By Adrienne Roberts 

Discounts have replaced labor costs as the U.S. car industry's biggest headache.

Auto sales were nearly flat in February compared with the same period a year ago with 1.33 million vehicles sold last month, continuing on a pace near the records set in 2015 and 2016. But keeping the motor running is getting more expensive for car makers as the average incentive hit a record of $3,830 per vehicle sold, according to J.D. Power, representing a 10% increase vs. the prior year, the latest in a string of incentive-spending increases.

Car executives have long pointed a finger at workers as the biggest drag on profits, with health-care costs, pensions and $30-an-hour pay rates pushing labor costs higher than most other industries. Auto makers have restructured so that it now costs less than $2,500 in labor to build a car or truck -- even as car prices continue to rise and buyers flock to pricier trucks and sport-utility vehicles. Hourly workers increasingly represent less of the cost.

Auto makers, however, show no signs of lowering incentive spending. "This (could turn into) a classic situation of (companies) not taking production out when there's high inventory and relying purely on incentives," said Mark Wakefield, global co-head of consultancy Alix Partners's automotive practice. While February's bad weather makes it tough to sell cars typically, raising the need for discounts,

Mr. Wakefield notes incentives have grown to 10.5% of the sticker price. Discounts have exceeded the 10% threshold for eight consecutive months, a record streak, according to J.D. Power. "We're firmly in a push market, using elevated incentives to drive sales," Mr. Wakefield said.

Inventories are swelling even as auto sales remain high, with vehicles taking an average of 70 days to turn, a level not seen since 2009, J.D. Power said. For the month, General Motors Co., Honda Motor Co. and Nissan Motor Co. logged sales increases, while Ford Motor Co., Fiat Chrysler Automobiles NV and Toyota Motor Corp. reported declines.

For auto makers, higher inventories can lead to discounts to help sell vehicles in the short term, hurting financial results. But humming production lines can put them in good position for the months ahead when consumers typically start visiting dealerships in larger numbers.

"The auto makers are in a tricky spot: Aggressive incentives are already starting to eat into profits and residuals, but it takes discipline to pull back the production reins in what's still a fairly strong market," said Jessica Caldwell, an Edmunds analyst.

Mark LaNeve, Ford's U.S. sales chief, said he is "very comfortable" with its inventory level of 79 days. "That's actually a good number to have going into spring selling season," he said during a conference call.

With low gas prices, consumers are flocking to large pickup trucks, sport utilities and crossover wagons, vehicles that deliver higher margins than smaller cars. That is helping auto makers fetch higher prices from customers even with increased discounts.

The average transaction price that customers paid for vehicles in February rose 2.5% from a year earlier to a record $31,435, according to J.D. Power, reflecting the shift to more expensive trucks and SUVs. The larger vehicles accounted for 63.7% of total retail sales, a record for the month and the second-highest mix ever behind December's 64.4%. GM benefited from the shift, with average prices of its vehicles rising nearly 2% from a year earlier to $34,900, even though the auto maker spent more on incentives, according to J.D. Power. GM said its incentive spending was "essentially flat" compared with a year earlier.

So did Nissan, which saw a 53.7% increase in sales of its Rogue crossover. Judy Wheeler, Nissan's U.S. sales chief, said the auto makers has maxed out production of the vehicle. Overall, sales of its trucks, crossovers and SUVs were up 22% in February compared with last year.

"I think we're being very efficient with what we're bringing into the marketplace," said Ms. Wheeler. "We're offering a more simplified lineup."

GM's sales rose 4.2% to 237,388 vehicles in February, with both retail and fleet sales up. Ford saw sales decline 4% to 207,464 vehicles, and Fiat Chrysler also posted a sales decline, with its February sales dropping 10% to 168,326.

Toyota's sales dropped 7.2% to 174,339 vehicles. Nissan's sales increased by 3.7% to 135,740. Honda's sales increased 2.3% to 121,686 vehicles for the month.

--

Mike Colias

, Anne Steele and John Stoll contributed to this article.

Write to Adrienne Roberts at Adrienne.Roberts@wsj.com

 

(END) Dow Jones Newswires

March 02, 2017 02:47 ET (07:47 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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