Fiat Chrysler Automobiles (NYSE:FCAU) said this week that sales of its Ram pickup trucks soared last month, up 29% from a year ago.
That gain came in a month in which most automakers saw sales drop year over year. FCA's overall sales were down 1%, so it's not like people were suddenly flocking to its brands.
What happened here? The explanation is pretty simple, but it has some worrying implications for FCA and at least one of its Detroit arch-rivals.
When sales jump in a stagnant market, there's usually one explanation
That 29% gain from September of last year meant that FCA sold 47,792 full-size Ram pickups last month. That's enough that the Ram was able to outpace General Motors' (NYSE:GM) Chevrolet Silverado (45,380 sold).
That doesn't happen very often. But we don't have to look too far to figure out how it happened: FCA cranked up the incentives. The average incentive on Ram trucks in September was a whopping $7,082, according to J.D. Power data published by Bloomberg.
Incentives on pickups are always high; that's how the market works. But the incentives that FCA was paying on Rams last month were nearly 30% higher than what it was paying a year ago. They were also far ahead of rivals': GM's average on the Silverado was $5,647 last month, while Ford (NYSE:F) paid an average $5,173 on its F-Series, according to the J.D. Power data.
FCA's increase made enough of a difference to win over quite a few price-sensitive shoppers. And it's clear where many of those sales came from: While sales of Ford's F-Series were down 2.6% from a strong year-ago result, sales of GM's Chevy Silverado dropped by over 15%.
Pickups are very profitable products for all three of the Detroit automakers. But FCA's sales gain likely came at a big cost, as those fat incentives cut deeply into the company's profit margins. Why did FCA do it?
Why FCA chose to boost its pickup-truck incentives
This is probably why: As of Sept. 1, FCA had 158,400 Ram pickups in inventory, according to Automotive News data. That was a 102-day supply, and that was too many.
When an automaker has too many vehicles in inventory, it has a choice: It can boost incentives to clear them out, cut back production, or both.
FCA chose the former. At this time of year, it's easy to explain that decision: FCA's biggest incentives were on 2016-model-year pickups. It can say, truthfully, that it was clearing out the 2016s to make room for the 2017s. And it worked: FCA's inventory fell to an 81-day supply at month end, according to Autodata figures obtained by The Motley Fool.
But again, the price of that that inventory drop may turn out to have been a dent in FCA's third-quarter profits.
FCA's discounts could soon put GM in a tough spot of its own
FCA's big sales gain wasn't the result of a booming market (in fact, the U.S. new-vehicle market is roughly at a plateau right now). As I noted above, FCA's gain appears to have happened largely at the expense of GM's Chevy Silverado. That showed up elsewhere, too: Silverado inventories jumped from 78 days' worth on Sept. 1 to 91 days' supply at month-end.
GM still sold plenty of pickups last month. One down month isn't likely to make a big dent in the General's third-quarter profits, given that its incentives were still reasonable. But here's the thing: FCA's high incentives on 2016-model Ram pickups have continued into October with only small changes, according to Automotive News data. That means the pressure on the Silverado could continue.
Ninety-one days' worth of inventory is probably not quite enough to force GM's hand. But if Silverado sales go the same way in October as they did in September, GM could soon find itself with 100 days' worth or more of Silverados in inventory. If so, GM will have to choose between cutting back production or boosting its own discounts -- and both choices have bottom-line consequences. We'll be watching.