This Price War Will Hurt Ford and GM



Wanna buy a pickup?

If you're in the market for a new pickup truck, December is turning out to be a pretty good month to go shopping.

An oversupply of pickups at General Motors - which is about to introduce all-new models - may be turning the traditional year-end-discount battle between the automakers into an all-out pickup-truck price war.

That could be great news for consumers. But it's not going to be so good for GM - or for archrival Ford .

GM has a pickup problem
Here's the background: GM's pickup sales have been falling - somewhat unexpectedly - in recent months, as cross-shopping consumers have preferred models from Ford and Chrysler, among others. To some extent, that's just part of the cyclical ebb and flow of the auto business: Ford's F-Series and Chrysler's Ram pickups are newer models, while GM's Chevy Silverado and GMC Sierra are at the end of their model cycle, due to be replaced shortly.

But there's no question that those preferences have been helped along by pricing: Chrysler has been offering huge incentives - discounts, "cash back" offers, and cheap financing - on its Ram pickups. Chrysler's incentives total over $8,000 per truck in some cases. Ford has bumped its own offers up as well, as has Nissan with its Titan pickup.

GM admitted that these moves caught it off guard last month, blaming an 8% year-over-year decline in full-sized pickup sales on "unexpectedly high competitive incentive activity." GM, which has been trying to reduce its incentive spending as part of a broader effort to improve margins, decided not to respond.

That decision seemed to make good sense, but it will probably end up costing the company big. GM's sales decline looked especially bad after Ford, Chrysler, and Toyota's full-sized pickup lines posted 18%, 23%, and 31% year-over-year gains, respectively. Worse, it left GM with a huge inventory of unsold trucks - a 139-day supply at the end of November, far more than is considered optimal.

That's a problem that GM needs to resolve quickly, because of those all-new trucks that it's planning to introduce shortly. And that's where the price war comes in.

Good for consumers, but not for GM - or for Ford
I predicted last week that GM would hold a "big honkin' pickup truck sale, starting pronto." That wasn't exactly a profound insight, and that sale seems to now be under way: According to trade publication Automotive News, GM last Friday notified dealers of additional new incentives on Silverados and Sierras - as much as $2000 in new incentives per truck, on top of offers GM put in place at the beginning of the month. GM also began offering so-called "zero percent financing" - interest-free loans - on some of its pickup models last week.

Some dealers are already planning to use the new incentives to discount their trucks by a whopping $10,000 or more, Automotive News reported. That's likely to lead Ford and the others to increase their respective games - and that could start to become a problem for both GM and Ford.

Here's the thing: Most of the time, pickups are hugely profitable products for the automakers. The F-Series line is almost certainly Ford's most profitable product, a major driver of the company's outsized North American earnings in recent quarters. Ford's margin in North America was 12% last quarter, huge by mass-market automaker standards.

The upshot: Profits for both could be squeezed
Preserving those margins is key to preserving Ford's comfortable profitability at a time when its overseas units aren't turning much of a profit. Increasing incentives on pickups could put a dent in Ford's fourth-quarter earnings - maybe a big dent, if GM discounts further and Ford feels forced to respond.

For GM, which has been struggling to catch up to Ford as well as global rivals like Toyota, increasing incentives on what should be its most profitable products could cost it big as well. But in the General's case, bloated inventories mean that it may be a price that has to be paid. Stay tuned.

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Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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