GM, Ford Scale Back US Auto Industry Sales Forecasts

The three biggest players in the U.S. automobile market have reduced their forecasts for industry sales this year as consumers feel the weight of high energy prices and a soft housing market while getting little relief in the form of deep discounts from the auto makers.

No.1 U.S. auto maker General Motors Corp.(GM) said Wednesday it now expects total industry sales to be as low as 16.5 million vehicles in 2007, down from nearly 17.1 million last year and in line with a forecast Ford Motor Co. (F) made a day earlier. Excluding sales of heavier-duty trucks - which are forecast at about 400,000 - light-vehicle sales could fall to 16.1 million, the lowest level since 1998.

Toyota Motor Corp. (TM), which has been gaining ground on its U.S. rivals, pegs light-vehicle sales slightly higher at 16.3 million, although the company has significantly lowered its expectation compared to its initial forecast.

The continued sluggishness in auto sales could put pressure on the auto makers to consider production cuts or sales incentives, moves that would take a bite out of profits. It also underscores weakness in confidence about the economy, as consumers balk at big-ticket purchases amid the housing market meltdown and financial market volatility.

"We lowered the sales forecast because of the U.S. economic growth, the GDP itself, and then the housing starts and the tighter credit," Ford Chief Executive Alan Mulally said Wednesday in an interview on the sidelines of an automotive industry conference in Traverse City, Mich. "The whole situation with homes and their values. It really is a big deal," he added, noting that August sales look weak after poor results the previous two months.

GM Particularly Vulnerable

GM is in a particularly delicate position, as it is carrying high inventories of key models and is producing more vehicles in the third quarter than it did a year ago, even as sales plummet. GM's sales fell about 20% in each of the past two months.

For now the auto maker is maintaining its goal of selling three million vehicles to retail customers this year, though the company is off pace to do that. During an analysts' conference Wednesday, GM sales analysis manager Paul Ballew repeatedly said the company will not slip into an old habit of offering widespread bargain-basement deals on all of its vehicles in order to juice demand.

GM executives appear to be at a crossroads, with Chief Financial Officer Fritz Henderson at one point during the conference saying the delicate act of balancing vehicle pricing and production levels is "the magic of the retail game."

During the second quarter, GM posted a slim profit in North America by ratcheting down incentive spending and building a larger-than-normal stock of pickup trucks. If the company had gone the opposite way - cutting truck production or boosting discounts - its inventories would be lower, but its margins would have been crimped by higher marketing costs or its revenue would have dwindled due to lower production.

Now it's decision time for GM. The company is not yet ready to pull the trigger on wider-scale production cuts, but Ballewdid say GM will revisit its production schedules "a little further down the road here this year." The company in July implemented a modest truck production cut.

Ford Weighs Production Cuts

Ford and Toyota, meanwhile, appear to have a built-in cushion against a short- term downturn thanks to modest inventory levels.

Ford sales analysis manager George Pipas told Dow Jones Newswires the company doesn't need to resort to the same type of deep discounting strategy it employed in past summers because the company's production levels have been so far below the company's historical average, leading to drastically lower inventory.

Ford will be evaluating its production schedules in the coming weeks to ensure that output matches up with demand. The company will be deciding its fourth- quarter production plans in early September.

"We will keep making adjustments we need to tailor the capacity to the real demand. So if we have to, and really believe demand is going to be lower, then we will make those cuts," Mulally said.

"The most important thing is to get to the real demand. We don't want to drive demand with big incentives. All you are doing is pulling it ahead, so we need to get to the real fundamental demand, and have the vehicles priced for the demand, " he added.

Toyota's U.S. sales chief Jim Lentz, speaking at the conference in Traverse City, Mich., painted a relatively optimistic picture about demand going forward. He said that sales numbers should be higher in the second half of 2007 than in the first, with a rebound likely in 2008. For Toyota - which has typically been bullish on U.S. demand and relies on continued momentum in the region to fuel its global success - Lentz expects sales to be up 5%-6% in 2007.

Even if auto makers decide that discounts and rebates are needed to spur demand, some analysts believe volatility in the economy will overshadow attractive deals, leading the consumer to continue sitting on the sidelines.

"As a result, we would expect industry production schedules to come down significantly over the next few weeks," Lehman Brothers auto analyst Brian Johnson said in a note to investors Wednesday. Johnson projects light vehicle sales could be as low as 15.9 million this year.

In late trading Ford shares were recently unchanged from the Wednesday close of $8.87, GM was off 2 cents from the close to $34.80 and Toyota was unchanged at $123.22.