its Jaguar, Land Rover and Volvo brands, rose $623 from a year ago to an average of $21,084.

Lloyd Hansen, Ford's vice president of revenue management, said Ford was able to raise prices about 1.7 percent in the third quarter while also boosting revenues from a richer mix of vehicles sold. The new Lincoln Navigator SUV can fetch $52,000, compared with a top price of about $40,000 for the old model.

"Some of our vehicles are good values and sell without many incentives," Hansen told Reuters. "Our truck mix isn't up like GM's, but we're selling more F-Series pickups and less Rangers, more large and luxury cars and less small cars."

But the pricing edge evaporated before it hit the bottom line, thanks to Ford's higher costs compared to GM. For example, GM requires new models to be cheaper to build than their predecessors, but Ford's current round of new models will likely cost more to build.

Including its luxury imports, Ford lost $47 on every vehicle built for North America in the third quarter. That was an improvement from a $910 per-vehicle loss a year earlier, when Ford suffered from costs of the Firestone tire recall.

"Ford is a real study in contrasts compared to General Motors," said Standard & Poor's analyst Scott Sprinzen. "At Ford, the real concern is the state of the North American business ... With all the progress they have achieved this year, they are still losing money in a strong market."

Ford and GM have each set a goal of improving margins over the next few years, but many analysts question how that will be possible given the uncertain forecast for the U.S. economy.

Ford Chairman and Chief Executive Bill Ford Jr. said on Wednesday the company wants to hasten the $9 billion in cost cuts and profit growth promised in its turnaround plan.

"It's ... an acceleration of actions that we would take anyway," Ford said. "We need to control what we can control and costs is one element of that."