Skies look sunny for automakers in 2nd half after strong second quarter
By EDWARD LAPHAM
Factors that led to stronger-than-expected automotive earnings in the second quarter are likely to keep the industry moving at a quick pace in the second half of the year.
Low vehicle inventories and continued high sales turbocharged by incentives will lead to a big rest of the year.
The Big 3 and major parts suppliers last week reported second-quarter profits that were higher than expected.
Profits in the beleaguered supplier sector have risen substantially because of production increases and cost-reduction programs. Six of the 10 largest suppliers to the North American industry reported combined net profits of $761 million for the second quarter, up 59 percent from the year-ago period.
That is likely to continue as production ramps up to meet vehicle sales driven by incentives.
And each of the Big 3 beat analysts’ estimates substantially in reporting second-quarter results last week.
General Motors led the Big 3 in the second quarter with net profits of $477 million, up 170.9 percent. Ford Motor Co. stopped a series of four money-losing quarters with a reported quarterly net profit of $570 million, compared with a net loss of $752 million last year at the height of the Firestone tire/Ford Explorer mess. DaimlerChrysler said the Chrysler group had an operating profit of $408 million.
Automakers and suppliers credited production increases with boosting profitability. Second-quarter North American light-vehicle production jumped 7.3 percent from the year-ago period. First-half light-vehicle production was 8.7 million, up 5.4 percent.
The rest of the year is on a similar pace. Second-half production should top last year’s second half by 5 percent, predicts J.D. Power and Associates.
The strong production schedules are needed to replenish inventories and keep pace with demand, which has been spurred by the new round of 0 percent financing and other incentives.
Last week, J.D. Power projected July sales will hit a seasonally adjusted annual rate of 18.1 million units, based on early July sales that were buoyed by GM’s 0 percent financing. Light-vehicle sales in July 2001 equaled an annualized rate of 16.5 million, which is in the range of most forecasts.
That will further strain supplies of unsold vehicles, which have been low all year.
On July 1, there was a 56-day supply of unsold vehicles, roughly the same level as a year earlier when there was less demand. The ideal is considered to be 60 days, and the Big 3 frequently have a larger supply.
“The current incentives are very aggressive and definitely have consumers out buying new vehicles,’’ said Walter McManus, executive director of global forecasting at J.D. Power and Associates. “We expect this could be one of the top five highest sales months in history.’’
McManus still expects sales of 16.5 million light vehicles this year, down from 17.2 million last year.
Dealers interviewed last week reported some severe product shortages, particularly among popular models across all brands.
“I have five total F-series trucks in stock, and I normally have 15 to 20 light-duty and 10 to 15 Super-duty,’’ said Jason Branham, general manager of Jack Kain Ford in Versailles, Ky. “If I were to stock up, I might end up not selling them because the 2003s will hit the ground and then nobody wants 2002s. So I have held fast.’’
Instead, Branham uses Ford Motor’s online inventory service to locate trucks at other Ford dealers.
Some dealers use brokers to help find scarce product. Rick Guller, president of Inventory Connection, a vehicle broker in Fresno, Calif., says his business is off 15 percent because he can’t find enough inventory.
“If I had 1,000 Cavaliers, by the end of the day I could sell them all,’’ Guller said.
“If I had 1,000 Chevy trucks I could sell them all.’’ Guller said he is getting calls from Honda dealers even though he doesn’t handle Honda vehicles.
Wall Street was pleasantly surprised by Big 3 results. Standard & Poor’s even revised its outlook on DaimlerChrysler from negative to stable based on Chrysler group operations, but did not change bond ratings.
Low inventories and the need to replenish them may help improve Wall Street’s opinion about supplier earnings in the second half, according to David Leiker, analyst at Robert W. Baird & Co. Inc. in Milwaukee.
Said Leiker: “What it really does is give confidence that the schedules that we’re seeing are going to hold, which would be a positive, because the market today doesn’t believe that.”
Staff reporters Donna Harris, Robert Sherefkin and Amy Wilson contributed to this report.
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