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Slower car sales could revive big discounts as dealer lots crowd

A Nissan GT-R 2014 edition is displayed in

A Nissan GT-R 2014 edition is displayed in a showroom of the Atlantic Auto Mall in West Islip. (July 29, 2013). Credit: Newsday / Jeffrey Basinger

Automakers entered their year-end sales push last month with the most cars and trucks on U.S. dealer lots in eight years, a buildup that’s poised to test the industry’s newfound pricing discipline.

Inventory climbed to almost 3.4 million cars and light trucks entering November, according to industry data provider WardsAuto. At 76 days’ supply, that was the highest for the month since 2005.

Carmakers have boosted production to meet demand that has left the industry on pace for the best sales year since 2007. Swelling supply raises the stakes for sales in November after deliveries missed estimates in October and slipped in September for the first time in 27 months. If buyers don’t absorb enough inventory, more automakers, including Toyota Motor Corp. and Honda Motor Co., may need to follow Ford Motor Co.’s lead by trimming production to avoid margin-slicing discounts.

“Inventory has been so tightly managed, and it has been because demand has been there and production hasn’t been able to keep up,” Jeff Schuster, an analyst with researcher LMC Automotive, said in a telephone interview. “If you change that scenario around, the question is, does the discipline that we’ve seen the industry operate with lately stick around?”

U.S. car and light truck sales in November probably climbed 5.2 percent to 1.2 million, the average of seven estimates in a survey by Bloomberg News. The monthly results automakers report tomorrow will include deliveries tallied through today, helping boost the number of vehicles sold, because the month ended over the weekend.

Getting Tougher

The monthly annualized industry sales rate, adjusted for seasonal trends, may climb to 15.8 million in November, the average of 13 estimates, from 15.3 million a year earlier.

Deliveries may rise to 16.1 million next year, the average estimate of analysts in a survey by Bloomberg News in September. While that would be the smallest annual increase since its rebound from a 27-year low for sales in 2009, it would extend the industry’s streak of gains to five years for just the second time since World War II.

“As the market begins to slow down and begins to peak, it’s going to get tougher for everybody,” Joe Langley, the head of North American vehicle production analysis for IHS Automotive, said by telephone. “Are manufacturers going to be responsible and curb production and keep inventory in check, or are some going to resort to old, bad habits and churn it out and then throw incentives on them? That’s what’s going to be interesting, to see how that plays out.”

Ford First

Ford has chosen the route preferred by analysts such as RBC Capital Markets’ Joe Spak by scheduling two weeks of downtime for its plant that builds the Focus compact and C-Max hybrid, as well as about one week off for a Fusion sedan factory late this year to trim inventory. Toyota and Honda may need to follow suit with their Camry and Accord sedans and RAV4 and CR-V utility vehicles, Spak wrote in a Nov. 7 report.

Toyota, whose Camry is headed for a 12th straight year as the best-selling car in the U.S., and Honda are being challenged by more competitive sedans from Detroit automakers such as Ford’s Fusion and GM’s Chevy Impala. Camry supply was about 25 days more than its seasonal historical average in October, and Accord exceeded its usual inventory by almost 40 days, according to RBC Capital. The Japanese automaker has resorted to offering no-interest loans for as long as 60 months to buoy Camry sales.

‘Stiffer Competition’

“Bottom line, both these historical stalwarts of the mid- size sedan market now face much stiffer competition,” Spak said in the report. “Toyota has shown a willingness to use incentives more than Honda, but we still believe matching supply to demand is their preferred method.”

Among 15 of the top-selling vehicles in the industry that RBC Capital’s analysts track for inventory, General Motors Co.’s Chevrolet Silverado and GMC Sierra pickups were the only models seen supporting higher production.

GM probably led major automakers with a 14 percent increase in November deliveries, the average of seven estimates. The U.S. Treasury Department said last month that it expects to sell its remaining GM common shares by year-end, pending market conditions. The exit would end restrictions on pay for top executives that the Detroit-based automaker has said hampered recruiting.

Stocking Up

Sales may rise 11 percent for Chrysler Group LLC, the average of five estimates. Wesley Lutz, a Chrysler dealer in Jackson, Mich., said his store has about 120 days supply of vehicles in stock, roughly double what he usually likes to carry. Lutz cited his anticipation of strong winter and spring selling seasons and his ability to borrow at less than 2 percent to finance the inventory on his lot.

“I’m probably not managing my inventory as well as I do at 8 percent, but I’m willing to roll the dice and stock some inventory in December and January, because I think we’re going to have a great market in February,” Lutz said by telephone. “We’re borrowing money so cheaply.”

Reid Bigland, Chrysler’s sales chief, said he was confident that the Auburn Hills, Mich.-based automaker would record its 44th straight monthly U.S. sales gain in part because he had a full month to sell the Jeep Cherokee, the long-awaited replacement for the Liberty sport-utility vehicle.

“They’re selling quickly and turning quickly,” Bigland said in an interview last month at the Los Angeles Auto Show. “We’re very excited about getting back into that mid-size SUV segment that we’ve been out of since August of 2012.”

‘First Real Test’

Deliveries for Ford probably climbed 5.6 percent, the average of seven estimates. Management from Dearborn, Mich.- based Ford cited “aggressive discounting” by Toyota of the Camry and its hybrids in meetings with Morgan Stanley’s Adam Jonas, the New York-based analyst said in a Nov. 26 note.

Executives at GM agreed “there are some warning signs brewing in industry sales momentum and discipline,” Jonas wrote. The average estimate of six analysts is for gains of 6.5 percent by Toyota, 3.1 percent for Nissan Motor Co. and 0.5 percent for Honda.

Discounting has been limited this year on an industywide basis, and the average selling price of new vehicles was $30,079 through the first half of November, up $461 from a year earlier, according to LMC Automotive.

“If it’s an underwhelming month, we’ll need to look to see if there are any decisions to start to ratchet back” production this month or in January, LMC’s Schuster said. “It could end up being the first real test that the industry’s faced since the restructuring."

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