Summary
Ford and General Motors reported they will reduce production due to slowing sales, continuing weakness in the economy, and Japanese competition, among other factors.
Analysis
General Motors and Ford reported they will decrease production for the first quarter of this year. General Motors reported 10.9% lower sales in November, Chrysler 2.1% reductions in sales, and Ford reported an increase of only 1.3% because of bulk sales to commercial and government agencies while Ford dealer sales actually decreased 3%.This agrees with government retail sales reports for November quoted from Bloomberg, December 13.
Sales Slowing
The government numbers for November contrast with some industry reports that suggest spending may weaken this month. Sales fell 2.7 percent in the seven days through Dec. 8, following a 4.4 percent decline a week earlier, Chicago-based research firm ShopperTrak RCT Corp. said yesterday.
The automakers gave four basic reasons for the decline.
1. Competition from Japanese automakers. Sales of Japanese automobiles increased for the month. The market is made for the Japanese brands. Japanese automobiles offer an inexpensive product compared to the US brands, they offer fuel efficiency, Japanese brands offer quality and personal care. These are valued traits in the present market. Toyota this month passed Ford as the second largest automaker in the USA, a full 1.5% ahead of Ford in sales.
2. Negative perception of US auto manufacturers compared to the good perception of the Japanese auto manufacturers. The perception is especially negative for US manufacturers in the present economic climate.
3. A decline in the SUV market. US auto manufacturers were too dependent on production of SUV's, which is one of the worst markets to be in at present. US auto manufacturers are just now beginning to transition to smaller vehicles, which is part of the future of the US auto industry.
4. Weakness in the economy. The meltdown in the housing market is effecting automobile sales, which is directly impacted by purchasing power in the home goods industries. The mortgage crisis decreases the spending power of the consumer, and therefore the ability of the consumer to afford new automobiles. There is the increasing risk that the home mortgage crisis will spread into the automobile industry.
Two reasons not mentioned by the automobile industry.
1. Increasing fuel costs. Oil is now approaching $100 per barrel. Some are now predicting $120 per barrel, even $200 per barrel. Increasing fuel costs will negatively impact sales of automobiles.
2. Government intervention in the housing/mortgage crisis. If the bush plan to freeze mortgages is implemented, the housing crisis will look for another outlet, and that is most likely to be the automobile industry. Banks and financial institutions have never been altruistic in the way they take money from the consumer. Expect auto loan rates to increase, especially if a freeze is placed on mortgage rates. On rule of investing is when the government gets involved, get out immediately, it means worse times ahead, and that saying holds true here.
The bright area for automobile sales is overseas exports into regions as Latin America, India, and China. That is not enough for now, as economic difficulty appears to be in the near future for the US markets.
