Ford and GM August Sales: Solid Q4 On the Way?

 |  Includes: F, GM
by: Jerry Marks

Below are the 2007 U.S. light vehicle sales and inventory levels by month (including my estimates for the rest of the year).

Month Light vehicle sales % Chg from prior year % of my 2007 vehicle sales estimate Dealer inventories % Chg from prior year Inventory as % of my 2007 vehicle sales estimate
January 1,086,273 -4.7% 6.8% 3,507,700 -2.8% 21.9%
February 1,249,023 -0.6% 7.8% 3,567,300 -3.7% 22.2%
March 1,534,021 +0.6% 9.6% 3,571,900 -9.4% 22.3%
1Q07 3,869,389 -1.4% 24.1% 3,548,833 -5.4% 22.1%
April 1,331,433 -7.8% 8.3% 3,534,000 -7.0% 22.0%
May 1,555,947 +4.8% 9.7% 3,391,300 -10.4% 21.1%
June 1,450,199 -3.1% 9.0% 3,428,700 -10.7% 21.4%
2Q07 4,337,579 -2.0% 27.0% 3,451,333 -9.4% 21.5%
July 1,304,150 -12.4% 8.1% 3,163,400 -4.4% 19.7%
August [E] 1,472,808 -0.7% 9.2% 3,272,959 +1.0% 20.4%
September [E] 1,358,832 +0.7% 8.5% 3,132,829 -4.7% 19.5%
3Q07E 4,135,790 -3.9% 25.8% 3,189,729 -2.7% 19.9%
October [E] 1,220,247 +0.6% 7.6% 3,137,811 -7.7% 19.6%
November [E] 1,201,457 +0.6% 7.5% 3,508,184 -0.2% 21.9%
December [E] 1,281,967 -10.0% 8.0% 3,301,525 -5.5% 20.6%
4Q07E 3,703,672 -3.3% 23.1% 3,315,840 -4.4% 20.7%
2007E 16,046,431 100.0%
Click to enlarge

Source: BEA, Ward's Auto, Automotive News, efficient insights llc

*Inventory August through December are my estimates.

**Inventory for the quarter is simply the unweighted average (so the sum of all three months in the quarter divided by 3).

Some things to note about the sales results

Ford's numbers (overall units down 14% versus last August) sounded a lot worse than GM and everyone else.

But I have to give the folks at Ford a lot of credit for sticking to their plan. Head of industry analysis George Pipas appropriately reminded us on the call yesterday that last year Ford ran a 0%, 72 month sale to clear the 2006 model year vehicles that caused their retail market share to spike up to 15% (from a current trend of around 13%). This year than ran no such program.

Also, Ford's fleet was down 18% (year over year) in August. Fleet sales are vehicles sold to places like the government (cop cars), businesses (taxi cabs), and the rental car industry. Rental cars comprise the bulk of fleet business and tend to be the least profitable. So it was encouraging to hear George say that Ford had a 44% decline in sales of vehicles to the "daily rent" (rental car) market.

General Motors (up 6%), on the other hand seemed to take a different route (so be careful when you read all the headlines praising their results). While measuring incentives is tough, GM's head of industry analysis (Paul Ballew) even seemed to suggest that they got a little more aggressive with pricing (to make up for letting the industry get away from them in the truck market in June).

So I am not going to debate whether it is housing or a saturated vehicle market causing relatively sluggish demand this month.

Because in either case, I think everyone agrees that the demand is not really there.

That automakers like GM put up better numbers by stimulating the market with higher incentives and dumping the rest in the fleet market. And that the risk to U.S. light vehicle demand is to the downside.

North American production volumes concerning

The real issue (in my opinion), that investors and industry participants need to start watching are the production volumes.

First, if you recall back to my August 2, 2007 table (showing my inventory forecast) you may remember that I was forecasting nearly a 10% decline (year over year) in dealer inventories (unweighted average) in the third quarter of 2007. And an 11.4% decline (year over year) in dealer inventories in the fourth quarter.

Now, I am not even looking for a 3% drop in dealer inventories in 3Q07 (third quarter 2007). And I have scaled back my expectations for inventories to improve only a modest 4% or so in the fourth quarter.

Yet my sales forecast for 2007 actually rounds a bit higher than where it was last month (last month I was forecasting just below 16 million light units, this month I am forecasting slightly above 16 million units).

So what is driving my expectations for more modest dealer inventory improvements? And why did I edge up my sales forecast?

Both relate to the production levels.

Higher production inevitably forces dealers to get stuck holding more product and automakers eventually to engage in unhealthy "demand creation" incentive driven business.

Production in North America over the last two months appears to have flattened out (year over year).

And when you look at the production schedules announced yesterday by General Motors and Ford, anyone invested in a dealer with heavy domestic exposure should get a little concerned.

True, Ford's George Pipas appropriately pointed out that last year in the third and fourth quarter, Ford's production levels were slashed pretty heavily to clear out dealer inventories. Whereas this year their inventory picture is a lot better (Ford's dealer inventories were down 140,000 units year-over-year).

I agree Ford is in a much better position. But I worry they are setting themselves up to have to do a massive promotion come December (or just stick the dealers with excess vehicles). Either way, it does not move Ford forward on its "Way Forward" plan.

Why am I so worried? Look at the 640,000 units Ford announced yesterday the company plans to produce in the fourth quarter. As you see, I am forecasting about 16 million in U.S. light vehicle sales in 2007, pretty similar to what most industry gurus are calling for. And to get to the 16 million, I assume about 3.3 million units will be sold in the United States in the fourth quarter.

As a general rule of thumb, industry analysts tend to look at North American production levels needing to be aligned with U.S. light vehicle sales (as imports and exports interestingly enough tend to balance out).

The rule of thumb is not perfect.

But following this general rule of thumb, taking Ford's 640,000 units of production and my forecast for 3.3 million units means Ford would need a market share of around 17.3% (retail and fleet). Year-to-date, however, according to the Ward's industry sales data, Ford has around a 15.8% market share.

And using this same analysis for General Motors plans for 1.0 million units of production in the fourth quarter, it suggests GM will need a market share of around 27%. Year-to-date, however, again the Ward's data suggests GM had a market share of only around 23.7%.

So what all of this tells me is that either: 1) Ford and GM are about to gain a lot of market share in the fourth quarter, 2) my vehicle sales forecast is too low (and if so it will probably be incentive driven), or 3) domestic dealers are about to get stuffed with more inventory in the fourth quarter.