Monday, November 02, 2009

Ford Profits, Cash for Clunkers, is the Auto Sector in for very tough times ahead?

Ford went from being the worst, to the best of the big three, which isn't saying much.

Their merger with Mazda several years ago, IMO, is what has kept them alive. Still, they are in trouble and recent successes and profits are only cosmetic.

They reported a one billion doller quarterly profit. If you take into account that the government incentive cost an average of $4000 per vehicle, then its scary to think of how much Ford would have lost without the incentive program.

Scarier still is the knock on effect this will have.

According to this article, The Cash for Clunkers program sold 125,000 out of the 700,000 cars that wouldn't have been sold otherwise.

In a normal cycle, 575,000 cars would have been sold.

Incentives, cut back, promotions, and the like have slowly killed the auto industry over the last decade. It's at the point where people don't want to buy unless there's some sort of sweet deal going on.

When the Cash for clunkers incentive program ends, what happens next?

If 125,000 future car purchases were pushed forward by prospective buyers this quarter, then you can assume that instead of a typical quarters 575,000 cars being sold, then 450,000 cars will be sold instead in the upcoming quarter. That's without the psychological effect. People who missed the cash incentives program might be holding out for another one.

I firmly believe these door buster deals are a huge contributing factor which killed the US auto sector. Sales spike with incentives (while auto companies profits are usually trimmed for the deals), then they slump by the same amount afterwards. It's common sense. It's like expecting sales on Thanksgiving week to compete with the following week.

I can guarantee you that the week after the US Thanksgiving week deals is the slowest week of the year. Most people who needed or wanted something already got it.

Same for the auto industry. They're in for more tough times ahead. The Cash for Clunkers might have given them a short term profit (at the expense of the American tax payer), but the pinch is coming big time. This time, the big question is, Is the auto industry prepared for another dramatic drop in sales?

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