DETROIT -- Planned cuts in vehicle production by General Motors and Ford Motor Co. will fail to pare high inventories, and could result in more costly cuts early next year, analysts said on Thursday.
Following weak U.S. auto sales in August, GM and Ford on Wednesday set targets for fourth-quarter vehicle production in North America that were 6.8 percent and 7.8 percent below year-ago levels, respectively.
"We don't expect the production cuts to solve the industry's inventory problems, raising the specter of additional cuts in 2005," said Deutsche Bank analyst Rod Lache, who also cut his earnings outlook on GM.
Deutsche Bank said it expects GM to earn $1.26 in the fourth quarter, down from its previous estimate of $1.39.
Production cuts can hurt earnings because automakers count profits from vehicles when they are shipped to dealers, not when they are sold to consumers.
GM has 1.15 million units in inventory, while Ford has 784,000 at the end of August. Cars and trucks piled up on dealer lots as both automakers saw sales decline for the third straight month, despite aggressive consumer incentives, as high energy prices and weak consumer confidence sapped demand.
If vehicle sales do not pick up in the next four months, "the automakers will have to bear the pain of further production cuts," J.P. Morgan analyst Himanshu Patel said in a research note.
Deepened worries about the overall health of the U.S. economy are expected to hurt vehicle sales in the coming months. Industry sales were down 5.4 percent in August from year-earlier levels.
On Thursday, Ford's chief sales analyst tried to play down concerns over inventories.
"The sell-down for 2004 models is going quite well," George Pipas said, adding that the automaker was comfortable with its current level of inventories.
The planned fourth-quarter production cuts from GM and Ford are expected to hurt major automotive suppliers.
Deutsche Bank on Thursday cut the earnings outlook on American Axle & Manufacturing Holdings Inc., Delphi Corp., Lear Corp., Magna International Inc. and TRW Automotive Holdings Corp.
Visteon Corp., the largest supplier to Ford, will have to cut its earnings outlook after the No. 2 automaker cut its production outlook, Prudential Securities analyst Michael Bruynesteyn said in a research note.
Goldman Sachs cut its fourth-quarter earnings estimate for Delphi Corp., the largest U.S. auto parts supplier.
The production cuts remove some uncertainty from the stock price, but are not deep enough to solve the inventory overhang, UBS analyst Robert Hinchliffe said in a note.