The cost of the Firestone tire recall grabbed the spotlight at Ford Motor Co.'s third-quarter earnings announcement last week, but the automaker's marketing costs in the quarter dwarfed the recall's $500 million price tag.
Ford reported net income of $888 million for the third quarter, down 7.4 percent from a year ago, but said profit would have been a record except for the cost of the recall. Worldwide revenue rose 7.5 percent from a year earlier to $40.06 billion.
At 11.1 percent of U.S. revenue, marketing costs came in at $2.4 billion, up from 10.5 percent and $2.2 billion last year. That includes advertising, as well as incentives. Ford said higher U.S. interest rates made it more expensive to offer lease incentives and cut-rate loans.
The company said it still expects record earnings of more than $6.1 billion in North America for the full year.
The high cost of incentives has cast a long shadow across the entire industry.
Jim Holden, DaimlerChrysler CEO for North America, used the term 'profit recession' to characterize the U.S. market, where sales are good but margins are thin.
INCENTIVES, SALES UP
Before 1996, manufacturers could cut incentives when sales were good, Holden said in an interview last month at the Paris auto show. Since then, incentives and sales have increased together.
'The winner is whoever is at the newest point in the product cycle. GM is there now. But the team poised to launch the most product in the next four years is us,' he said.
DaimlerChrysler reports earnings Thursday, Oct. 26. The company has warned investors that high incentives will help push its North American operations into the red for the quarter.
Autodata Corp. in Woodcliff Lake, N.J., estimates that incentives for the former Chrysler Corp. brands averaged $2,380 per unit in August, up from $1,675 a year ago.
Wall Street analysts expect DaimlerChrysler's per-share earnings to fall about 80 percent for the third quarter, according to Boston-based First Call Corp.
Meanwhile, 'pricing pressure in the European market makes North America look like kid stuff,' said Scott Merlis, auto industry analyst for Wasserstein Perella Securities Inc. in New York. He described the European market as 'profitless prosperity.'
Ford's third-quarter loss on European operations widened to $221 million from $156 million a year earlier as unit sales slipped 1.2 percent for the quarter, to about 415,000.
GM reported on Oct. 12 that European operations lost $181 million in the third quarter, compared with $32 million a year earlier.
Merlis said he estimates incentives in North America could go up another $300 to $400 per unit next year.
In the short term, new product for the 2001 model year should help ease the industry's incentive burden, said John Casesa, auto industry analyst for Merrill Lynch & Co. in New York.
'There is no better solution for the incentive problem,' Casesa said, short of a worldwide reduction in overcapacity, which is not likely any time soon.