Will GM, Ford offers lure more buyers?
Posted
Mar 31 2009, 01:11 PM
by
Anthony Mirhaydari
Rating:
On Tuesday, General Motors (GM) and Ford (F) announced they will join Hyundai in offering protection plans to attract buyers threatened by job loss.
If, say, you get laid off after splurging on a new Corvette, GM will contribute up to $500 toward your monthly payments for nine months and protect the value of your car at trade-in time. Ford will offer payments of up to $700 for a full year.
The moves comes as the auto industry suffers from the lowest sales rates in nearly three decades. Complicating matters is the continued slide in Detroit's market share as buyers become more interested in small, fuel-efficient cars at the expense of hulking trucks and SUVs. Through February, GM's sales are down 51% while Ford's are off 46%.
Will these new sales incentives -- along with 0% financing, generous discounts, rebates and the government's commitment to back GM and Chrysler warranties -- be enough to get people back into the showrooms? There is room for optimism. Here's why.
The single most important metric we need to be watching is the spending habits of America's consumers. Deep spending cuts caused by over-indebtedness is the reason this recession is so much deeper and more painful than prior slowdowns. Last year, the U.S. personal savings rate jumped from 0% all the way to 5% of disposable income. As a result, auto sales fell at a horrific, gut-wrenching pace.
So, what changed? Well, retail sales in general are starting to stabilize as Americans reach the limit of how deeply they can cut or postpone spending to boost savings and reduce debt. UBS analysts now project the savings rate to top out at 6.8% this quarter (it's currently at 4.2%). It is then expected to finish the year at 5.8% before falling to 5.6% in 2010.
America's current obsession with thrift is unsustainable. It will take 27 years to replace all the cars on the road at the current sales rate. Car repairs are being postponed. Durable-goods purchases as a percent of income, which includes cars and appliances, have fallen to the lowest levels in more than 40 years.
This will eventually have to stop, out of pure necessity. The automakers, by offering these additional incentives, will only encourage this process by making it less risky. Warmer weather (which helps dealer traffic) and distribution of fiscal stimulus funds through payroll tax credits will help as well. By the end of the third quarter, the automakers could very easily be on the path to recovery. The big question is whether the companies can survive until then.
Image credit: rambleonsylvie
Disclosure: The author does not own or control shares in any of the companies mentioned.
Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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