For the first couple of months after the September 11 terrorist attacks in America, new car and truck sales in the United States raced ahead, fueled by automakers' programs of no-interest loans. But now, many of those in the industry are worried about the so-called "pull-ahead effect."
The executive editor of the industry publication Automotive News, Peter Brown, explains how the pull-ahead effect works: "If you make a deal that is good enough, you can make people buy a car earlier than they otherwise would have bought it," he says. "And that is nice in the short run for getting rid of inventory or keeping your plants running. What that means is that a person who might have bought a car three months from now or six months from now is now out of the market for the next couple of years."
In the effort to stimulate buyers following September's terror attacks, American automakers' no-interest loan programs were so successful, says Peter Brown, that they produced the best sales month ever. "It is hard to imagine, but the greatest auto sales month in the history of man in America was October, the month right after September 11," he says. "And that is because the zero-percent financing took the imagination of the American public so much that lots of people who were planning on getting a new car next year went out and bought a car."
On a year-to-year basis, General Motors' November sales were up 13 percent, while Ford's rose by 4.4 percent. Ford's Sales Analysis Manager George Pipas says "that was not far off our all-time record for November."
But DaimlerChrysler sales fell nearly 6 percent because it offered no-interest loans on fewer models. Peter Brown says Chrysler stood to lose the most on these incentives. "Chrysler was in terrible shape," he says. "Their market share was low. ... They were trying to lower sticker prices and get away from so many incentives and trying therefore to hold some modest amount of gross profit on the vehicle. Suddenly, they have got lower sticker prices and an incentive of zero-percent, which can be $2,000 or $3,000 [loss of profit per vehicle], depending on the deal."
What does zero-percent financing do to the carmakers' profitability? It takes several hundred dollars of gross profit out of the vehicle and, on a good many of these vehicles, they were not making much money, if any, when they started," says Mr. Brown. "So, you are going to see Chrysler's loss be much deeper than they expected it to be. Same way with Ford."
Ford's George Pipas acknowledges the big incentives hurt profits. "The level of profitability is what funds investments in future products and, you know, the vitality of the industry," he says.
We asked Peter Brown who is in good-enough financial shape to withstand these assaults on profitability? "GM, of the Big Three, is in the best position to do it," he says. "Their operations are running reasonably well. They have got a lot of 'hot' trucks. Toyota has, of course, followed. Toyota has been having a great year and continues to have a great year."
But Ford's George Pipas believes a downturn in sales in inevitable, due to the pull-ahead effect. "You know, at some point in time, you do have to consider the fact that there was so much business generated in October and early November that you are going to run out of customers," he says.
In short, look for U.S. auto sales to drop off early in the new year.