Competition could be overheating in the US auto industry.
Ford reported second-earnings on Thursday, and they missed analysts’ expectations. In a statement, the carmaker noted that it “now sees risks challenging achieving guidance.”
Ford’s shares plunged Thursday. Business Insider spoke with CFO Bob Shanks right after earnings were released, and he said that while issues surrounding Britain’s vote to leave the European Union and challenges with the struggling Brazilian market might have looked like major problems for the quarter, Ford had actually planned for them.
“Last quarter was so strong that analysts may have overadjusted for this quarter,” he said, noting that Ford had turned in its best-ever six-month period for profits.
But he did point to a red flag for the entire auto market: There has been an unexpected acceleration in the pace of incentive spending.
‘Not what we expected’
Incentives, such as discounts and cheap financing, spur sales of new cars but can undermine profits and cash on hand. When the entire industry piles in – out of fear of losing market share – automakers can essentially compete away their profits.
In this case it is coupled with a slowdown in sales that has come on faster than anticipated. Shanks said Ford had predicted a 2016 sales pace of 17.4 million to 18.4 million in deliveries of new vehicles but was downgrading the high end of that to 17.9 million.
“Sales are plateauing,” he said. “And incentives have continued to rise, which is frankly not what we expected.”
Rising incentive spending in a tapped-out US market for sales growth is an issue that industry observers have been fretting over for months. But Shanks cautioned against pushing the panic button prematurely.
“We’re not saying, ‘Oh no, it’s the Wild West again,'” he quipped, alluding to the rampant incentive spending increases that characterized the previous sales boom, before the financial crisis. “It’s small increases, month-to-month.”
He stressed that with challenges finally appearing in the US market, which has been surging for several years, all the major automakers will be trying to optimize their mix of vehicles on sale, focusing on the ones that can bring in the highest profits. Investors aren’t pleased at all.
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