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Industry Insight: Can Cars Be Profitable?

Stocks in this article: GMGMQ F TM

DETROIT ( TheStreet) -- After the collapse of General Motors (GMGMQ) and Italian automaker Fiat's investment in the bankrupt Chrysler, the American car industry looks completely different from just a year ago.

With Ford (F) being the only company still financially viable from the Big Three, foreign companies' shares have become investors' main options. However, even the relatively strong Honda (HMC), Toyota (TM), Volkswagen and Nissan (NSANY) have suffered huge declines in sales.

The question is: Is it possible for any car maker to turn a profit big enough to satisfy investors? After all, car sales tumbled 35% in the first six months of the year. While the drop has been less severe for foreign manufacturers, their sales are still down 25% on average.

Competitive factors in the auto industry are massive and put a big damper on profits. Consider the following factors influencing the industry before betting on car stocks:

Degree of Rivalry: The average person off the street would have a difficult time naming all the car brands available in America today. There is a dizzying array of vehicles for sale, many of which are simply variations on other offerings by the same company under a different brand name. In an effort to develop a brand for every conceivable consumer, the auto industry has become an overly crowded market that can't get out of its own way.

Fierce competition in the industry has led to an ever-decreasing ability to produce a profit. Companies regularly cannibalize their own sales with identical models across brands and flood markets with more dealerships than an area can support. With a credo of "more is more," it seems the car industry is content with fighting tooth and nail for sales rather than working smarter on better products that meet customers' needs.

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