Will Ford Motor Company and Chevrolet Both Lose This Discount War?

Ford and GM are both boosting incentives -- and that could be bad news for profits.

Aug 23, 2014 at 12:47PM


Ford has reduced incentives on its F-150 pickup this year, the company says. But it's boosting them elsewhere -- and archrival GM is responding in kind. Source: Ford.

It's a summer sales battle -- with a twist. 

Ford (NYSE:F) and General Motors (NYSE:GM) both launched big promotional campaigns -- complete with fat incentives -- well in advance of the traditional Labor Day sales season.

Both Ford and GM's Chevrolet brand are making these big moves to try to boost slowing U.S. sales. 

But is this the kind of war that nobody can win?

America's top-selling brands have lost ground this year
It's clear why Ford and Chevy officials are feeling the need to boost sales. Through July, year-to-date Chevrolet sales are up just 2.1%, while Ford sales are are actually down 0.8%. 

They trail the U.S. market's overall 5% gain over the same period -- and that means that both Chevrolet and the Ford brand have lost market share this year. 

Officially, neither automaker is worried. Ford said that it has lost some ground in the huge full-sized pickup market because of production constraints leading up to the introduction of its all-new 2015 F-150. That's not a problem, according to the company, because it has reduced its pickup discounts to help manage demand.


Incentives on the new-for-2014 Chevy Silverado are much lower than those GM offered on the 2013 model. But they started rising after competitive pressures hurt sales. Source: General Motors.

Meanwhile, Chevrolet has increased sales, albeit just a little, despite GM's massive recall scandal. And while sales of its Silverado pickup are down slightly versus last year, GM has said it's selling more of the most profitable variants.

Both brands have seen good gains in SUV sales as more buyers are favoring new "crossover" SUVs over cars. Ford and GM also reported good profits in North America for the last quarter (not counting the costs of GM's recalls, of course), so they're clearly doing something right. 

So why is a little sales battle worthy of concern?

Are U.S. auto sales running out of steam?
The concern is that after several years of big growth, U.S. auto sales might be peaking. One indicator is an increase in incentives, as automakers find they need to offer more discounts to keep sales growth going. 

Over time, those discounts can cut into automakers' profits in a big way. That's the concern: That Ford and GM could be heading in the direction of trading profits for sales.

So far, the discounts aren't outrageous. As noted, North American profits at both Ford and GM were strong last quarter. 

But the trend is worrisome.

Chevy's incentives are actually down this year -- the brand has several strong models that were new last year, and it has significantly reduced discounts on vehicles such as the Silverado and the Impala. But after initially making very deep cuts in its discounts on the new-for-2014 Silverado, GM has had to boost them to stay competitive.

Meanwhile, Ford's overall incentives are up 12% this year, according to Autodata data reported by Automotive News, despite the automaker's reduction in discounts on the F-150 pickup.

It's not just Ford and Chevy
Ford latest round of offers, launched at the end of July, include interest-free financing for 72 months on most of its models (the F-Series pickups, Ford's commercial vans, and the Mustang are excluded). 


Critics have raved about the new Chevy Impala sedan. It's one of the big stars of GM's product renaissance, and it has sold very well. But even the Impala is getting interest-free financing deals now. Source: General Motors.

GM responded last week with a slew of interest-free financing deals on Chevys, along with a "no payments for 90 days" offer on several models -- one-upping Ford by including all Silverado pickups and the Camaro in its offers.

In and of themselves, these offers are no big deal -- good for buyers, but not a big threat to the auto giants' bottom lines. And one could argue that Ford and GM are simply meeting the competition head-on.

After all, other competitors are also stepping up with end-of-summer deals: Toyota (NYSE:TM) is offering interest-free financing for 60 months on several hot-selling models, including the Prius and the just-refreshed Camry, and Nissan (NASDAQOTH:NSANY) has also stepped up with free-financing offers on many models.

But again, it's the trend that's worrisome. If U.S. auto sales really are peaking, that's bad news for profits at Ford and GM -- and a warning sign for shareholders. Stay tuned.

Warren Buffett's worst automotive nightmare (Hint: It's got nothing to do with incentives -- or with Tesla Motors.)
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John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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