General Motors Corp. and Ford Motor Co. broke records this summer with their employee-discount incentive programs, each touting the promotion as a big success.
But while cars sales zoomed, profitability plunged. Last week, GM North America, the company disclosed a loss of $1.6 billion in the third quarter of 2005, compared to $88 million one year ago. Over at Ford Motor Co. Chairman Bill Ford announced a global third-quarter pre-tax loss of $1.3 billion.
After the party, the hangover. As the incentive programs ended, retail sales of General Motors and Ford Motor Co. new vehicles dropped 57% and 45%, respectively, in early October, compared to early October 2004.
Industry-wide, the first nine days of October saw a sales decline of 33% compared to the prior year, and a 44% drop vs. the first nine days of September, according to a survey by the Power Information Network (PIN), a division of J.D. Power and Associates. American Honda had the smallest decline in early October (8%), followed by Toyota Motor Sales USA (14%). DaimlerChrysler sales declined by 32% and Nissan North America reported a 21% decline.
While rising gasoline prices were a factor during the period, the thinly disguised rebate programs are being blamed for undermining the market. Manufacturers say they can’t continue to offer large incentives for fear it will negatively impact the industry, experts said.
Tom Libby, senior director of industry analysis at PIN, attributes the drop to a lack of high-impact incentives from the major automakers, higher gas prices, low inventory levels and a possible market adjustment due to strong summer sales.
“The aftermath of the employee pricing programs is having a dramatic impact on automotive retail sales in October,” said Jeff Schuster, executive director of global forecasting at J.D. Power and Associates, in a statement. “A lot could happen between now and the end of the month, but at this point, we’re on track for an October like we haven’t seen since the early 1990s.”
General Motors became the first company to extend employee pricing to consumers in June, offering the discount on 2005 models to clear out its inventory (Sept. 14 P&I). The company later extended the offer to select 2006 models.
Competitors Ford and DaimlerChrysler AG’s Chrysler Group offered similar discount programs and concluded the employee-pricing plan on Oct. 3 on 2005 models.
GM North America reported a loss of $1.6 billion in the third quarter of 2005, compared to $88 million one year ago. The company attributes the loss to lower production volumes, increased health care costs, higher material costs and a shift away from full-size sports utility vehicles.
GM attributes the decline to the clear out of its 2005 models and has said it wasn’t planning any immediate changes to its incentives offerings.
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