Ford and GM cushioned by economic safety features

Crash test smarties. Detroit’s shock absorbers look strong enough to withstand many bumps. Ford Motor and General Motors, worth a combined $100 billion, both spooked investors after unveiling their latest financial results this week, but for the most part the two automakers are humming along. Although there are reasons to worry, economic safety features will cushion the ride.

Despite a 6% rise in second-quarter revenue from a year earlier, Ford’s operating profit declined 27%, worse than analysts were expecting, according to Visible Alpha. The company pinned the decline largely on warranty issues involving models from or before 2021. Its stock price promptly tumbled 9% in after-market trading on Wednesday. Rival GM unveiled stronger results a day earlier, but lost nearly $4 billion of market value nevertheless.

One concern is pricing. Thanks to a lengthy supply-constrained market, markups on Chevrolet Silverados, Cadillac Escalades and other vehicles have contributed an average $1.4 billion boost to GM’s quarterly operating profit since the start of 2020. Such uplifts, which tallied $500 million combined for GM and Ford between April and June, have helped offset mounting losses in electric vehicles, but both companies have signaled that their pricing power may be ebbing.

After all, nearly 6% of auto loans to customers with weaker credit scores were at least 60 days overdue in June, per Fitch Ratings, twice the rate in 2021. More cars are also sitting on dealer lots, with GM and Ford inventories both up from last year. Even so, prices of new vehicles held steady, according to marketing firm Cox Automotive.

Sticky prices should help smooth the road ahead. Dealers are retrenching, with retailer AutoNation reporting that the gross margin on new vehicles is down from highs three years ago, falling to 7% last quarter. Ford and GM also could reasonably see scope to eat into profitability that was turbo-charged by post-Covid-19 price-gouging before taking any hit themselves. AutoNation’s margin is expected to normalize at about 5%, based on estimates gathered by VisibleAlpha.

Americans are also overdue upgrades. The average passenger car is 14 years old, S&P Global said in May, up from 11 years in 2012. As they return to showrooms, shoppers also may soon be able to borrow more cheaply. Interest rates on car loans run about 7%, up from 4% in 2022, Experian reckons, but traders are increasingly pricing in cuts from the U.S. Federal Reserve. These reinforced guardrails should keep the Motown duo on the right track once prices start to sputter.