Zero Percent Stays at GM, Ford

GM Riding a Wave? by Joseph Szczesny (11/12/2001)

General Motors and Ford Motor Co. has extended their zero-percent financing offers through the holiday season, and the Chrysler Group is expected to follow suit.

The new round of incentives aren't as generous as those first offered in late September and more vehicles are excluded this time around. Ford, for example, deliberately left out its popular Ford Escape sport-utility vehicle and GM has excluded the entire Cadillac line, the new Saturn VUE and the Chevrolet Corvette.

Nonetheless, observers expect the extension will continue pulling buyers into the showrooms for balance of the year. Despite the concerns about dwindling profit margins, the automakers really didn't have much choice, analysts observed. Neither GM nor Ford was in position where they could simply go cold turkey, suggested Jim Sanfilippo, executive vice president for Automotive Marketing Consultants Inc. in Warren, Mich. "The can't terminate it. They have to back away a couple steps at a time," said Sanfilippo.

Sanfilippo added both GM and Ford have restructured the zero-percent loan in the programs that take effect this week. For example, the no-interest loans are only available in 36-month contracts for qualified customers. In addition, many of the best deals involving leftover '01 models are now gone and the automakers are scrambling to catch up demand for most popular utility vehicles, he added.

Power unleashed

The zero-percent financing has been one of the most powerful incentives unleashed this year by Detroit's carmakers, Sanfilippo added. Car sales jumped more than 26 percent in October and the strong show boosted total retail sales across the U.S. by a record seven percent in October, according to the U.S. Department of Commerce.

In addition, the interest rates cuts have made the zero-percent financing a little less expensive for automakers, and with unemployment rising, the Federal Reserve Board is expected to cut interest rates again in early December, noted Saul Hymans, an economist with the University of Michigan. The zero-percent financing also has ensured that total car sales this year will come in at around 16.6 million units — the second-best total in the industry's history, he added.

David Cole, director of the independent Center For Automotive Research in Ann Arbor, Mich., added that the zero-percent financing has helped stimulate the overall economy at a critical time. The federal government’s stimulus package, which is supposed to help short-circuit the recession that economists now believe was developing even before the terrorist attacks of September 11.

The zero-percent financing also helps stronger companies such as GM keep the pressure on rival on weaker rivals, Cole added. "Somebody is going to have to drop out," Cole said.

Competitive pressure

Jim O'Connor, Ford Division president, said Ford was extending zero-percent loans offer into January because of competitive pressures. "We are extending our program to keep our dealers competitive and sales strong in an increasingly aggressive market," O'Connor said.

"When we announced 'Keep America Rolling' we hoped it would positively impact automotive sales and help stimulate consumer spending," noted Bill Lovejoy, GM Group Vice President for Vehicle Sales, Service and Marketing. "Results have been beyond anyone's expectations…Our decision to continue to 'Keep America Rolling' through the end of the year is to build on our positive momentum and overwhelming public reception to this program," Lovejoy added.

Goldman Sachs, meanwhile, said it has raised its estimate of GM's earnings in 2002 to $1 from 70 cents. The brokerage said GM was expected to post modest earnings in North America for 2002 despite a significant drop in automobile sales, the report suggested. "Our forecast already presumes that significant cost reductions work to offset lower volume, eroding prices and higher pension costs in North America," Goldman said in a brief research note.

William Clay Ford Jr., however, warned in a speech in Kansas City, Mo., the current level of incentives is unsustainable.

Ford, however, also said the slowdown in the worldwide economy, coupled with the overproduction of vehicles, "assures that extreme price competition and razor-thin margins are going to be the order of the day.”

Hymans, however, also said the slowdown in the U.S. economy, coupled with a huge U.S. trade deficit, should slowly undercut the value of the U.S. dollar, which would make big-ticket imports like automobiles more expensive in North America.

story posted 11/18/01

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