Sales stall as discounts dry up

DETROIT • Automakers just paid the price for dialing back on discounts for the first time in 55 months.

Almost all major manufacturers reported declining U.S. deliveries for July, led by a 15-per-cent plunge at Nissan Motor Co. The industry tempered spending on incentives, snapping a streak of monthly consecutive increases that began 41/2 years ago, according to J.D. Power.

The drop in sales caps a rough month for the auto industry during which Detroit’s carmakers all reined in their earnings guidance and Ford Motor Co. embarked on a five-year restructuring plan. The sales month will underscore investor fears that auto sales have peaked and that, without ever-higher sales incentives to keep consumers interested, demand will continue to soften.

“The incentives we’re seeing are more targeted,” in part because inventories are lean, said Michelle Krebs, executive analyst for AutoTrader. “They’re not just slathered on.”

General Motors Co. lowered its profit expectations last week largely because of rising commodity prices, which have jumped since U.S. President Donald Trump put tariffs on steel and aluminum. Meanwhile Fiat Chrysler Automobiles NV said Jeep’s weak performance in China was its problem. Jeep had a great July in the U.S. — making Fiat Chrysler the biggest player in the market to report a gain — but softening overall demand just adds to the industry’s worries.

Carmakers may have done their discounting early this summer and decided that enough was enough. The results indicate some payback for promotions that fuelled a better-than-expected close to the first half. Underwhelming numbers from Nissan, Ford and Honda Motor Co. suggest the annualized industry sales rate probably trailed analysts’ average estimate for 16.7 million cars and light trucks. The rate, which is adjusted for seasonal trends, was 16.8 million a year earlier and 17.5 million in June.

An incentive pullback is rare for this time of year, said Mark Laneve, the head of U.S. sales for Ford, which was kneecapped by steep drops for the Escape crossover and Fusion sedan.

The firm also was running short of inventory for its highly popular F-series pickups after a supplier fire disrupted production back in May.

“I don’t ever remember a de-escalation from June to July, as you go into the traditional summer sell-down season,” Laneve said on a call with analysts. “June received much more benefit than July in terms of the Fourth of July business.”

Part of the reason for the pullback is that it’s getting more expensive to offer incentives, especially those tied to loans. The U.S. Federal Reserve hiked interest rates three times last year, once this year and has signalled that it will bump them two more times in 2018. That makes subsidized interest rates more expensive to offer and undercuts sales.

“The summer is usually a time for manufacturers to roll out the deals and clear out the inventory,” said Edmunds analyst Jeremy Acevedo. “But interest rates are peaking right now. It’s getting more expensive to offer these deals.”

Another issue, said Charlie Chesbrough, senior economist for Cox Automotive, is that while carmakers are pulling back on new-vehicle incentives, there are great deals on the used lot. Cars are coming out of leases in huge numbers, giving consumers a low-priced alternative just across the parking lot from the showroom.

“There is such tremendous competition from the used-car market,” Chesbrough said in a phone interview. “We have so many off-lease vehicles coming back to market and they are cheaper than new cars.”