Car Sales And The Financial Threat Of Incentives

July car sales will almost certainly be the best since the “Cars for Clunkers” period last September. Industry experts expect annualized figures to reach 11.8 million. That is still far below the 16 million vehicles that were sold in America in 2006, but automakers have fired enough  people and closed enough plants to make money at lower production levels.

Edmunds expects that last month’s sales will be 1,064,400 units, an 8.4% increase from July 2009 and an 8.9% increase from June 2010. Ford Motor (NYSE: F) and Nissan are expected to do well. Chrysler and Toyota Motor (NYSE: TM) are not.

One of the reasons, if not the primary reason, that sales are doing so well is incentives. Car companies had largely gotten out of the incentive business except for Toyota, which has tried to lure buyers back to its showrooms after its recall disaster. Chrysler has started to cover the first two months of car payments for new customers. Even with that and other promotions, Edmunds reports that incentives were down 7% year-over-year in June to $2,261.

It is easy to blame Toyota for an industry-wide return to programs that pay customers to buy cars. But none of the large car companies has held the line completely. Ford’s June incentives were $3,182 per vehicle, just short of Chrysler’s $3,259. Ford is by far the most successful of The Big Three. It is a wonder that it has to hand out so much to keep its order flow coming.

Now that car companies have brought their expenses down so extensively, there is little that can hurt their new-found profits other than another deep recession. Those margins can be undermined, however, and giving away money is the most likely path to that. The new model cars must not be as good as the auto companies say they are.

Douglas A. McIntyre