The're Makin Em but Not Sellin' Em

November 25, 2002 Justin Hyde writing for Reuters reports that while salespeople at auto dealers around the United States are waiting anxiously for business to pick up, workers at the former Big Three's auto plants have been on overtime for much of the last two months.

That disconnect between weaker auto sales and aggressive production has Wall Street analysts forecasting a ballooning of new vehicle inventories that could cut into earnings next year, especially at DaimlerChrysler AG's Chrysler arm and Ford Motor Co.

"Production comparisons are going to be particularly difficult for Ford and Chrysler, as these two automakers built a significant amount of inventory in 2002," Deutsche Bank analyst Rod Lache said Friday. "We now believe double-digit production declines are possible for Ford and Chrysler" in the first half of 2003.

Dealer inventories are measured by days' supply; 60 to 70 days is a standard range for Ford, GM and Chrysler inventories and there's a lower range for foreign automakers. October's weak sales left the industry with a 69-day supply, higher than normal but not alarming.

But Chrysler's 31-percent drop in October sales left it with a 97-day supply and Ford's inventories swelled to an 81-day supply. Some analysts forecast that Chrysler could end November with a supply that exceeds 100 days.

Several Wall Street analysts lowered their 2003 earnings estimates for automakers and suppliers based on lower production in the first quarter next year. Goldman Sachs analyst Gary Lapidus estimated that a 150,000-vehicle cut in Ford's production would reduce its earnings per share 30 cents, while a 200,000-vehicle reduction at Chrysler would hit its earnings per share 75 cents.

Automakers set production schedules by quarter, and are loath to cut them once a quarter is under way. Despite the larger inventories, overtime has been plentiful this quarter in factories Detroit's major automakers operate.

Even if they could make changes, automakers would likely choose to keep running full-tilt. Executives like to caution that one month doesn't make a sales trend; a strong November and December could bring inventories back in line. And inventories usually rise in the first quarter as automakers prepare for the spring sales season.

But November sales have not been showing much strength. After gloomy predictions earlier this month that sales might not meet October's seasonally adjusted annual rate of 15.4 million vehicles, expectations rose slightly that the month could produce a 16-million rate.

The boost was helped in part by a drop in U.S. jobless claims, along with improving consumer confidence. Consumer spending accounts for two-thirds of the U.S. economy, and new cars account for roughly 15 percent of retail spending.

Automakers may have tweaked their incentives. For the industry as a whole, rebates averaged $2,000 per vehicle in October and about $2,500 per vehicle for the former Big Three.

November "is looking reasonably strong, a little better than October," John Devine, chief financial officer of General Motors Corp., said during a Merrill Lynch conference on Thursday. "We think the market is down from where it was the first nine months of the year, but still holding up reasonably well."