During the Great Recession, we all know how much the Detroit Three suffered. General Motors (NYSE:GM) and Chrysler took government bailouts, and Ford (NYSE:F) added massive amounts of debt on its own to avoid the same fate. Dealerships, meanwhile, couldn't give cars away and were forced to tie thousands of dollars in incentives to take advantage of what little demand did exist.
The good news for automakers this year is that transaction prices are up, and incentives have dropped. But even so, investors need to keep their eyes on situations that could force automakers to revert to their old incentive-driven ways. One such potential situation is GM's recent inventory surplus. How big of an issue could this be, and how did January sales wrap up for both GM and Ford?
GM did well in 2012 keeping its inventory numbers in check, ending the year with about 80 days' worth. One month later, though, the story has changed, as GM now sits on a 117-day supply of vehicles. That's a 24% increase. With the redesigned Silverado and Sierra set to be released in the second quarter, GM is walking a fine line with high inventory levels and could find itself forced to deliver higher incentives to sell down supply and create room for the new models.
That would be an issue in itself, but it's even worse in that it would also create competition with the new models. Consumers would have to choose between an old design with attractive pricing and incentives or the new, redesigned, and more expensive model -- which doesn't even look all that different, in my opinion. Investors shouldn't worry yet, as part of the surplus is no doubt due to the planned 10-week shutdown of GM's three truck plants, to prepare for the new model changeover. But this is still something the company needs to keep an eye on.
January was a solid month for both Ford and GM, with U.S. sales increasing 22% and 16%, respectively. The Chevy Silverado and GMC Sierra have at least a year's head start on the next-generation Ford F-150, and GM will do everything it can to maximize its advantage. Kicking off 2013, GM announced that it will offer free standard maintenance for two years or 24,000 miles on any Sierra 1500 pickups purchased in February. It will be important for investors to watch how many of these incentive programs pile up to bring out potential buyers before the new F-150 hits the market in 2014.
Fusion races off
Until then, Ford will be trying to steal truck sales while maximizing sales on smaller vehicles. So far, the automaker is off to a fast start. The Fusion and Escape delivered January records, with sales up 65% and 16%, respectively, versus the previous year, and consumers didn't seem deterred by previous recalls on the vehicles. Explorer sales were also up 46%, marking the vehicle's best January since 2005.
Ford will be counting on the Fusion, Escape, and F series to win back its lost market share, which fell from 16.8% in 2011 to 15.5% in 2012. And to try to get a sales boost in 2013, Ford, too is using some incentives, offering a "3 Payments on Us Cash" deal on several vehicles, including the Focus, Escape, Explorer, and Taurus.
So far, the automakers have largely remembered the hard lessons they learned during the recession and have avoided handing out large incentives. On the other hand, the automakers' discipline hasn't yet been tested, as pent-up demand is allowing the companies to enjoy increased sales with little need for incentives so far. The only guarantee we do have is that that will not always be the case. When the market changes, and it will, investors will have to keep an eye on incentives to make sure the automakers can retain their margins and profitability. The incentives we've seen so far, however, shouldn't worry investors. In fact, they should serve a nice sales boost at little cost.
For now, enjoy the ride, as both automakers look poised for a great 2013.