Middling June Auto Sales Could Have Car Companies Hitting the Gas (Again) on Incentives

The next numbers to watch, after relatively ho-hum U.S. auto sales in June, will be the closely related numbers for incentives, and for inventories of unsold cars. That's an important test whether the car companies can stick to their stated plans to cut production to fit demand, often called a "pull" strategy. In that ideal world, demand always just barely exceeds supply. That scenario allows the automakers to maximize profits and avoid big discounts.

A switch like that would be a big change from years of a "push' strategy for Chrysler, Ford (F) and General Motors. Too many vehicles chased too few buyers, resulting in ever-lower margins and ever-higher discounts. Bankruptcy for Chrysler and GM last year and a near-miss for Ford were the ultimate logical conclusion of the "push" philosophy.

In 2010, if disappointing auto sales cause cars to pile up, look for incentives to creep higher, possibly for the first time this year. Fleet sales could also increase. The last thing the car companies want is to go into the summer and fall with a lot of unsold cars from the previous model year. A classic example of that was in the summer of 2005. GM back then kicked off Employee Pricing for Everyone, for short-term tactical reasons, to get rid of excess inventory. The deals worked so well other car companies were forced to follow suit. The artificial stimulus boosted U.S. auto sales to 17 million in 2005, but in retrospect, the 2005 sales spike was a milestone on GM's road to bankruptcy. This year, according to Edmunds.com, the average U.S. incentive in June was $2,661. That was just about even with the previous month. That's down some from $2,857 in the year-ago month, but not by a whole lot. June car sales came in about as expected, which is to say disappointing after a few earlier months this year with bigger percentage increases. According to AutoData, June industry sales of 983,738 were 14.4 percent higher than the year-ago month. AutoData estimated the Seasonally Adjusted Annual Rate for June at about 11.1 million units, up from a dismal 9.7 million in the year-ago month. Year to date, auto sales were up 16.7 percent to about 5.6 million.

A real test will come over the next few weeks, while the car companies decide how many cars to build, and how much they'll have to cut prices to move the metal.

Photo: GM