Daimler's Ripple Effect

Even as U.S. automakers scale back production capacity, yet another wave of cut-rate deals may be in the offing. This time the culprit is DaimlerChrysler (NYSE: DCX  ) , which is aiming to reduce inventory levels at its Chrysler unit. The move is definitely a negative sign for the German-American company, but the plan could be even worse news for one of its competitors.

DaimlerChrysler is reportedly mulling an incentive program that would offer employee pricing to U.S. buyers this summer on 2006 Chrysler vehicles. General Motors (NYSE: GM  ) pioneered a similar offer last summer to great effect, as sales skyrocketed the month it was introduced. Still, the cuts in sticker prices eat into profit margins.

The German-American automaker's goal is to reduce its Chrysler inventory levels down to two months of supply, versus the 77-day supply the company was carrying as of the end of May. Thankfully, Chrysler's new 2007 lineup stands a good chance of attracting buyers without overly generous offers, although the new vehicles aren't likely to generate breakout sales. Obviously it also would be far better if Chrysler could avoid such giveaways, especially since its pre-tax profit margin on North American sales is already pretty slim, at just $223 per vehicle in 2005, according to the HarbourReport North America 2006.

If DaimlerChrysler does go ahead with the offer, the impact could be even worse for Ford (NYSE: F  ) , however. Ford recently reiterated its goal of returning to profitability by 2008. Achieving that milestone, even under optimal market conditions, will be a pretty tall order. Ford posted a pre-tax operating loss of $590 on each vehicle it sold in 2005. Showing progress this year and next likely will be made difficult by the lack of a single completely new car in the company's 2007 lineup. Ford's market share in the first quarter was down to 17.6% from 18.2% in the first quarter of 2005. Without new models, it's hard to see this slide reversing.

Add in a cut-rate financing deal that Ford doubtless will have to match, and Ford's 2006 outlook looks even shakier. If Chrysler keeps the aggressive financing going for an extended period, Ford's goal of 2008 profitability is going to look more and more like a pipe dream.

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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.


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