Competition could be overheating in the US auto industry.
Ford reported second-earnings on Thursday, and they missed analysts expectations. In statement, the carmaker noted that it “now sees risks challenging achieving guidance.”
Business Insider spoke with CFO Bob Shanks right after earnings were released, and he said that although Brexit issues in Europe 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 analyst may have over adjusted 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’s been an unexpected acceleration in the pace of incentive spending.
‘Not what we expected’
Incentives — like discounts and cheap financing — spur sales of new cars but they can undermine profits and cash on hand. When the entire industry piles in — out of fear that they will lose market share — automakers can essentially compete away their profits.
And it’s coupled with a slowdown in sales that’s come on faster than anticipated. Shanks said that Ford has predicted a 2016 sales pace of between 17.4 and 18.4 million in new vehicle deliveries, but is now downgrading that to between 17.4 and 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 characterised 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 optimise their mix of vehicles on sale, focusing on the ones that can bring in the highest profits.