For Ford, Incentives Are Making Things Worse

Zero-percent financing is exacerbating problems that began several quarters ago.
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Interest-free financing has supercharged

Ford's

(F) - Get Report

sales this fall, but the company needs a lot more than goosed-up volume to get its earnings out of reverse.

The big sales momentum created by financing incentives again loomed large in the industry's November numbers, though it was far from evenly distributed.

General Motors

(GM) - Get Report

said sales were higher by 13%, while Ford's were up 4.4% in November from a year ago.

Daimler-Chrysler

(DCX)

said sales were down 5.8% from a year ago.

The story is well known: In the wake of the Sept. 11 attacks, GM began offering interest-free financing, essentially forcing its competitors to do the same. GM extended the deals last month, and despite the potential damage to future sales and their financing profit, Ford and Chrysler had little choice but to follow suit.

Ford's problems, which began with the Firestone tire recall this year and have encompassed a steep sales decline, go well beyond the cost of sales incentives. On Monday, the company said it was reducing its retirement and health care benefits, and cutting 600 hourly workers, and warned that fourth-quarter sales, despite the incentives, would trail those of a year ago. The company is widely expected to report a loss of more than $600 million for the period, its third in three quarters.

But the pressure of a price war could not have come at a worse time.

"Ford and Chrysler are at the mercy of GM," said Domenic Martilotti, a research analyst at Bear Stearns. With strong product momentum, especially in light trucks, GM has taken market share from the other companies.

"If it had a choice, Ford would abandon the incentives," said Martilotti. "It's not a profitable proposition for them."

According to industry analysts, the incentives are expensive. "The cost of the program is $290 per vehicle," said Scott Hill, an analyst at Sanford Bernstein. He said Ford has confirmed that his estimate is in the ballpark.

"These are expensive programs," said Hill. "The only way to pay for them is to gain market share on a long-term basis." So far, GM is gaining market share at the expense of the other U.S. automakers, including Ford.

In a conference call with industry analysts, Ford said it expects it rate of sales to slow in December, January and February, because the aggressive incentives pulled ahead demand from 2002. Today, Ford set its production schedule for the first quarter of 2002, cutting it 9.3% from a year earlier, to 980,000 vehicles.

Among other reasons for an earnings warning from Ford, the

Wall Street Journal

cited higher-than-expected costs for bad loans at its finance unit and losses on return lease vehicles.

The Big Three fell in trading today, with Ford losing the most. It shed $1.14, or 6.02%, to $17.80, while Daimler-Chrysler declined 99 cents, or 2.36%, to $41. General Motors fell 67 cents, or 1.35%, to $49.03.