UPDATED: 2/10/14 8:24 am ET
Supplies of unsold vehicles have ballooned to the highest level since the recession, and U.S. sales growth has slowed significantly in the past five months. It's an ominous combination that could mean a return of bigger discounts and lower profit margins throughout 2014.
Each of the Detroit 3 started February with more than a 100-day supply of unsold vehicles, enough to last until roughly Memorial Day at the slow January selling rate. Across the industry, automakers had 88 days' worth of vehicles as of Feb. 1, the most for that date since 2009, when the industry's downturn was at its worst.
"We think incentives are going to start climbing," said Larry Dominique, executive vice president of TrueCar. "The way to avoid an incentive war is to back off on production, but other than Ford with the switchover to the new [F-150], we haven't heard much about production coming down."
In what might be the first volley, General Motors on Friday began a nearly monthlong Presidents Day promotion on Chevrolet, Buick and GMC vehicles, offering some of GM's biggest incentives in months.
The sales event runs through Feb. 28, according to a summary sent to dealers. The brands are offering $500 to $2,000 rebates on most models and have sweetened lease pull-ahead deals. Dealers will offer the deepest discounts so far on the redesigned 2014 Chevy Silverado and GMC Sierra pickups, which were launched last summer.
U.S. new-vehicle sales have risen just 2 percent year over year since Labor Day, compared with a 10 percent gain in the 12 months before that. In January, sales declined 3 percent and the seasonally adjusted annualized selling rate fell to 15.2 million, the lowest since April, as relentless snowstorms and subzero temperatures deterred buyers in much of the country.
But analysts are warning of troublesome signs that go well beyond bad weather.
After four years of rapid growth, the sales pace "appears to have stalled," Morgan Stanley analyst Adam Jonas said.
"The industry stands at a crossroads," Jonas said. "We really think the best of the U.S. auto replacement cycle is over. The incremental buyer is moving from someone who needs to replace their car to one who just wants to, making financial willingness to lend and credit availability more important than ever."
Publicly, at least, automakers are downplaying rising inventories. And most are holding the line on incentives so far.
TrueCar said incentives declined 3 percent in January year over year, though Ford Motor Co. and American Honda Motor Co. posted double-digit increases. Incentives dropped 10 percent from December, when year-end sales created a flurry of business as dealers scrambled to meet 2013 targets.
GM's inventory grew by about 32,000 units in January as its sales fell 12 percent. That resulted in a 114-day supply of vehicles as of Feb. 1, the highest among major automakers and up from 81 days a month earlier.
"We're closely watching U.S. industry and our own inventory levels, and we will maintain our disciplined approach to balancing supply and demand," GM CFO Chuck Stevens said during a conference call to discuss quarterly earnings last week.
Ford Motor had a 107-day supply as of Feb. 1, after starting the year at 73 days, and Chrysler Group had a 105-day supply, up from 79 days. Chrysler's inventory did not grow as much because its sales rose 8 percent last month, largely because of the new Jeep Cherokee.
Threat to margins
Ford's chief sales analyst, Erich Merkle, said he's not concerned, noting that the figure was exaggerated by the weak selling rate in January, when Ford Motor's sales slid 8 percent.
But Brian Johnson, an analyst with Barclays Capital, said even when adjusting for the weather -- he recalculated inventories assuming a January SAAR of 15.8 million -- GM and Ford each still would have had more than 100 days' worth of vehicles, more than any month since early 2009.
Earl Hesterberg, CEO of Group 1 Automotive, said his biggest worry this year is the potential effect of high inventories on profit margins. Group 1 dealerships had a 72-day supply of new vehicles.
"There's no way you can have dealerships with that level of inventory without it impacting margins," Hesterberg said on a conference call.
Asbury Automotive Group COO Michael Kearney said he's comfortable with overall inventories right now, but he's keeping his eye on a few brands and their production levels. He declined to say which brands.
"If production starts to quickly outpace consumer demand for a product, you first would expect the manufacturer to put on some sort of incentive," Kearney said. "If that did not correct the problem, what you would logically draw from that would have to be a slowdown in production of that product. There's only so much physical space to store product and inventory."
Kearney said any increase in interest rates also could raise concerns. Every 1 percentage point increase in interest rates would cost an average dealership about $3,750 a month for floorplanning, according to data from the National Automobile Dealers Association.
"If interest rates started to jump up or started to move," Kearney said, "then everybody in the industry would take a much harder, longer look at inventory levels because of the cost involved."
Awaiting warmer weather
Automakers and dealers hope lots start to become less crowded with cars in the coming months as customers put off by the cold in January get in more of a shopping mood.
"Ultimately, when the weather breaks, we figure we're going to get very busy very quickly," said Don Griffin, general manager of Kayser Ford-Lincoln in Madison, Wis., where subzero temperatures were recorded on 14 days last month.
"Out of the 27 years that I've been doing this, I don't ever recall a winter quite like this," he said. "We can deal with the snow, and I think the consumer can deal with the snow, but the bitter, frigid cold has definitely had an effect. I told our staff if somebody shows up out on the lot in this weather, don't let them leave because they obviously have a need."
Several automakers bucked January's negative trend, including Subaru, which posted a 19 percent increase. All of Subaru's vehicles except the BRZ sports car are all-wheel drive, making them appealing options in the winter.
Nissan North America posted a 12 percent sales increase in January, the second full month of U.S. production of its redesigned Rogue crossover, which was up 55 percent in January.
Toyota Motor Sales U.S.A. said weather was the biggest reason its deliveries fell 7 percent last month, its biggest year-over-year decline since the 2011 tsunami created inventory shortages.
"Our sales were actually up in all Western and Southern areas," Bill Fay, Toyota Division's general manager, said during a conference call last week. "But that couldn't offset the losses we had in Middle America and the East Coast."
Mike Colias, Jamie LaReau and Amy Wilson contributed to this report.