The factory is shaping up as the next big battleground in the war for automaker market share.

Cheap financing has cleaned out auto showrooms and brought inventory to levels that threaten future sales. Despite the flagging economy and a growing belief that vehicle demand can't hold, some automakers are planning more production in the first quarter than originally forecast. Analysts speculate that companies may have already added some overtime production for particularly hot-selling items.

General Motors

(GM) - Get Report

remains in the driver's seat. Its neighbors in Detroit are nervously awaiting the company's production plans for first quarter, due Monday, to plot their own moves. A spokesman for the company confirmed that it would provide such figures in its conference call, but declined to give more specifics.


(F) - Get Report

said Tuesday that production would be higher than expected in the first quarter, though it didn't say by how much. Ford also will announce official figures Monday, while


, the U.S. division of



, hasn't made a final decision.

"Just like GM has been a driver of financing, a critical call will be its planning on production schedule," said Scott Hill, an analyst at Sanford Bernstein. "Nobody is going to load up on production, but the question is how rapidly will they replenish inventories." If GM raises first-quarter production, it's a sign the cheap financing will keep coming, he says.

"We think they're absolutely going to continue the program. We think they're trying to dig a ditch for their competitors," said Hill.

Dig Your Own Hole

GM has reason to push. The incentives have won it market share and forced its rivals to extend interest-free loans into to early January. Those deals were first offered after the Sept. 11 terrorist attacks and were initially scheduled to last through October. Consumers have responded enthusiastically, and inventories, down 20% from the year-ago period in absolute terms, are at their lowest levels in 10 years.

"Inventories are so low that when you go to the dealers, you can't find the vehicle you're looking for," says Domenic Martilotti, analyst at Bear Stearns.

In some cases, the low inventory levels endanger sales. While Hill is forecasting November industry sales will be up 3.5% vs. the year ago to 17 million, some think an inventory squeeze will bring that figure down to 16 million compared with an all-time record of over 21 million in October.

Hill forecasts that General Motors made substantial share gains again in November, and that Ford and Chrysler gave up share. But, again, the X-factor is how much impact low inventories had on each company's sales. The financing's extension through early and mid-January also may have taken some of the immediate pressure off of consumers to buy.

In the meantime, seasonal factors might also play into production plans. The automakers like to have higher inventory levels in the spring, when car sales tend to be stronger, partly because of year-end bonuses. Though fat bonuses will probably be scarce this year, they won't disappear altogether. "They have to be prepared for the spring selling season, and there's a real battle for market share," says Jim Glassman, senior U.S. economist at JPMorgan Chase.

The production increases will be relatively minor, though the fact that they're going up at all is significant. Some analysts have forecast that sales will total only 13 million units in 2002 as opposed to 16 million forecast before Sept. 11, due to the frenzied pace of this year's final months. Philadelphia car dealers already have begun limiting their orders to manufacturers in anticipation of the drop in sales, according to the

Federal Reserve's

beige book, a survey of regional economic conditions released Wednesday afternoon.

No matter how minor, production increases would be great for the struggling economy. The automotive industry accounts for close to 5% of GDP, and all kinds of things go into making them, from semiconductors to leather.

Hood to Hood

With respect to Ford's decision to preannounce its production plans, Hill speculated that the company might be preparing to show blowout numbers and market gains for November and wanted to position itself in the lead relative to Chrysler and Asian competitors Honda and Toyota.

But that's just speculation. His market share estimates tell a different story. Hill believes that GM's share of the light trucks and car market rose to 30.5% in November from 25.9% in the same period last year; that Ford's sank to 23.1% from 24%; and that Chrysler's slid to 12.1% from 14.9%. The struggle for market share is made more intense by loyalty rates in the industry, which hover around 60%. That means that customers lost to another manufacturer are hard to lure back, even if and when your product offering improves.

From a fundamental long-term standpoint, he doesn't like any of the automakers or suppliers as stock market investments. But in the short term, he "loves" them. Despite strong performance since Sept. 21, he projects 60% or more upside from current prices if the economy recovers in the second quarter of next year as many economists are forecasting.

"We need the economy to find its bottom, when it does, these stocks will offer huge opportunities," he says. "They're likely to have cyclical outperformance and lead a recovery. That's when auto companies do well."