Autumn of the Automakers

Ah, September. The days are getting shorter. The evening temperatures are cooler. The geese are browsing Orbitz (Nasdaq: ORBZ  ) for airfare rates to Florida.

And speaking of fowl, the chickens are coming home to roost for America's automakers. We've been saying it for some time now: Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and DaimlerChrysler (NYSE: DCX  ) have been robbing Peter to pay Paul with their 0% financing deals, their average $4,200 in rebates on new car models. Because the fact of the matter is every customer who buys a new car today is a customer less likely to buy a new car tomorrow.

On Wednesday, Ford was the first of the Big Three Detroit automakers to report that what three months ago could have been a fluke has now developed into an honest-to-goodness trend. August car sales for Ford's brands were down 13% from their year-ago numbers, a dramatic acceleration in the slide that, year to date, has Ford sales down 5%.

The reason is pretty simple: A lot of Ford's potential customers have already bought their Fords, and with new cars parked safely in their garages, these erstwhile customers are no longer in the market for a new Ford Leviathan SUV. Moreover, even those who want to replace a new car with a "newer" car are already upside down on their current car loans. They simply can't afford to trade one car in to buy the other. Selena Maranjian laid out the math for us all last year, explaining how the average new car loses 20% of its value in its first year of use, and 48% after three years. I'd be willing to wager that, with loans of 0% for five years now common, there are plenty of car buyers out there who have paid off less than 48% of their car loans in three years.

That spells bad news for the American car makers, who may now be running out of customers, as analysts say that even record-level incentives are failing to boost sales. As a result, Ford announced yesterday that it will slash fourth-quarter production by 8%, building fewer new cars while the company tries to move the old ones off the lot. That bodes ill for Ford's ability to repeat its strong earnings report of July. And it foreshadows similar bad news from GM and Chrysler.

Really, about the only company investors can expect to profit from this trend, would be used car sellers such as CarMax (NYSE: KMX  ) , who could use a letup in the competition from new car sales.

For more Foolish information on the perils of subsidizing sales:

Continue this discussion on Motley Fool's Buying and Maintaining a Car board.

Fool contributorRich Smithowns no shares in any company mentioned in this article.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 501425, ~/Articles/ArticleHandler.aspx, 7/24/2014 2:38:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement