Rebates, Production Cuts Blamed for 27.5% Drop in Auto Profits

Costly customer rebates and production cutbacks took their toll on the nation’s Big Three auto makers, which reported sharply lower third-quarter profits Thursday.

Combined profits for General Motors, Ford Motor and Chrysler fell about 27.5% during the quarter ended Sept. 30, and industry analysts say they do not expect conditions to improve in the fourth quarter.

“If the new models don’t move and they have to give these incentives again, it could be just as bad,” said Bob Bernstein, an analyst at Edward D. Jones & Co., a St. Louis brokerage.

General Motors reported third-quarter profit of $516.9 million, a 40% decline from the same period last year. Revenue during the third quarter rose slightly to $28.79 billion.

The nation’s No. 2 auto maker, Ford Motor, reported a 44.3% slide in third-quarter profit to $477.1 million, while revenue fell less than 1% to $20.24 billion. Ford, which has been the industry’s most profitable player, said it had a third-quarter loss in its domestic operations of $37 million--the first quarterly loss in its U.S business since 1982.

At Chrysler, a one-time gain nearly tripled profit to $331 million for the third quarter. The gain was the result of Chrysler’s sale of nearly half its interest in Mitsubishi Motors Corp. of Japan for $309 million.

Excluding the extraordinary gain, however, Chrysler’s profit skidded 77.3%. Third-quarter revenue remained nearly unchanged at $7.88 billion.

The news triggered a drop in the auto stocks on Wall Street. Chrysler fell 37.5 cents to $22.25; Ford closed at $47.50, down 37.5 cents, and General Motors declined 50 cents to $44.375.

Many analysts had expected such poor showings given the rash of incentives--including cash rebates and low interest rate financing--that took place during the quarter. “These earnings were very much in line with expectations, as miserable as they were,” said analyst Harvey Heinbach at Merrill Lynch Research.

Heinbach noted that profits were also pushed down by a 13% decline in auto production in the quarter as the Big Three wrestled to thin out inventories. Ironically, it was excessive production during the begining of the year that bloated inventories and forced the auto makers take steps to boost sales, Heinbach said.

The third quarter is traditionally the weakest time of year for auto sales, analysts said. And trying to match the performance of last year, when sales and profits set records for many of the companies, will be tough.

Sales and profits usually take off during the fourth quarter as the new models arrive in showrooms. But auto makers are still cutting back on production and are still using incentives to boost sluggish sales.

“We’re looking at fourth-quarter figures to be down fairly significantly,” said Heinbach. “Incentives are continuing at a fairly hefty pace.”