F Ford Motor Company

Auto maker expects higher interest rates, decline in used-car values to hurt affordability

By Christina Rogers and John D. Stoll 

Ford Motor Co. raised a caution flag for the auto industry, saying higher interest rates and a steady decline in used-car values will hurt the most important factor in the recent U.S. sales boom: affordability.

The outlook, coming as the company forecast leaner results for the first quarter, comes amid a broader view that car sales in the world's two largest markets have peaked after a string of record profits and sales for the U.S. auto industry. Ford estimates volumes will fall in the U.S. and China in 2017 and again in 2018.

The U.S. market has been buoyed by customer access to cheap leases and long-term loans that come with low interest rates. The Federal Reserve is pushing interest rates higher, potentially crimping retailers' appetites to dole out the 0% loans that have fueled demand.

A flood of preowned vehicles are going on sale, a product of a leasing boom that has accelerated in recent years is heightening concern. Leasing has become a popular way to finance vehicle purchases, allowing buyers to borrow a car for two or three years at a subsidized rate and return it at the end of the term -- many of which are expiring this year.

As more preowned cars become available, the price of a gently-used vehicle is falling. While that could force auto makers to ramp up sales incentives, it also could make leasing less attractive because leases are often cheaper on vehicles that are expected to have strong resale values.

"We do think there will be people who fallout and they won't be able to afford a new vehicle," Ford Chief Financial Officer Bob Shanks said, speaking to analysts Thursday. Rising interest rates and tightening credit will further inflate car prices, and some may find better value in online classifieds or on used-car lots.

A clutch of Ford's rivals, including Toyota Motor Co. and BMW AG, have voiced concern about the impact the used market is having on car prices and the performance of their internal credit arms. About 25% of Ford Credit's balance sheet, for instance, is made up of leasing assets -- at General Motors Co.'s GM Financial that number exceeds 40%.

Cheap leases are possible because car makers pay a subsidy that is based on the forecast value of the car at the end of the lease. Mr. Shanks said Thursday the auto maker has had to change those residual-value calculations recently based on data furnished by the National Automobile Dealers Association and other third parties.

Car buyers tend to make buying decisions based on monthly payments instead of sticker price. Edmunds.com estimates the average monthly car payment for a vehicle purchased in February was $515, up only 6% from the $487 buyers paid in February 2007.

Over the same period, the amount financed by new car buyers has skyrocketed 23%, from $25,003 to $30,753, the firm said.

In addition to subsidized leases, the disparity between car payments and purchase prices over the period has been low borrowing costs. The average loan was written with a 4.9% interest rate, more than 2 percentage points less than the 2007 loans.

Ford also said Thursday it expects full-year adjusted operating profits of $9 billion this year, a 14% decline over 2016, due to higher costs and continued investment in autonomous cars and other advanced technologies. The company also guided to first-quarter earnings per share of between 30 cents and 35 cents, lower than the same-period a year earlier and far below analysts' expectations of 47 cents.

Higher engineering costs, the strong dollar, rising warranty costs and commodity price increases are reasons for the weaker performance. Lower volumes are also expected to weigh on the performance.

Lower-than-anticipated quarterly guidance further confirms Wall Street's view that auto makers are too exposed to cyclical swings in the car business.

Ford, coming off several years of record profitability, has pledged billions in new investment in electric cars and autonomous vehicles, aiming to catch up with both rivals inside the auto industry and new tech startups entering the car business. Auto makers are under pressure to meet tightening U.S. regulatory standards and are in a race to reinvent the automobile business.

Pressure on Ford's bottom line comes as its two main rivals, GM and Toyota, also encounter turbulence. Earnings for both companies in the profitable North American market slumped in the most recent financial quarter amid a growing price war in the U.S.

Write to Christina Rogers at christina.rogers@wsj.com and John D. Stoll at john.stoll@wsj.com

(END) Dow Jones Newswires

March 24, 2017 02:47 ET (06:47 GMT)

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