Pricing discipline to be tested, analysts warn

Detroit 3 shrug off rising output, stockpiles after January chill

Pricing discipline to be tested, analysts warn

U.S. car buyers stayed home last month, causing an unexpected drop in sales and leaving dealers with higher-than-normal piles of unsold vehicles just as factories are cranking up output.

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DETROIT (Bloomberg) -- The polar vortex that blasted through much of the United States last month made selling cars as difficult as moving the snow mounds that rose up around David Martin's dealership near New Hampshire's Mt. Washington.

"We literally have vehicles frozen to the ground," said Martin, general sales manager of Berlin City Auto Group in Gorham, which sells Ford, Dodge, Chrysler, Honda and Toyota models. "We needed five guys to cut a Corolla out of the ice so that a customer could buy it."

Car buyers stayed home last month, causing an unexpected drop in sales of 3 percent.

That has left dealers with higher-than-normal piles of unsold vehicles just as factories are cranking up production.

Automakers run the risk of resorting to discounts to move cars off lots to meet 2014 forecasts, which remained unchanged even after the January slump.

"Just because times are good, doesn't mean we should get reckless with inventory again," Mike Jackson, CEO of AutoNation Inc., the largest U.S. retailer of new cars and trucks, said in an interview last week. "It's a bit undisciplined to let the inventories get to this level -- undisciplined and unnecessary."

Each of the Detroit 3 automakers now has enough vehicles on lots to last more than 100 days, at least 67 percent more than ideal inventory levels.

Detroit's discipline

General Motors, Ford Motor Co. and Chrysler Group have made an estimated $57.9 billion over the past three years on the strength of their best models in a generation, which have fetched higher prices and reduced their dependency on discounts.

Detroit's discipline will now be tested as the cold winter has exposed growing stockpiles that pressures prices, just as automakers plan to crank up North American factory production by 6 percent in the first quarter, according to IHS Automotive.

The "disturbing" buildup leaves automakers with a choice, said Joe Langley, production analyst for IHS.

"You either fall back on the bad habits of incentivizing the vehicles or you just curb production levels," he said. "It's a case of who's going to blink first in the industry and potentially begin that wave of incentive spending."

Chrysler, even after a better-than-estimated sales increase of 8 percent, said its inventory grew to 105 days supply, more than the roughly 60 days that automakers generally consider ideal.

Vehicles on hand rose to 114 days for GM and 111 days for Ford. Sales declined 12 percent last month for GM and were off 7.5 percent at Ford, with each blaming the bad weather.

Normal build-up

The automakers say the build-up is normal during the slow days of winter and predicted supplies will normalize as business picks up when warmer weather brings out tire-kickers.

"January and February is when we load up a little bit and, the theory goes, we'll really sell it down in March, April and May," said Reid Bigland, Chrysler's U.S. sales chief. "There's an old saying: You can't sell off of an empty wagon."

Automakers shouldn't expect help from the weather anytime soon.

Temperatures are predicted to remain below normal this month and intense snow storms will continue, said Paul Pastelok, a senior meteorologist at AccuWeather Inc. who specializes in long-range forecasting.

"It looks pretty rough, particularly in the beginning of the month," Pastelok said. "And unfortunately, the start of March doesn't look very great, either. It may be past mid-March before things really abate."

AutoNation's Jackson: "It's a bit undisciplined to let the inventories get to this level -- undisciplined and unnecessary."

Market ambitions

The longer this winter weather socks sales, the more automakers will feel pressure to reduce production or cut prices, Langley said.

Automakers plan to build 16.8 million cars and trucks in North America this year, up 4 percent from 2013, according to IHS. About half of that production gain is scheduled for the year's first three months, Langley said.

"There is some ambition built into that" production schedule, said Mark Wakefield, a partner with auto consultant AlixPartners in Southfield, Mich. "They don't seem cautious to me."

The automakers argue they need to avoid being overly cautious.

GM, Ford and Chrysler each predict U.S. auto sales will top 16 million this year after growing by more than 1 million annually for the last four years.

This year, Ford rolls out a redesigned Mustang sports car and F-150 pickup, the volume slice of its top-selling line, sales of which declined 0.7 percent last month. Chrysler will field a restyled 200 sedan and the Jeep Cherokee is off to a good start.

GM product

GM predicts sales will ramp up for its critically acclaimed Cadillac CTS and Chevrolet Impala.

CTS sales fell 11 percent last month, while Impala dropped 16 percent.

"Cadillac has found a path to redemption and respect," The New York Times wrote in a Jan. 31 review of the redesign CTS sedan. "The CTS Vsport, with a new 420-horsepower twin-turbo V6, is one of the most thrilling, focused sport sedans around â€" good enough, in fact, to trump most rivals from Japan or Germany."

With buzz building around its new models, GM doesn't see its recovery being stopped by a cold snap.

"Don't read too much into January. It wasn't a great month, but it is a very small month," said Jim Cain, a GM spokesman.

GM, Ford and Chrysler each predict U.S. auto sales will top 16 million this year after growing by more than 1 million annually for the last four years.

Photo credit: TOM WOROBEC

Lesson learned

Ford said it failed to build enough inventory last year and was caught short when sales picked up in the warmer months.

"We may ride inventories just a little bit higher because if you remember, last year, especially in the third quarter, we know we left some share on the table because we started running out of stock in the summer selling months," Erich Merkle, Ford's sales analyst, said on a conference call Monday with analysts and reporters.

Automakers' goals for share and sales, though, outstrip demand in a market that is still growing slowly, Langley said.

"Everybody has very rich sales targets," Langley said. "If you add up everybody's targets, we should be selling over 18 million vehicles, but that's not the case."

Failing to meet those targets could have consequences on Wall Street, where auto stocks have been on the rise and the newly combined Fiat Chrysler Automobiles NV is planning a listing on the New York Stock Exchange.

GM shares have risen 25 percent in the last year and Ford is up 12 percent, while the Standard and Poor's 500 index has gained 15 percent.

Unusual recovery

"The good news on GM is they're holding the line on incentives; the bad news is they're losing sales," Alan Baum, an analyst with Baum & Associates of West Bloomfield, Mich., said Monday on Bloomberg Radio. "The financial community will be unhappy if those incentives go up, but of course they'll also be unhappy if those sales remain down."

The problem is the rules of past recoveries -- where employment and income come roaring back along with auto sales -- do not apply in this slow-growth economy, Wakefield said.

"It is a new world," Wakefield said. "We're in the unprecedented position of being five years after a recovery and still a million jobs below where we were at the last peak. And you need a job to buy a car."

So far, automakers have mostly coaxed sales from that smaller pool of buyers by offering high-quality, high-style and high-tech models, such as Ford's Fusion sedan.

Now, after Ford added a second factory of Fusion production late last year, the challenge will be maintaining prices that Ford said average almost $24,000 a car. Fusion sales fell 8 percent last month.

Challenge coming

"The big challenge won't be until the first big automaker really breaks ranks on pricing and we approach a market top and we see how people deal with it," Wakefield said. "Dealing with growing 5 percent or 10 percent a year is a lot different than dealing with a reduction."

Scraping for sales in a slow market with bloated inventories could set off a price war, AutoNation's Jackson warned.

"High inventories, market-share ambitions, slower-growing market: The tinder is there this year," he said in an interview last month. "The last four years haven't been a real test for the industry. This year will be a real test."

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